This obligation to disclose differences has been in place for many years. However, in 2016, a new Profit Tax Act and the accompanying Transfer Pricing Regulations were adopted that oblige all legal entities that have transactions with related parties to prepare transfer pricing documentation.
Failure to comply with this obligation entails, in addition to the potential obligation to increase the income tax base, also fines in the amount of KM 3,000 to KM 100,000 for the legal entity and in the amount of KM 2,500 to KM 10,000 for the responsible person in the legal entity.
In practice, several dilemmas arise as to who and when in the FBiH should prepare documentation on transfer pricing. Below we will try to eliminate some of them:
Dilemma: An individual is the owner of two legal entities whose headquarters is in the territory of the FBiH. These legal entities have transactions with each other
Answer: Both legal entities need to prepare transfer pricing documentation.
Dilemma: The husband owns one legal entity, while the wife owns another legal entity. These legal entities have mutual transactions and are registered in the FBiH.
Answer: Both legal entities are required to prepare transfer pricing documentation. Specifically, close kinship is considered an element of connection under the provisions of the Income Tax Act.
Dilemma: The individual (the owner of the legal entity) has lent to the legal entity in question. The legal entity is registered in the FBiH.
Answer: The legal entity is obliged to prepare the transfer pricing documentation and prove that the loan was given on market terms.
Dilemma: The FBiH Company has transactions with an affiliate whose seat is in Republika Srpska, but we do not charge for these transactions.
Answer: The requirement to prepare the documentation is that there is a transaction, regardless of the fact that no fee has been determined. Here, the risk of cutting the additional tax liability is further increased, since the absence of a fee indicates that the fees are not marketable (the argument is that an unrelated company would not be likely to provide services without compensation). The FBiH Company is obliged to prepare the transfer pricing documentation in accordance with the provisions of the FBiH Law on Corporate Income Tax and the relevant Rulebook. The company receiving these services is also required to document the transaction in accordance with the transfer pricing regulations of the Republic of Srpska.
Dilemma: The FBiH Tax Administration and the FBiH Ministry of Finance want to impose a decision on what prices to operate.
The answer is negative. Namely, the competent authorities will not affect the contractual relations in the economy – prices are set freely (of course with the restrictions set out in other regulations for individual industries under the control of the competent regulator). The aim of the cohesion provisions is to pay an adequate amount of income tax in the FBiH.
Dilemma: Businesses operate with a related party and it is safe to do business in accordance with the principle out of reach. All prices are marketable. Is there an obligation to prepare transfer pricing documentation?
Answer: Yes, there is still an obligation to prove that the business is in compliance with market conditions. The proofing process is done through reports and other transfer pricing documentation, which is prepared using the prescribed methodology (defined by the provisions of the ordinance).
Dilemma: Can a transfer pricing report be prepared when requested by the FBiH Tax Administration?
Answer: Under current regulations, a taxpayer is indirectly required to have a transfer pricing report prepared at the time of submission of the annual income tax return. If there is a difference between market and transfer prices, the taxpayer is obliged to report the difference in the tax balance. In order to make a possible difference, a transfer pricing analysis is needed. In addition, within 45 days of the request of the FBiH Tax Administration, the taxpayer is obliged to submit the report together with other documentation on transfer prices. In practice, drafting reports and obtaining the required documentation requires several weeks, the deadline being extended if additional time is required to collect relevant bids or if the process of obtaining certain documentation from related parties is delayed. Consequently, it is advisable to start these activities early and provide resources for the process of preparing transfer pricing documentation. Therefore, the transfer pricing documentation should be prepared by the deadline for submission of the annual income tax return (ie, if there has been no change in the financial year, that is 31 March 2017 for the period 2016). In addition, in the annual income tax return it is necessary to fill in the box if the report on transfer prices has been prepared.
Dilemma: Is it necessary to prepare a transfer pricing report every year?
Answer Yes, a transfer pricing report is produced every year. However, it should be borne in mind that the first drafting of the report and other documentation will take more time than in the years ahead, unless major business reorganizations are made or new transactions with related parties are introduced.
Given that we have eliminated the most common concerns, we move on to the dilemma of whether each taxpayer can prepare transfer pricing documentation on his own.
The answer is yes. However, several factors must be considered before making the final decision on accession:
The Complexity of Testing Methodology
Transfer prices are usually evidenced by the use of transfer pricing testing methodology, which is detailed in the rulebook (and the OECD Transfer Pricing Guide can serve as a good guide), so that workers involved in the transfer pricing report process take considerable time to prepare and implement a project of completing documentation (which means that they cannot handle current affairs).
Cost of Database Access Licenses
Testing the prices of transactions between related parties is performed by comparing conditions in a business or financial relationship with comparable circumstances between independent entities. In most cases, access to relevant databases is necessary for these purposes. The cost of individual databases (depending on the type of transaction) is material and is measured in thousands of euros annually.
Independent Transaction Analysis / Knowledge of Practice
The professional and independent party has a much broader view of taxpayer transactions and can provide an impartial view of the transactions relative to the taxpayer’s internal resources. Also, an experienced consultant can point you to the shortcomings he has noticed with other taxpayers.
Consequently, many legal entities choose to outsource the preparation of documentation, that is, the preparation of transfer pricing reports, to external consultants.
However, if you decide to choose an external consultant, there are several items to consider:
Society Experience and References
The consultant should have experience in preparing transfer pricing documentation (and be familiar with OECD regulations). Be sure to ask for the references of the consulting firm you want to hire.
Databases and licenses
The consultant should have adequate licenses and databases to test the transactions. Without adequate bases, the report itself does not justify its purpose. Although not the only, most commonly used transaction testing database is the Amadeus database made available by Bureau van Dijk. Additional bases may be applicable depending on the type of transaction.
Appropriate team and capacity to meet deadlines
Your consultant needs the capacity to meet the agreed deadlines. Specifically, drafting a report often takes weeks, so you need to choose the right partner who can keep up with your pace.
We hope that this brief analysis will make it easier for you to make the right choice for your strategy regarding the development of transfer pricing documentation. Transfer pricing has been the focus of tax administrations in our region for a long time, so a similar approach will appear in the FBiH. Adequate and timely preparation will certainly enable you to complete your commitments and still be able to commit to ongoing work.
Authors: Emir Ibisevic, Senior Manager & Haris Jasarevic,