Transfer Pricing Regulations of Georgia
The Tax Code of Georgia (“TCG”) contains specific provisions that are aimed at regulating taxation of transactions between related persons located in different tax jurisdictions or entities incorporated in offshore/low tax jurisdictions and carrying out transactions with Georgian entities.
In 2014 came into force the "Instruction on Valuation of International Controlled Transactions" (“Instruction”) of the Minister of Finance of Georgia.
• Valuation methods of the International Controlled Transactions;
• Comparability of non-related transactions and rules of reviewing transactions;
• Information and list of documents to be provided to the tax authorities;
• Sources of information on market prices;
• Criteria based on which the price of the assessed transactions shall be deemed as the market price;
• Procedures for the advance pricing agreements of international transactions;
• Rules of using the range of prices, terms and other procedural issues.
The Instruction is based on the transfer pricing guidelines for multinational companies and tax administrations created by the Organization for Economic Cooperation and Development (“OECD”) as of 2010. According to the Instruction if nothing is otherwise regulated by the TCG as well as the Instruction itself, the OECD guidelines should apply.
In terms of the TCG a taxpayer is entitled to obtain from the tax authorities a legally binding advance ruling on prices for cross border transactions in case the amount of such transaction exceeds 50 000 000 GEL and the prices will be applicable for profit tax purposes. The ruling should be obtained before the commencement of the transaction and is valid for definite period of time.
According to the TCG two persons are related if one of them directly or indirectly is involved in the management or holds a capital of another person; or if the same persons are directly/indirectly are involved in the management or hold a capital of a third person. A person is regarded as being involved directly or indirectly in management, control or capital if: it holds directly or indirectly more than 50% of enterprise; or it practically directly or indirectly takes control over business decisions.
The Instruction regulates transfer pricing issues in Georgia and determines:
• A person can directly or indirectly own or control a majority of shares with the voting rights in a company;
• A person can directly or indirectly control the composition of the board of directors;
• A person can directly or indirectly earn 50% or more shares in profits of the enterprise;
• The total amount of loans directly or indirectly granted by a person to an enterprise and loans of that enterprise directly or indirectly guaranteed by the person is greater than 50% of value of the enterprises’ total assets;
• More than 50% of an enterprise is directly or indirectly owned or controlled by a relative of a person;
• Except for those listed above, business decision of an enterprise can be proved based on facts and circumstances.
Pursuant to the instruction “direct or indirect practical control over business decision” includes the following:
• Comparable independent price method;
• Resale price method;
• Cost plus method;
• Net profit margin method; and
• Profit split method.
The instruction envisages that comparable price method will have the priority and the first three methods are preferred over the last two methods.
The Georgian tax legislation envisages the following five specified pricing methods for evaluating whether the prices are at arm’s length:
Upon request of Georgian tax authority, the taxpayer within 30 (thirty) calendar days should provide transfer pricing documentation prepared according to the requirements set forth by Instruction.
The transfer pricing documents should include:
(a) Overview of the economic operations/transactions of Georgian enterprise, including the analysis of economic factors that influence and impact the price of its goods and services;
(b) Description of the corporate/organization structure of the Georgian enterprise that encompasses all elements that are necessary for analyzing of controlled transactions;
(c) Description of that transaction the analyses of which are conducted including criteria of comparability of transactions and policy of group transaction assessments;
(d) Description of the assessment method for selected transaction and interpretation why the particular method was selected;
(e) Analysis of the comparability;
(f) All economic analysis and forecasts that were applied as the basis in the course of elaboration of assessment methods;
(g) Details of Prior Agreement or Prior Decision that are relevant for transactions in question;
(h) Conclusion on compliance with market principle and if necessary, any amendments of transaction price/taxable income made for the purposes of achievement compliance with the market principle;
(i) Any other information that could essentially affect the assessment of the transactions in question;
According to the instruction if annual tax turnover of a Georgian entity is below 8 000 000 GEL would be deemed as meeting the requirements related to the requested documents, provided that the update of the external comparability transaction determined based on analysis of the comparability is carried out only in every third year, provided that there has not been any essential changes in the activities of the Georgian enterprise, comparable transactions or respective economic circumstances.
If you have any questions regarding the information provided in this newsletter, please contact one of the tax and legal professionals at our Deloitte office in Georgia: