Transfer pricing in Serbia

1.1 General information

For many years, there have been rules on transfer pricing in Serbia. However, in 2013 the detailed tax regulations regarding transfer pricing have been adopted. Overview of the relevant transfer pricing regulations will be presented in the following text.

1.1.1 Applicable legislation

Transfer pricing in Serbia is covered by following legislation:

• Corporate Income Tax Law (“Law” or “CIT Law”);

• Rulebook on transfer pricing and methods that are applied according to the arm’s length principle in determinations of transaction prices between related parties (“Rulebook”);

• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010 and July 2017 (“OECD Guidelines”);

• Rulebook on interest rates that are considered to be in accordance with the arm’s length principle (“Rulebook on interest rates”).

1.1.2 Definition of transfer price

Article 59, paragraph 1 of the Law states that the transfer price is a price associated with assets transactions or creating obligations between related entities.

1.1.3 Definition of related entities

Article 59 of the Law stipulates that any private individual or legal entity that can exercise control or has significant influence on taxpayer’s business decisions is considered to be a related entity. Further, the Law defines that capability of control over taxpayer exists in case of direct or indirect ownership of at least 25% of taxpayer’s shares or stocks, as well as in case when an entity directly or indirectly controls at least 25% of the votes in taxpayer’s management board.
Legal entity related to the taxpayer is also considered an entity in which the same private individual or legal entity, as in taxpayer’s ownership or voting structure, directly or indirectly participate in management, control or capital. Additionally, spouses, descendants, adoptees and their descendants, parents, adopters, siblings and their descendants, grandparents and their descendants, as well as siblings and parents of spouses of persons related to the taxpayer in a previously described manner are also considered related entities.

1.1.4 The Arm’s length principle

The arm’s length principle is the international transfer pricing standard that OECD member countries have agreed should be used for tax purposes by multinational enterprises and tax administrations, and it is applicable in Serbia. An arm’s length price is generally considered as the price that would be achieved between related entities, if they were treating each other as independent parties. The authoritative statement of the arm’s length principle is set forth in the Article 9, Paragraph 1 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries. The Article 9 provides:
“[Where] conditions are made or imposed between [...] two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”.

1.1.5 BEPS Regulations and OECD Guidelines treatment

Serbia is not an OECD member; however, Serbian TP provisions and documentation requirements are generally based on the BEPS Regulations, including OECD Guidelines. However, as of today, there are no BEPS structure documentation requirements (i.e. no CbC/Master File/Local File documentation is required, but rather just the Local File, as prescribed by the Rulebook).

1.2 Transfer pricing documentation

1.2.1 The obligation to submit transfer pricing report

Taxpayers in the Republic of Serbia who have transactions with related entities are, according to Article 60, paragraph 3 of the Law, obligated to submit, along with the tax balance sheet, documents stating the value of transactions with related entities at prices that would be realized on the market or in similar transactions, i.e. as if they were not related entities. Further, taxpayers are obliged to prepare and submit transfer pricing report every fiscal year. Analysis presented in the transfer pricing report have to be updated every year, in order to be based on the last publicly available information.

As stated, the transfer pricing report is filed along with the tax return and the tax balance within 180 days from the end of fiscal period. For example, if fiscal year of taxpayer is finishing on December 31, 2019, taxpayer will be obliged to submit transfer pricing report at the latest on June 28 or 29 (depending on whether the year in question is a leap year), 2020.

1.2.2 The content of transfer pricing report

The content and the form of transfer pricing documentation is regulated by the Rulebook, stating that the documentation is submitted in the form of report or in the form of abbreviated report.
The form of transfer pricing report is precisely defined and it is mostly reconciled with BEPS Regulations, albeit that the documentation would be considered as a hybrid between BEPS Master File and Local File.
In addition, the taxpayer can submit Abbreviated Report for transactions with related parties, except for loans, if one of the following conditions has been met:

1. That it is a one-off transaction with a related entity in the respective year, whose value does not exceed RSD 8 million turnover (VAT registration threshold);

2. That the total value of transactions with a single related entity in the respective year does not exceed RSD 8 million turnover (VAT registration threshold)1.

Abbreviated report should be submitted for all transactions with related entities and it should contain information regarding each transaction, particularly:

1. transaction description;
2. transaction value;
3. related entity with whom transaction has been realized.

1.2.3 Applicable transfer pricing methods

In accordance with the Law and the Rulebook, the taxpayer is obliged to select the most appropriate method for determining the arm’s length prices for the analysis of transactions with related entities, i.e. the method that is the most appropriate bearing in mind circumstances of each individual transaction. The following methods can be applied:

• Comparable Uncontrolled Price Method
• Resale Price Method
• Cost Plus Method
• Transactional Net Margin Method
• Transactional Profit Split Method
• Any other method for determining the arm’s length price, under condition that the application of the aforementioned methods is not possible, or that the other method is more appropriate than the aforementioned methods.

1.2.4 Deadlines and language

The official language is Serbian language. Bearing in mind that the report is prepared for the purpose of submission to the Tax Administration, it is necessary to be prepared in Serbian language.
If transfer pricing report is not submitted, the Law prescribes that the tax authorities could ask in writing for a taxpayer to submit transfer pricing report and are obligated to give a deadline of 30 to 90 days to act upon the request.

1.2.5 Transfer pricing penalties and reliefs

Each taxpayer is obligated to file annual transfer pricing report together with the annual tax return. Penalties are prescribed only if the taxpayer fails to submit the transfer pricing report upon official written request by the tax authorities, subject to an additional filing deadline between 30 and 90 days. The range of penalties for eventual noncompliance is between RSD 100,000 (approximately EUR 800) and RSD 2 million (approximately EUR 16,500) for the legal entity and up to RSD 100,000 (approximately EUR 800) for the responsible individual in the legal entity. In addition, the possible adjustment of taxable income on a transfer pricing basis may result in a penalty of up to 30% of the understated tax liabilities and may further result in increased interest for late tax payments.
Taxpayers may opt to pay 50% of imposed penalties (if imposed to tax offense) no later than eight days from the receipt of the tax penalty order, whereas they would be exempt from payment of the remainder 50% of imposed penalties.

1.2.6 Statute of limitations on transfer pricing assessment

The general statute-of-limitations period of five years for taxes in Serbia also applies to transfer pricing assessments. A five-year period starts from the beginning of the year following the year in which the respective tax liability arose.

1.2.7 Likelihood of transfer pricing related tax audit

The likelihood is medium, although transfer pricing specific or targeted tax audits by the Serbian tax authorities are not conducted regularly. Once audited periods are not considered irrevocably closed. Usually, audits take place only once every three to five years, and they cover all taxes. Transfer pricing is likely to be within the scope of most tax audits related to corporate income tax.

The likelihood of transfer pricing methodology being challenged is medium. Currently, tax authorities have a limited level of practice with transfer pricing methodology, but they have raised pertinent questions in certain previous situations.

The transactions that have the highest likelihood of undergoing audit are management and consulting services, while no specific industry has a special audit treatment in this regard. There is a more frequent audit of large taxpayers concerning transfer pricing than other taxpayers.

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