TRANSFER PRICING ANALYSIS

Transfer prices are the prices calculated in transactions between related parties. Business entities that conduct transactions with related parties are obliged to submit a transfer pricing documentation along with the tax balance, as a mandatory element of the corporate income tax return. The definition of a related party is provided in Article 59 of the Corporate Income Tax Law of the Republic of Serbia (it should be noted here that any non-resident legal entity from jurisdictions with preferential tax systems is considered a related party).

Transfer prices regulate the economic relations between related parties by determining the amount of revenue of the party appearing in the transaction as the seller (service provider) and the amount of expense of the party appearing as the purchaser. Consequently, the prices established in transactions between related parties have a direct impact on the net profit and the taxable base of both parties.

Given that transfer prices may be used as an instrument for reducing tax liabilities, they are subject to particular scrutiny by the tax authorities. For the purpose of safeguarding public revenue, the tax regulations of most jurisdictions require that transfer prices be verified by comparison with the prices that would have been established in the same transaction between unrelated parties (the “arm’s length principle”). The Law on Corporate Income Tax of the Republic of Serbia recognizes the following methods for the verification of transfer prices:

• The comparable uncontrolled price method
• The cost-plus method (costs increased by an appropriate profit margin)
• The resale price method
• The transactional net margin method
• The profit-split method
• Any other method capable of establishing an arm’s length price, provided that the aforementioned methods cannot be applied or where another method is more appropriate in view of the circumstances of the case

In the analysis of transfer prices, particular account shall be taken of:

• The nature of the transactions under review
• The availability, reliability and relevance of the data used in the analysis
• The nature and reliability of the underlying assumptions

The transfer pricing documentation (transfer pricing report), which is submitted together with the tax balance sheet, must mandatorily contain the following:

• An analysis of the group of related parties to which the taxpayer belongs, and of the taxpayer’s business activity
• A presentation of all transactions with related parties
• An analysis of the functions performed and risks assumed in the taxpayer’s transactions with related parties, as well as the taxpayer’s economic position in such transactions (functional analysis)
• The selection of methods for verifying the conformity of transfer prices with prices determined in accordance with the “arm’s length principle” and the analysis of transfer prices by applying the selected methods
• A conclusion on the need for adjustment of the tax base

The content of the transfer pricing report is prescribed by the Rulebook on Transfer Prices (here).

Pursuant to the Law on Corporate Income Tax and the Rulebook on Transfer Prices, the conclusion of the transfer pricing report must first determine the amount of transfer pricing adjustments for each transaction or category of transactions with an individual related party. The aggregate amount of final transfer pricing adjustments from transactions with all related parties shall be included in the corporate income tax base.

Our team has many years of experience in preparing transfer pricing documentation and in providing comprehensive support to business entities in the field of tax optimization of transactions with related parties. Our continuous consulting support (throughout the year) is aimed at minimizing the risk of non-compliance with the applicable regulations in this area in the Republic of Serbia, as well as any potential costs arising from such non-compliance.

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valuation@alderman.rs