When the Democratic Party came into office in 2008, it promised 200,000 new jobs.
“However, the [economic] crisis put cold water on everything,” said Slobodan Mihajlovic, general manager of Eurofast Global, a firm of tax advisers.
Moreover, structural changes to the Serbian economy are placing a strain on tax revenues.
“Serbia's plan to crack down on tax evasion is an important instrument for achieving macro-economic stability in a mid-term,” said Branka Rajicic, a tax director at PwC in Serbia. “It is expected that shifting focus in the macro-economic growth model from import and consumption to export and investments will result in a drop of tax revenues.”
As such, Serbia was left with the choice of either raising rates or enforcing some rarely used measures from existing tax laws including transfer pricing regulations.
“The government opted for the second option due to a very unpopular public response to increasing VAT, while raising corporate tax will not be good measure as all the countries in the neighbourhood have a 10% or similar tax rate,” said Mihajlovic.
Transfer pricing will become an increasingly important part of Serbia’s drive to tackle tax evasion and advisers note the government has been ramping up its efforts.
“The tax authorities seem to be devoting more attention to transfer pricing by focusing on this topic during audits, with intensive preparation and training of staff for transfer pricing controls,” said Rajicic. “Growing awareness is expected to result in more detailed regulations and more rigorous control in the future.”
It is unlikely, however, that the government will introduce new rules.
Rajicic said companies are concerned by the increased focus on transfer pricing in the absence of detailed guidelines, which creates uncertainty.
An instruction on the application of transfer pricing rules is being prepared by the authorities and is expected to be released this year.
“It is reasonable to expect that developments in transfer pricing regulations will follow along the guidelines expressed by the OECD as a source of international best practice,” said Rajicic.
Serbia has had transfer pricing regulations since 1992 when the Corporate Profit Tax Law was introduced.
“[But] the concept of transfer pricing was without importance in the Serbian legislation or in the practice of the Serbian tax authorities,” said Mihajlovic.
