Most taxpayers across the globe are struggling with interruptions to supply chains, falling income and margins, and a host of other crisis-related matters. Belarusian companies, in addition to these challenges, are also facing the launch of a new transfer pricing (TP) era with the introduction of new TP rules and greater enforcement behind TP audits.
In the first half of 2020, several companies in Belarus received requests for TP documentation that included reporting periods before 2019. In addition, one multinational company in Belarus recently faced a TP audit on intra-group prices that saw significant additional tax liabilities assessed.
Important issues to consider
Available cases allow us to recognise the following features of the current TP control in Belarus.
Transfer prices are reviewed during field or desk tax audits by regular local tax offices. The involvement of the Tax and Duties Ministry can be expected when a taxpayer attempts to contest the position of the tax inspectorate. There is a lack of practice in this area of law enforcement that results in very limited communication between the taxpayer and tax office during a tax audit. At present, taxpayers are only discovering they have TP issues, facing additional tax accruals, when they receive the final tax audit report. This leaves them with just 15 working days to object and find a pre-trial settlement.
The tax authorities commonly request and review several periods at once, including previous years when different, redundant TP rules were in force. This has resulted in shifting the burden of proof to the taxpayer, as the tax authorities are only obliged to review and challenge a taxpayer’s position from 2019 and subsequent periods. The specific nature of Belarusian TP reporting forms contributes to the problems taxpayers face: there is an economic justification form or a TP documentation form. The economic justification form, which is applicable to the majority of transactions, does not require disclosure of the TP method applied by the taxpayer, but only financial information and the conditions of the controlled transaction. The taxpayer thus has almost no room for later discussing its TP methodology with the tax authorities.
The tax authorities often use secret comparables when estimating the arm’s-length level. TP rules in Belarus present a hierarchical application of methods for use, and as a result the use of secret comparables may render the method used by a taxpayer redundant and cause another ‘higher priority’ method (such as the comparable uncontrolled price method, CUP). The application of secret comparables in Belarus is caused by the lack of direct prohibition in the Tax Code to refer to such source of information, as well as absence of comprehensive financial data of local companies in the databases.
Besides the CUP method, the local tax authorities also give preference to gross-margin methods, such as the resale price method (RPM) and cost-plus method (CPM). In practice, application of these methods usually requires a high degree of information comparability when calculating gross margin in comparable transactions. In most cases, commercial databases do not have enough information to perform this analysis, yet this does not stop the tax authorities in Belarus from applying the RPM and CPM based on benchmarking studies that use internal data or external information regardless of the potential insufficiencies in the gross margin indicators. Moreover, when the tax authorities strive to analyse aggregated annual gross margins from controlled transactions, they naturally apply the transactional net margin method (TNMM).
Tax Code provisions for transfer pricing regulations in Belarus
At present, OECD BEPS Action Plan 13 has not been implemented in Belarus; however, since 2019, new local TP rules have applied. These rules have much in common with the OECD Guidelines, although they have some national specifics.
Under the new TP rules, the following transactions between related parties are defined as controlled in Belarus: (a) cross-border transactions, and (b) domestic transactions, where the related counterparty is exempted from profits tax. According to the Tax Code, transactions with residents of offshore zones (as defined by a list issued by the President of Belarus), and transactions through intermediaries of third parties which lack key functions, are considered as equivalent to transactions with related parties.
In addition, transactions are controlled when the transaction subject is:
Real estate, when the counterparty is a related party or when an unrelated counterparty is exempt from profits tax
Strategic goods (oil, gas, etc.) in cross-border transactions. The list of goods defined as strategic goods is issued by the Belarusian Council of Ministers.
There are several thresholds for recognising transactions as controlled for TP purposes, depending on the type of transaction. It is worth noting that thresholds are calculated using the aggregated volume of all transactions between two parties during the reporting period, i.e. calendar year.
In 2020, the main threshold for most transactions and taxpayers is BYN 400,000 ($150,000). For the foreign trade transactions of Belarusian taxpayers on the list of large taxpayers (a list formed in line with the provisions of the Tax Code), as well as for transactions with strategic goods, the threshold is BYN 2,000,000. Real estate transactions are controlled in Belarus without a threshold.
The new TP rules in Belarus also implemented two-tier TP reporting, including:
Submitting electronic invoices in the e-VAT portal, highlighting controlled transactions by ticking the respective box on the invoice; and
Submitting economic justification or TP documentation forms using the format stipulated by the Tax and Duties Ministry. These forms are to be provided to the tax authorities upon request during a field or even desk tax audit, usually within 2-10 working days.
If an underestimation of tax is identified by the tax authorities during their review of transfer prices, the taxpayer will be penalised at the rate of 40% of the amount of underestimated tax, and will also have to pay fines for the late payment of tax. However, the Tax Code has introduced a transition period, free of fines for the late payment of tax from 2019 to 2022.
The transition period from the old TP rules to the new one covers a period in which many unclear issues are arising for taxpayers, as well for the tax authorities. The lack of law enforcement practice in the courts at the moment makes it difficult to foresee the approaches the tax authorities will use to analyse certain controlled transactions.
In these uncertain times, taxpayers should give specific attention to their transfer prices by introducing internal controls over prices in intra-group transactions, i.e. develop and stick to a reasonable TP methodology and prepare in advance solid TP analysis and TP reporting forms.
Recent cases show that if a taxpayer does not have a solid, reasoned and substantiated position regarding its usage of arm’s-length prices in controlled transactions, the tax authorities can take an aggressive position, making it even harder for the taxpayer to contest. In contrast, a reasoned position from the taxpayer, prepared in advance, can successfully defend the prices it has used in the course of a tax audit.
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