1. Who is legally bound to prepare a transfer pricing documentation file?

All Serbian resident companies that carry out transactions with related parties are legally bound to prepare transfer pricing documentation files, either full scope documentation or short form report. The term related party is defined in art. 59, par. 2-6 of the Corporate Income Tax Law (Official Gazette RS no. 25/2001, 80/2002, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012 and 47/2013, hereinafter: “CIT Law”).

Generally, most companies part of a group and carrying out business transactions with other entities of the same group are required to prepare a transfer pricing documentation file. In addition, a Serbian resident company that carries out transaction with a non-resident legal entity established in a jurisdiction with preferential tax system should also prepare transfer pricing documentation files for the transactions concluded with that entity. The list of the preferential tax systems includes 52 countries as per the Rulebook on the list of jurisdictions with a preferential tax system issued by the Ministry of Finance.

2. When must a transfer pricing documentation file be submitted?

According to the CIT Law, transfer pricing documentation file must be submitted together with the annual tax return to the competent tax authorities up to 180 days after the end of the fiscal year. In case that the taxpayer omits to submit the transfer pricing documentation by the given deadline, or submits the incomplete documentation, the tax authorities will provide additional 30 to 90 days to correct the omission.

Note that according to the law, Serbian resident companies are obliged to submit their yearly financial statements for FY 2013 to the Serbian Business Registers Agency by the latest 28 February 2014. As financial statements also include information regarding the annual income tax to be paid for FY 2013 (which is impacted by the level of transfer pricing adjustments), this implies that any Serbian company that has obligation to comply with the transfer pricing rules should finalize its transfer pricing analysis before 28 February 2014.

3. What are the consequences of me failing to prepare my transfer pricing documentation file?

Any failure to submit a transfer pricing documentation file by the deadline imposed by the competent tax authority is subject to a fine ranging between RSD 100,000 and RSD 2,000,000 for the company and additionally RSD 10,000 to RSD 100,000 for the responsible person of the company.

However, the most critical matter is the fact that any failure to submit/submission of an incomplete transfer pricing documentation file entitles tax authorities to proceed to their own assessment of taxpayer’s transfer prices charged in their inter-company transactions. Transfer pricing assessment procedure involves identification by tax authorities of similar transactions available to them at the time of assessment.

Such transfer pricing assessment procedure may result in significant adjustments of the transfer prices applied in inter-company transactions. Therefore related parties are advised to prepare their transfer pricing documentation file and avoid facing tax authorities’ applying their own assessment procedure in disregard of the particularities of the inter-company transactions under review or the tested entity’s functional and risk profiles.

4. For what transactions must a transfer pricing documentation file be prepared?

As required by the existing laws, either a full transfer pricing documentation file or a short form report must be prepared for all company’s transactions with both non-resident related parties and resident related parties, irrespective of the nature thereof. In addition, all transactions carried out with an entity from a jurisdiction of the preferential tax system should be covered by either a full transfer pricing documentation file or a short form report.

5. For what value of inter-company transactions should a transfer pricing documentation file be prepared?

Serbian legislation provide for a minimum cap, equal to the prescribed threshold for entering the VAT system (currently RSD 8,000,000) for the consideration of the inter-company transactions, either for one-off transactions or cumulative amount of transactions with single related party during the fiscal year that need to be documented in a full scope transfer pricing documentation file. For the transactions that do not meet the criteria set above, company is allowed to prepare a short form report, including the basic details regarding those transaction(s).

6. How long is virtually required to prepare a transfer pricing documentation file?

In practice, it would take us anywhere between two weeks and three months to prepare a transfer pricing documentation file.

The key factors that may affect the period required to prepare a transfer pricing documentation file are as follows:

• number of transactions to be documented;
• number of financial years for which the intended transfer pricing documentation file is prepared;
• number of benchmarking studies to be performed;
• availability of group-wide documentation that could be used as a starting point for the preparation of the local documentation.

Therefore, the reparation of a transfer pricing documentation file involves the determination of a working strategy that may proceed from a review of the related party transactions and the materiality thereof during a given financial year, followed by a most effective capitalization of the group-wide available information (as included in the master file).

7. For what financial years should a transfer pricing documentation file be prepared?

As the arm’s length principle has been introduced to the Serbian tax legislation in 2001 and the taxpayer has the obligation to comply with the transfer pricing rules, any prudent tax manager should prepare its transfer pricing file for the financial years open to tax audits. As regards to submission of the transfer pricing file, taxpayers are liable to submit the transfer pricing documentation only for the FY 2013.

As regards a company’s transactions with its related entities, in order to avoid an assessment of that company’s transfer prices by tax authorities, the transfer pricing documentation file should be prepared for all the financial years that were not approached by any tax inspection focusing on the company’s corporate income tax. As part of such approach, the responsibility of providing proof of the arm's length nature of the applicable transfer prices would initially lie with the relevant taxpayer, with tax authorities having to prove that taxpayer’s transfer pricing methodology fails to reflect the adherence to the arm's length principle.

In accordance to the local legislation, the tax authorities may perform tax audits for the previous 5 years from the moment of tax audit.

8. Should transfer pricing documentation be drafted on an annual basis?

According to the Serbian law, the Serbian taxpayer that carries out transactions with the related parties is obliged to submit the transfer pricing documentation together with annual tax return each year. The deadline is 180 days after the end of the fiscal year to which the transfer pricing file relates to.

9. Should a transfer pricing documentation file be requested by tax authorities, may I prepare one transfer pricing documentation file for the whole period subject to inspection or prepare one stand-alone file for each such financial year?

In the absence of any clarifying legislative provisions, the decision to prepare one transfer pricing documentation file for the whole period subject to inspection or one stand-alone file for each such financial year lies with the taxpayer. In practice, we have chosen both ways and both choices were acceptable to the tax authorities.

A single transfer pricing documentation file should be advisedly prepared where taxpayer carried on the same identifiable types of inter-company transactions during the inspected period, and where both the functional and risk profiles of the audited related entity and the transfer pricing methodology remained unchanged during the audit’s period. Moreover, such approach is also recommendable where the taxpayer has no transfer price documentation file already available for a given financial year.

Where types of inter-company transactions and transfer pricing methodologies are different from one financial year to the next one, stand-alone transfer pricing documentation files should be prepared for each audited financial year. Such approach is also recommendable where the taxpayer has already prepared a transfer pricing documentation file for a given financial year, with such file to be used as basis for the transfer pricing documentation file dealing with the other financial years subject to tax inspection.

10. Can a group transfer pricing documentation file be used for local purposes?

A group transfer pricing documentation file can be used for local purposes as a starting point for drafting a local file. Having a group transfer pricing file does not necessarily mean that it can be successfully used by a Serbian resident related party for tax inspection purposes. Given the particularities of the Serbian transfer pricing legislation any group transfer pricing file should be duly revised and amended from a local perspective.

Note that the submission of a transfer pricing documentation file that is deemed incomplete from the angle of the Serbian transfer pricing legislation (see Transfer Pricing Rulebook on the contents of transfer pricing documentation file) entitles the competent tax authorities to assess the amount of the relevant transfer prices and make adjustments.

Moreover, transfer pricing documentation files should be prepared in Serbian.

11. What are the steps to be taken in preparing a transfer pricing documentation file?

There are a few major steps that must be taken into consideration when preparing a transfer pricing documentation file:

• prepare the descriptive sections of the transfer pricing documentation file. Such sections must include background information on the group and the relevant local company (e.g. financial information, key customers and competitors, business strategy, legal organization etc.);
• prepare the industrial analysis that should include descriptive analysis of all activities the taxpayer is involved in, regardless of the principal activity. Industrial analysis should emphasize definition and classification of the each activity, market conditions, description of the factors affecting the price determination and definition of the business risks related to the each activity;
• carry on the functional analysis aimed at identifying the functional and risk profiles of the company for which the transfer pricing documentation file is prepared, i.e. identifying the functions performed, the risks assumed and the assets used by the company as part of its business;
• describe the transactions between the company and its related parties involving an identification of all types of transactions conducted between the company and its related parties (including the values thereof), an analysis of the economic context surrounding such transactions, the analysis of the contractual terms and conditions agreed by parties etc.;
• economic analysis – this is the specific section of a transfer pricing documentation file that involves an analysis of the transfer pricing methodology used for each category of inter-company transaction, the selection of the most suitable transfer pricing method given the specific nature of each transaction and the application of such method in order to test the arm's length nature of the prices charged in the relevant transaction.This step may also involve preparation of comparability / benchmarking studies using specialized databases (e.g. Amadeus, RoyaltyStat etc.).

12. What should a transfer pricing documentation file include?

The elements that must be contained in a transfer pricing documentation file are listed in the Transfer Pricing Rulebook.

Locally, a transfer pricing documentation file should include:

• "Group and taxpayer overview", including overall information on the group and specific information on the relevant resident related party. Information on the group should include the following: description of the group’s business and business strategy, its legal, operational and organizational structure, financial data of the group, overview of the transactions between related parties, description of the group’s transfer pricing methodology, presentation of the group’s owners of intangible assets. Information on the taxpayer should include description of the resident related party, its history, its legal, operational and organizational structure, financial data of the company and the strategy of the company;
• “Industry analysis” should include descriptive analysis of all activities the taxpayer is involved in, regardless of the principal activity. Industrial analysis should emphasize definition and classification of the each activity, market conditions, description of the factors affecting the price determination and definition of the business risks related to the each activity;
• “Functional analysis” should include detailed description of the relevant function, risks and assets associated with the intra-group transactions carried out, description of the key indicators in price determination, determination of the factual economic position of the taxpayer in the transactions it carries out. Also, functional analysis should include a detailed description of the intra-group transactions carried out by the taxpayer and the context of carrying out the transactions, the back-up documents related to the transactions (e.g. contracts, invoices, activity reports, etc.), the yearly amounts for each type of intra-group transaction as well as the transfer pricing methodology;
• “Economic analysis” which should include the selection of the most appropriate transfer pricing method and the application of the respective method in order to test the arm’s length nature of the transfer price for each type of intra-group transaction;
• “Conclusion” where the taxpayer should elaborate if the prices used in the transactions with the associate enterprises are set in accordance with the arm’s length principle and if there is any need for the further adjustments in this respect;
• “Appendixes” - the taxpayer should include here the breakdown of data used for the determination of the arm’s length price or price range, in accordance with the methodology used, with special emphasize to the data regarding the comparable domestic or foreign transactions / enterprises.

13. What are the most frequent mistakes in preparing a transfer pricing documentation file?

Our experience shows us that errors in preparing a transfer pricing documentation file occur as a result of either a failure to be aware of/understand the existing legislation, of an insignificant experience on the part of the study prepare in transfer pricing matters.

The most frequent of such errors include:

• failure to include in the transfer pricing documentation file all information required under Transfer Pricing Rulebook;
• failure to understand the differences between various transfer pricing methods, which further results in erroneously selecting and applying a transfer pricing method for a specific transaction;
• failure to properly comprehend a company’s functional and risk profiles;
• erroneous preparation of comparability / benchmarking studies (e.g. inclusion in the final sample of comparable companies of entities who are members of the same group themselves);
• failure to understand the specifics of the industry where the company under review is active;
• failure to include in the transfer pricing documentation file of all inter-company transactions entities; or
• providing insufficient or irrelevant data, which may result in requests of further information from tax authorities.

14. How much does the preparation of a transfer pricing documentation file cost?

There are multiple factors that directly affect the workload required to prepare a transfer pricing documentation file or result in additional overheads (e.g. for the databases used to prepare the comparability / benchmarking studies), which consequently generates an increase in the applicable rate.

The most important of such factors include:

• complexity of the business of the group and the local company for which the transfer pricing documentation file is prepared;
• availability of group-wide documentation to be used as basis for the preparation of the local documentation;
• number of the company’s transactions with related entities to be documented;
• transfer pricing methodology used for each category of company’s transactions with related entities;
• number of comparability / benchmarking studies to be prepared (such studies involve overheads incurred for the use of specialized databases such as Amadeus, RoyaltyStat, LoanConnector or Bloomberg).

Practice showed us that the rate applicable for the preparation of a transfer pricing documentation file may vary between several thousand EUR (in the case of a company with simple business that does not interact significantly with its related parties) and several tens of thousands EUR (for a very large company involved in highly complex and diverse business activities with its related parties).