– WHAT THEY REPRESENT AND WHO ARE OBLIGATORS OF THE STUDIES-
1. Definition
The concept of transfer pricing has been present in the accounting literature for a long time. The same appeared through the decentralization of complex organizational structures in business entities, holding companies. In particular, the concept of transfer pricing gain its place through the development of business, the realization of acquisitions, which leads to establishment of small or large groups of affiliated companies whose organizational structure consists of main or parent companies and subsidiaries or branches. Of course, if you include an international element to this, the tax implications in different countries come to the fore.
Viewed from the perspective of a business entity that is part of a group of related parties – a transfer price is considered a price arising in connection with transactions with funds or the creation of obligations within that group, which means that transfers of goods and services between related parties must be made at transfer prices.
Controlled transactions are transactions based on direct or indirect agreements, arrangements, contracts or other business relationships between related parties and include all types of transactions that may have an impact on the taxpayer’s tax base.
2. Related parties
- According to the Law on Profit Tax of the Republic of Srpska
One party/person is related to another when the same participates directly or indirectly in the management, control or capital of the other party, or when the same party or parties participate directly or indirectly in the management, control or capital of both parties. A party/person participates directly or indirectly in the management, control or capital of another party/person when that party directly or indirectly owns at least 25% of the shares or shares in another legal entity or when that party has the factual ability to govern the business decisions of another party/person. A party/person has the factual possibility of controlling the business decisions of another party/person when: the same has or controls 25% or more of the voting rights in another legal entity, has control over the composition of the board of directors of another legal entity, has the right to participate in the profit of another party/person of 25% or more, is a member of the family (married and common-law spouses, children and adopted children, parents and adoptive parents, brothers and sisters, i.e. relatives in the direct line regardless of degree, in the collateral line up to the third degree, as well as in-laws up to the second degree) or a related person with the family member or otherwise has actual control over the business decisions of another person.
- According to the Law on Profit of the Federation of Bosnia and Herzegovina
Related parties/persons means any two parties/persons if one party/person acts or is likely to act in accordance with the directions, requests, suggestions or wishes of another party/person or if both act or are likely to act in accordance with the directions, requests, suggestions or wishes of a third party, regardless of whether these guidelines, requests, proposals or wishes have been communicated. The following persons are considered to be related persons in particular: spouse and common-law partner, adopted children and descendants of adopted children, parents, adoptive parents, siblings and their descendants, as siblings and parents of a married or common-law partner, and a legal entity and any natural person who owns directly or indirectly 25 or more percent of the value or number of shares or voting rights in that legal entity, i.e. two or more legal entities if one natural person or third party owns directly or indirectly 25 or more percent of the value or number of shares or voting rights in each legal entity.
3. Purpose of transfer prices
A taxpayer who participates in a transaction with a related party must determine the taxable profit in a manner that is consistent with the “arm’s length” principle.
The principle of “arm’s length” represents an international
standard that determines the relationship that indicates that the conditions set or imposed between two parties in their business or financial relations must not deviate from the conditions in business or financial relations expected in similar transactions and/or similar circumstances between independent/unrelated parties, in comparable transactions carried out under comparable circumstances.
A transaction between unrelated parties is comparable to a transaction between related parties:
- when there are no significant differences between transactions that could materially affect the financial indicator that is examined in accordance with the appropriate method for verifying transfer prices, or
- when, despite the existence of significant differences, the effect of such differences has been eliminated by reasonable precise adjustments of the relevant financial indicator.
4. Methods of determining transfer prices
In accounting practice, there are several methods of determining transfer prices:
- According to the Law on Profit Tax of the Republic of Srpska
- Comparable Uncontrolled Price “CUP” method according to which the price, in connection with the completed transaction with funds or created obligation, is compared with the price in market conditions for the same or similar transaction. If price comparison and analysis are possible, this method has an advantage over other methods.
- Net Profit Method, which examines the realized net profit on some basis, such as total
costs, sales revenue, property or own capital that one party realizes in business with one or more related parties.
- Trade Price Method, which determines the price at which goods purchased from related parties are sold to unrelated parties. The price determined in this way is reduced by the corresponding gross trading margin that can be achieved in market conditions.
- Method of Adding Gross Profit to Costs, by which first determined are the costs of products, semi-products or services of the party who sold the products, semi-products or services to another related person. The corresponding gross profit that can be realized under market conditions is added to the costs determined in this way. The resulting amount represents the price at which the products, semi-products or services could have been purchased from an unrelated person.
- Profit-Sharing Method, which eliminates the effects of special conditions on profit between related parties. The elimination of effects refers to the determination of the division of profits that an unrelated party would achieve by participating in one or more transactions. According to the profit-sharing method, the profit sharing between related parties in one or more business transactions in which these parties participate is first determined and then, the division of profits that would be achieved among unrelated parties under conditions of free competition is determined.
- According to the Law on Profit Tax of the Federation of Bosnia and Herzegovina
a) Comparable Uncontrolled Price “CUP” method, according to which the price of assets, rights or services sold, purchased or transferred in a controlled transaction is compared with the price of assets, rights or services sold or purchased in a comparable uncontrolled transaction under comparable conditions and circumstances.
b) Method of Cost Price Increased by Normal Earnings, according to which the cost of the supplier (tested party) is increased by the corresponding normal earnings (difference in price or margin) with the aim of obtaining the appropriate profit, and considering the functions that are performed, the risks that are taken, the property used in a given transaction.
c) Resale Price Method, in which the resale price (the price at which the product purchased from a related party is resold to an unrelated party) is reduced by the corresponding gross margin, which represents the amount with which the reseller could cover the subject sales and other operating costs and achieve the corresponding profit commensurate with assumed functions and risks.
d) Profit Sharing Method assumes that the combined profit in a controlled transaction should be divided between related parties participating in that transaction according to the functions performed.
e) Transactional Net Margin Method, where the net profit margin realized by the company in transactions with related parties is compared with the net profit margins realized in similar transactions with unrelated parties.
5. Who is responsible for making transfer price studies
- According to the Law on Profit Tax of the Republic of Srpska
every taxpayer who has transactions with related parties.
A taxpayer who has controlled transactions is obliged to have, at the time of submitting the annual income tax return, documentation on transfer pricing that contains sufficient data and analysis on the basis of which it can be determined that the terms of transactions with related parties are in accordance with the principle of the “arm’s length “.
If the total amount of controlled transactions (including credits and loans) of the taxpayer in the tax year exceeds 700,000 BAM, the taxpayer is obliged to submit an annual report of controlled transactions to the Tax Administration.
- According to the Law on Profit Tax of the Federation of Bosnia and Herzegovina
every taxpayer who has transactions with related parties.
At the time of filing the income tax return, taxpayers are required to submit a Transfer Pricing Report, which should contain, as a minimum, data on the organizational structure and an overview of the operations of the group of related parties to which the taxpayer belongs, analysis of the taxpayer’s activities, functional analysis, choice of transfer pricing methods, and conclusion.
If the total amount of controlled transactions (including credits and loans) of the taxpayer in the tax year exceeds 500,000 BAM, the taxpayer is obliged to submit an annual report of controlled transactions to the Tax Administration.
Author: Natasa Krejic
E-mail: [email protected]
