The revised definitions are included in a law passed by the Serbian Parliament on 15 December 2012, and the law was published in the official gazette (no. 119/2012, dated 17 December 2012). The following provides an overview of the revised transfer pricing definitions.
A related party is considered to be a private individual or a legal entity that directly or indirectly holds at least 25% of shares or a stake (thereby enabling control over the taxpayer) or that holds at least 25% of voting rights in the taxpayer’s managing bodies (i.e., significant control over decision making). Parties related to the taxpayer may also include every non- resident entity from a jurisdiction with a preferential tax system.
Besides banks, the debt to equity ratio of 10:1 also applies to financial leasing companies.
Transfer pricing documentation
The taxpayer is required to submit documentation of transactions with related parties at prices that would have been realized on the open market, had they not involved a related party (i.e., the arm’s length principle), when a uniform approach can be applied to a large number of individual transactions or a separate approach, in the case of complex transactions.
If the transfer price differs from the arm’s length price, the taxpayer is required to declare in the tax base:
- The amount of the positive difference between the arm’s length income and the transfer price income
- The amount of the positive difference between the transfer price transaction costs and arm’s length transaction costs
If the arm’s length price is specified as a range, and the value of the transfer price is within such range, it is deemed that there is no difference between the two prices. If the value of the transfer price is outside of such range, the arm’s length price is equal to the median value of the specified range.
The taxpayer is also required to declare separately in the tax balance any interest on deposits, loans and borrowings involving related-party transactions (up to the level specified by thin capitalization rules).
The Minister of Finance can specify instance for which it is possible to reduce amounts that are declared in the tax base, when such reduction can be used only in cases involving the application of double taxation avoidance treaties.
Arm’s length pricing methods
In addition to the comparable uncontrolled price method, the cost-plus method (increased for gross margin) and the resale price method (in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations), the following additional methods for determining the arm’s length price have been introduced:
- Transactional net margin method
- Profit split method
- Any other method, if shown that any of the above methods cannot be applied
In determining the price, the method used is the method that corresponds best to the particulars of the case when the use of several methods is permitted.
Only the effects of the difference between the transfer price and the market price are declared in the tax balance as an increase in the tax base.
The Minister of Finance and Economy is to provide guidance that will specify separately the contents of required transfer pricing documents, relying on the OECD guidelines.
In the event of incomplete or partially complete documentation, the Serbian tax authority will issue a warning to the taxpayer with instructions to provide the requisite documentation within a period that cannot be shorter than 30 days or longer than 90 days, as of the date of issue of such warning.
Arm’s length interest rate
The Finance Minister can specify arm’s length interest rates on deposits, loans and borrowings between related parties. Instead of such interest rates, the taxpayer is entitled to apply arm’s length transfer pricing methods to all loans and borrowing involving related parties.
For more information, contact a KPMG tax professional:
+381 60 20 55 570