Transfer Pricing and BEPS to Increase Tax Revenues in Georgia

Transfer Pricing and BEPS to Increase Tax Revenues in Georgia

The FINANCIAL -- Transfer Pricing Rules were implemented by the Government of Georgia in 2011, based on OECD guidelines. Since the number of international companies in Georgia is increasing steadily, Transfer Pricing Rules have become a point of obvious interest. However, multinational companies operating in Georgia are not sufficiently well-informed about the rules.

Currently, Georgian international taxation law is expected to implement modifications, which can be used by multinational corporations in order to avoid or significantly reduce their tax liabilities by shifting profits from one country to another. Promoting economic development and attracting FDI in Georgia is believed to be an additional profit of Transfer Pricing.

The Managing Partner of NEXIA TA, Gela Mghebrishvili, explains, “Transfer pricing is the setting of the price for goods and services sold between related parties, which are residents of different tax jurisdictions (countries). For example, if a subsidiary company sells goods to a parent company, the cost of the goods is the “transfer price”. Transfer pricing can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before taxation, to countries where it does business.”

“Members of OECD agree that taxes should be fairly divided between jurisdictions and transfer prices charged by one related party to another, must be the same as if the parties were not related (Arm’s-Length principle).” Therefore, entities should charge the price of the open market. Georgian Transfer Pricing rules apply to transactions between a Georgian entity and a related foreign company and generally follow the OECD Guidelines, states the representative of NEXIA TA.

Levan Lomtadze, a Chief Auditor of Internationally Controlled Operations Assessment - Transfer Pricing Division, at Revenue Service, says that every time when RS audits a company, they provide a clear explanation to taxpayers what kind of information companies should provide regarding their international transactions. However, Lomtadze agrees with business representatives that confusion due to a lack of precise information really exists. “We plan to take relevant actions to raise awareness of taxpayers regarding Transfer Pricing rules in Georgia and RS is going to draft more clear procedure about Advance Pricing Agreements,” Lomtadze told The FINANCIAL.

“Companies who are asked by RS to document certain transactions, can prepare documentation by themselves. However, since the process is highly complicated and time-consuming, usually companies are not ready to prepare this documentation within 30 days. Therefore, some audit companies operating in Georgia do offer this service. If the company does not provide documentations, its transfer prices will be audited by RS in order to determine whether prices applied to these transactions are in accordance with the “Arm’s Length Principle” or not. Therefore, this may impose additional taxes and penalties” Mghebrishvili told The FINANCIAL.

Well, the implementation of OECD recommendations seems pretty satisfying, but why does it matter for the overall wellbeing of the country?!

According to the UN’s report, Transfer Pricing does not necessarily involve tax avoidance, since the need to set such prices is a normal aspect of how multinational companies must operate. However, the taxation authorities may consider a transaction to be “mis-pricing”, “incorrect pricing”, “unjustified pricing” or non-arm’s length pricing, and issues of tax avoidance and evasion may potentially arise.

“Transfer pricing can be used by multinational corporations in order to avoid or significantly reduce their tax liabilities by shifting profits from one country to another. For example, when profit is generated in Country A, which has a high Corporate Tax Rate, a multinational enterprise can give a higher profit margin to its subsidiary, which is a resident of a low-tax jurisdiction, by overpricing or underpricing goods and services transferred between them. Therefore, corporate profit tax can be avoided or reduced significantly and economies of some countries are harmed, because they receive less tax revenue,” says Mghebrishvili, NEXIA TA.

It seems that Transfer Pricing is essential in terms of economic development too. Lomtadze says that the main incentive for implementing Transfer Pricing rules, was to make the Government more effective against base erosion and profit shifting to another country. “In addition, it’s important for Transfer Pricing rules in Georgia to be in compliance with international taxation standards. At the same time, we want to have the relevant policy with clear rules and high legal certainty to make Georgia attractive to multinational companies and promote foreign direct investment,” Lomtadze told The FINANCIAL.

Now, what about BEPS?

Base Erosion and Profit Shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. BEPS is not fully implemented so far, but Georgia has been a member of the BEPS Inclusive Framework since 2016, which means it has committed to implementing the four minimum standards, on harmful tax practices, tax treaty abuse, country-by-country reporting, and improving dispute resolution mechanisms.

“OECD has developed 15 Actions that countries should take in order to avoid tax manipulations by Multinational Enterprises. These are actions against Base Erosion and Profit Shifting (BEPS). Action 13 gives recommendations to countries with regard to Transfer Pricing documentation. Many OECD member countries have already taken into consideration these recommendations and adopted new rules of TP documentation. The Georgian Government has not implemented these rules yet, but in the nearest future we are expecting changes,” Mghebrishvili told The FINANCIAL.

By the way, Transfer Pricing rules are regulated by articles 126-1291 of the Georgian Tax Code and Instruction on Pricing International Controlled Transactions approved by Decree #423 of the Minister of Finance of Georgia. The framework of international tax laws is developed by the OECD, based on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

To conclude, Transfer Pricing refers to the rules for pricing international transactions between enterprises under common ownership or control. Intragroup pricing is a major opportunity of corporate tax avoidance, and it was one of the issues identified when the OECD released BEPS action plan in 2013. Implementing Transfer Pricing Rules and BEPS measures, the Government of Georgia controls international transactions more effectively, prevents corporate tax avoidance and increases tax revenues of Georgia.