International Tax Planning and Transfer Pricing Planning: Bulgaria from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The low tax country Bulgaria in the OECD context 2.3 Transfer pricing rules of Bulgaria 2.3.1 Country-per-Country (CbC) reporting 2.3.2 Laws and rules 2.3.3 Arm's length principle 2.3.4 Transfer pricing methods 2.3.5 Definition of related companies 2.3.6 Reporting requirements 2.3.7 Documentation requirements 2.3.8 Cost sharing 2.3.9 Interaction between customs valuation and transfer pricing 2.3.10 Dispute resolution 2.4 Calculation of the case studies in international tax planning between Bulgaria and the USA 2.4.1 Design of the tables 2.4.2 The treaty Bulgaria-USA in brief 2.4.3 BEPS Project progress 2.4.4 Bulgaria in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from Bulgaria to the US 2.4.8 Case study 2: Interests from Bulgaria to the US 2.4.9 Case study 3: Royalties from Bulgaria to the US 2.4.10 Case study 4: Management and technical service fees from Bulgaria to the US 2.4.11 Case study 5: Capital gains with Bulgaria as asset country to the US as seller country 2.4.12 Case study 6: Dividends from the US to Bulgaria 2.4.13 Case study 7: Interests from the US to Bulgaria 2.4.14 Case study 8: Royalties from the US to Bulgaria 2.4.15 Case study 9: Management and technical service fees from the US to Bulgaria 2.4.16 Case study 10: Capital gains with the US as asset country and Bulgaria as seller country 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetary Fund, Bulgaria confirms in 2016 with a gross domestic product (GDP) of US$ 50,446 million the nineteenth-highest GDP of the European Union. In Bulgaria, Corporate income tax is levied at a rate of 10.00%. Further, the Bulgarian corporate tax system has many of the features of a classical system: corporate profits are fully taxed at the corporate level, distributed dividends are also taxed in the hands of individual shareholders. Thus, Bulgaria is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Bulgaria has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, the Combined review assessed Bulgaria’s legal framework as well as its implementation in practice. The report concludes that Bulgaria is overall largely compliant with the international standard on transparency and exchange of information. Nevertheless need for improvement was identified in respect of availability of ownership information on companies which can issue bearer shares and certain gap remains in respect of foreign companies and partnerships conducting business in Bulgaria and foreign trusts. The relevant laws and regulations are properly implemented in practice. However, supervisory and enforcement measures taken by the registration authority should be further strengthened. Bulgaria has in place processes and resources to ensure timely provision of the requested information in the majority of cases and it is considered by its peers an important and reliable EOI partner. This chapter provides a survey on the actual tax law frame conditions in Bulgaria and provides practical support in international tax planning and transfer pricing planning between Bulgaria and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Bulgaria applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the transactional net margin method (TNMM), and the profit split method (PSM). CUP is preferred, followed by the resale and the cost plus method. Unless none of these can be applied, the profit based methods are allowed. The tax legislation provides a broad definition of related companies and a list of circumstances constituting control of a company. For example, related companies are: two companies, of which one participates in the management of the other company; two companies, both controlled by a third company; or two companies, of which one is commercially representative of the other, two companies, of which one holds 5.00% of the voting shares of the other company. There are reporting requirements and documentation requirements. Cost sharing is allowed. There is interaction between customs valuation and transfer pricing. There are no regulations on binding advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Bulgaria, an emerging market economy in the upper middle income range, where the private sector accounts for more than 80 per cent of GDP, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, ^[1] Bulgaria confirms in 2016 with a gross domestic product (GDP) of US$ 50,446 million the nineteenth-highest GDP of the European Union. In Bulgaria, Corporate income tax is levied at a rate of 10.00%. Further, the Bulgarian corporate tax system has many of the features of a classical system: corporate profits are fully taxed at the corporate level, distributed dividends are also taxed in the hands of individual shareholders. Thus, Bulgaria is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Bulgaria has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, ^[2] the Combined review assessed Bulgaria’s legal framework as well as its implementation in practice. The report concludes that Bulgaria is overall largely compliant with the international standard on transparency and exchange of information. Nevertheless need for improvement was identified in respect of availability of ownership information on companies which can issue bearer shares and certain gap remains in respect of foreign companies and partnerships conducting business in Bulgaria and foreign trusts. The relevant laws and regulations are properly implemented in practice. However, supervisory and enforcement measures taken by the registration authority should be further strengthened. Bulgaria has in place processes and resources to ensure timely provision of the requested information in the majority of cases and it is considered by its peers an important and reliable EOI partner. For further information on the exchange of information practice of Bulgaria and to read the full report click here. ^[3]

According to Orbitax, ^[4] (Daily Tax News Digest of 1 December 2016),

on 23 November 2016, the Bulgarian parliament approved amendments to the corporate and individual income tax return filing requirements. The changes include:

• Requiring the electronic filing of corporate tax returns (proposed electronic filing requirement for individuals was removed); and

• Allowing both corporate and individual taxpayers to file an amended return by 30 September of the year in which the initial return was filed without needing to submit a written correction request to the tax authority.

The electronic filing requirement applies from 1 January 2018, while the amended return changes apply from 1 January 2017.

The pivotal question is therefore, how groups of affiliated companies with group companies in Bulgaria and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the low tax country Bulgaria is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Bulgaria (see section 3), and constructive hereon 10 case studies in international tax planning between Bulgaria and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Bulgaria and the US.

This chapter had been written based on the following sources:

• Orbitax^[5], Orbitax Country Analysis Bulgaria and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,

• the Bulgarian Corporate Income Tax Act (CITA), ^[6]

• the Bulgarian Tax Reform 2017, ^[7]

• the US Internal Revenue Code, ^[8]

• the Double Taxation Convention between Bulgaria and the USA signed 23 February 2007 and effective from 1 January 2008, ^[9] and

• the Protocol etween Bulgaria and the USA signed 26 February 2008. ^[10]

The low tax country Bulgaria in the OECD context

International tax planning and transfer pricing planning between Bulgaria and the US based on cross-border case studies is of central importance. In Bulgaria, corporate income tax is levied at a rate of 10.00%. Further, the Bulgarian corporate tax system has many of the features of a classical system: corporate profits are fully taxed at the corporate level, distributed dividends are also taxed in the hands of individual shareholders. Thus, Bulgaria is a low tax country.

Between OECD Member States, also Bulgaria that is no OECD Member State, the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any...