Amendments to the Tax Code

On 1 January 2021 the National Center of Legal Information of the Republic of Belarus published Law N 72-З dated 29 December 2020 "On Amendments to the Tax Code of the Republic of Belarus" (hereinafter –Law N 72-З), which also clarified and updated some transfer pricing control provisions in Belarus from 2021 onwards.

As a reminder, since the beginning of 2021 the following major changes in transfer pricing have applied:

- There has been a new procedure for calculating the arm’s length range which disregards extreme values (interquartile range);

- The list of information sources for conducting benchmark studies has been refined and clarified: (1) the priority given to different sources of information was abolished; now information sources which allow for the greatest number of comparable criteria to be used are given precedence; (2) the "internal" source of information was clarified – now, transactions of a taxpayer's counterpart with third parties can also be used for analysis; (3) the data of EEC companies and, if data are not available, of other foreign companies, are allowed for profitability analysis if there is no data on the profitability of Belarusian companies in databases;

- The possibility of using the results of independent valuations as the arm’s length price have been expanded. Specifically, the notion of a "one-off transaction" has been introduced, and the number of permissible valuation methods in certain cases have been expanded. As before, the valuation is applicable for determining the arm’s length prices, provided certain requirements are met (there is more about the valuation requirements for transfer pricing purposes on the website of the Tax and Duties Ministry of the Republic of Belarus);

- The cases in which TP documentation is required have been reduced. Specifically, Law No. 72-Z provides two additional exceptions: (1) TP documentation is not required for controlled transactions if profits are exempt from income tax; (2) TP documentation is not required if the amount of an individual foreign trade transaction of a major taxpayer with a related party does not exceed ten percent of the amount threshold (currently 200,000 Belarusian rubles) and cannot be grouped on the basis of the transactions having homogeneity. The issue of whether it is necessary to prepare and provide economic justification upon a request from the tax authorities for these transactions remains open;

- Transactions with the owners of the VISA, MasterCard and American Express international payment systems, registered in offshore zones, have been excluded from the list of controlled transactions from the beginning of 2021.

The proposed amendments clarify the application of TP rules in Belarus, bringing them closer to those adopted in neighbouring countries. At the same time, since the practice of applying TP controls in Belarus is still very limited, many issues still require careful research.

OECD Guidance on the transfer pricing implications of the COVID-19 pandemic

On 18 December 2020, the OECD published Guidance on the transfer pricing implications of the COVID-19 pandemic (hereinafter – the “Guidance”).  The Guidance clarifies and illustrates practical application of the arm's length principle as articulated in the OECD Transfer Pricing Guidelines (hereinafter – “OECD TPG”) to the unique real-world patterns and specific challenges resulting from the COVID-19 pandemic. 

The Guidance represents the consensus view of the 137 members of the Inclusive Framework and is intended to help taxpayers and tax administrations conduct transfer price analyses by taking better account of the facts and circumstances of the transaction under consideration. The Guidance is not mandatory and should be seen by tax professionals as being helpful in making arm’s length pricing determinations according to existing local laws in circumstances where COVID-19 has had an impact.

The Guidance focuses on four priority issues where the practical challenges posed by COVID-19 are considered most significant: (1) Comparability analyses; (2) Losses and the allocation of COVID-19 specific costs; (3) Government assistance programmes; (4) Advance pricing agreements.

Below we have highlighted the key aspects of each of the four key elements in the Guidance:

–      Comparability analysis

  1. Additional sources of information which may be used to support the performance of comparability analyses for 2020 now also include analysis of how sales volumes changed during COVID-19, capacity utilization analysis, analysis of exceptional costs, and data from industry/analytical reports.
  2. Financial outcomes that taxpayers within a controlled transaction would have achieved “but for” the impact of COVID-19 may provide useful information for assessing the financial impact of COVID-19 and determining any appropriate resulting impact on intercompany prices.
  3. A comparability analysis that is solely based on financial information from the global financial crisis of 2008/2009 would raise significant concerns given the unique and unprecedented nature of the COVID-19 pandemic.
  4. In some cases it may be appropriate to have separate testing (or price setting) for periods most impacted by the pandemic.
  5. Loss-making comparables that satisfy the comparability criteria in a particular case should not be rejected on the sole basis that they suffered losses in the periods affected by the COVID-19 pandemic.

–      Losses and the allocation of COVID-19 specific costs

  1. The Guidance emphasises that the specific facts and circumstances must be considered when determining whether a so-called “limited-risk” entity could incur losses at arm’s length.
  2.  Exceptional costs should generally be consistently excluded (at the level of the tested party and the comparables) from the net profit indicator except when those costs relate to an accurately delineated controlled transaction.
  3. The Guidance encourages tax administrations to carefully review the assertions of force majeure circumstances or renegotiations in light of accurately delineated transactions and the economically relevant circumstances of the transaction.

–      Government assistance programmes

       i.         Not all types of government assistance require special attention. However, the most economically effective examples of government assistance do require assessment of their possible impact on controlled and comparable transactions, especially if the analysed party and comparable companies apply different accounting standards or are facing different economic conditions.

      ii.         While the receipt of government assistance may reduce the quantitative negative impact of a risk, it must be distinguished from the allocation of risk under the guidance of Chapter I of the OECD TPG.

–      Advance pricing agreements

  1. Existing APAs and their terms should be respected, maintained, and upheld, unless there have been conditions that lead to the cancellation or revision of the APA (e.g. breach of critical assumptions). Under the Guidance, whether a critical assumption has been breached should be analysed on a case-by-case basis.
  2. For APA’s under negotiation, the parties could consider a short-period APA for the period affected by COVID-19, and then a separate APA for the post-COVID period. They can also consider certain retrospective amendments to an APA, extend the period of the APA, or use a cumulative or term-test throughout the APA period

Our KPMG professionals will be pleased to answer any questions you may have about application of the Amendments to the Tax Code in Belarus starting from 2021 and application of the OECD Guidance in more detail, or assist you in substantiating the arm’s length level of prices in the challenging times of the affected period.

We will discuss the impact of the Covid-19 Pandemic on transfer pricing analysis and ways to address the myriad complex issues arising in Russia and the CIS at a webinar to be held in 2021. We would be delighted to see you and your colleagues among the webinar participants; please do not miss the forthcoming announcement of the event.

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