Global Tax Alert (News from Transfer Pricing) | 20 December 2013

Georgia's Ministry of Finance issues transfer pricing instruction and documentation requirements

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Executive summary

On 18 December 2013,Order N 423 of the Minister of Finance of Georgia enforced the Instruction “On Pricing International Controlled Transactions” (Instruction) which is pursuant to Articles 126-1291 of the Tax Code of Georgia (Tax Code). The Instruction clarifies transfer pricing principals set forth in the Tax Code.

Although general transfer pricing rules have been in the Tax Code since 1997, specific transfer pricing provisions were introduced to the Tax Code only in 2011. The rules generally follow the Organisation for Economic Co-operation and Development (OECD) principles. However, the rules were not enforced in practice as their implementation was dependent on the instruction of the Minister of Finance. Finally, the Instruction has been published. The Instruction also introduces contemporaneous transfer pricing documentation requirements in Georgia.

This Alert outlines key provisions of the Instruction concerning the scope of transactions subject to Georgian transfer pricing rules, acceptable transfer pricing methods, comparability criteria, information sources, arm's length range, procedure for advance pricing agreements, transfer pricing documentation requirements and other procedural issues. It also outlines actions necessary for those companies which do business in Georgia.

Detailed discussion

Controlled transactions

Georgian transfer pricing rules are applicable to cross border transactions between a Georgian resident company and a foreign company which is a related party or a resident of an offshore/law tax jurisdiction as per the list defined by the Government of Georgia.

For transfer pricing purposes, two persons are related if:

  • One person is directly or indirectly involved in the management or control of another person, or directly or indirectly holds the capital of this person; or
  • Same persons are directly or indirectly involved in the management or control of two other persons, or directly or indirectly hold the capital of those other persons.

A person is regarded as being involved directly or indirectly in management, control or capital if:

  • It holds directly or indirectly more than 50% of enterprise;
  • It practically takes control over business decisions.

The Instruction clarifies what “practical control over business decisions” means:

  • A person holds or can control a majority of the voting rights in a company;
  • A person can control the composition of the board of directors;
  • A person holds 50% or more shares in profits of the enterprise;
  • The total amount of loans granted by a person to an enterprise and loans of that enterprise guaranteed by the person is greater than 50% of the enterprises' total assets' value;
  • An enterprise is owned or carried on by a relative of the person;

  • Control over business decisions of the enterprise is otherwise evidenced by the facts and circumstances.

Transfer pricing methods

Georgian transfer pricing rules provide for five methods similar to those recommended by the OECD Transfer Pricing Guidelines:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Net profit margin method
  • Profit split method.

Generally, the “best method” rule should apply. However, the comparable uncontrolled price method will have the priority. Additionally, the first three methods (comparable uncontrolled price, resale price and cost plus) are preferred over the last two methods (net profit margin and profit split).

It is also permissible to use some other method if none of the approved methods can provide reliable results and such other method yields a result consistent with that which would be achieved by independent enterprises engaging in comparable uncontrolled transactions under comparable circumstances. In such cases a taxpayer shall bear the burden of demonstrating that the above requirements have been satisfied.

When applying transfer pricing methods, the Instruction allows analysis of certain controlled transactions in combination (i.e., on an aggregated basis) in case these transactions are carried out under the same or similar circumstances and are economically closely linked to one another in a way that cannot reliably be analyzed separately.

Sources of information

In determining market prices both taxpayers and the Georgian Revenue Service may use internal or external comparables, dependent on whether or not the parties of the controlled transaction have comparable transactions with third parties.

An external comparable may be relied upon only after comparability adjustments, if relevant, and only to the extent that such comparable does not represent a tax secret. The application of foreign comparables will be acceptable due to lack of information sources within Georgia, but the impact of geographic differences and other factors need to be analyzed, and, where appropriate, comparability adjustments to be made in accordance with the Instruction.

Arm's length range

Instruction provides that an interquartile range of comparable prices or margins will be used in order to determine the arm's length range of prices (margins). Where the relevant financial indicator derived from a tested transaction falls outside the arm's length range, the tax authorities can make an adjustment to the taxable profits of a Georgian enterprise. The adjustment shall be to the median of the arm's length range unless the facts and circumstances clearly support an adjustment to a different point within the arm's length range.

Services and intellectual property

The Instruction stipulates special provisions for application of the arm's length principle to service transactions and transactions involving intangible property. Interestingly, the Instruction provides that a service charge for a controlled transaction shall be considered consistent with the arm's length principle where:

  • It is charged for a service that is actually rendered;
  • The service provides, or when rendered was expected to provide, the recipient with economic or commercial value to enhance its commercial position;
  • It is charged for a service that an independent enterprise in comparable circumstances would have been willing to pay for if performed for it by an independent enterprise, or would have performed in-house for itself; and
  • Its amount corresponds to that which would have been agreed between independent enterprises for comparable services in comparable circumstances.

Further, the Instruction appears to accept the cost allocation principles where services are rendered by an enterprise jointly to various associated enterprises and it is not possible to identify specific services provided to each of them – in this case, the Instruction states that the total service charge shall be allocated among the associated enterprises that benefit or expect to benefit from the services according to reasonable allocation criteria.

Transfer pricing documentation

A taxpayer should maintain contemporaneous transfer pricing documentation and present such documentation to the tax authorities upon their written request within 30 calendar days. The documentation does not have any predefined format, rather it should contain the following types of information:

  • Overview of the business operations of the Georgian enterprise
  • Analysis of the economic factors affecting the prices
  • Organizational structure
  • Description of the controlled transactions
  • Analysis of the comparability factors
  • Details of the group's transfer pricing policy
  • Transfer pricing method applied and reasons for selection of a particular method
  • Comparability analysis
  • Details of advance pricing agreements relevant to the controlled transaction (if any)
  • Conclusion on compliance with the arm's length principle, and, where relevant, on adjustments made by the Georgian enterprise to its transfer prices/taxable income
  • Other information that may have a material effect on the determination compliance with the arm's length principle

Transfer pricing documentation can be submitted in Georgian or English language. However, whenever the documentation is submitted in English, tax authorities may request Georgian translation to be arranged by a taxpayer.

The question remains as to what is the first calendar year to be covered by the new transfer pricing documentation requirements. Based on informal discussions with the tax authorities, it appears that the first year for which documentation would be requested is 2014. Nevertheless, in view of the fact that (a) the arm's length principle has been in the Tax Code of Georgia since 2011, and (b) transfer pricing documentation is required to be contemporaneous, it is possible that transfer pricing documentation might be requested also for earlier years, i.e., 2011-2013. Additionally, one cannot exclude that the tax authorities may start applying the procedures outlined in the Instruction when auditing transfer pricing positions of Georgian taxpayers for previous years.


Generally, taxpayers are expected to conduct economic analysis using the benchmarks relevant to the financial year in which controlled transactions occurred. However, where required information is not available, taxpayers are allowed to use the benchmarking data for the years preceding the year of their transaction, but not more than four years prior to the financial year in which the tested transaction took place.

Taxpayers with a turnover of less than GEL 8 million (about USD 5 million) could update economic analysis based on external comparables every third year, provided there have been no material changes to business and economic circumstances.


No specific penalties are defined for failure to submit or incomplete transfer pricing documentation. The standard penalties for underreporting of tax will apply if the tax authorities re-assess the amount of taxable profit of the Georgian enterprise.

Advance Pricing Agreement

A taxpayer may apply to the Georgian tax authorities with the request to conclude a unilateral Advance Pricing Agreement (APA). An APA can be issued with respect to one or several controlled transactions provided that they are expected to exceed GEL 50 million (about USD 30 million). Application for APA shall be filed in advance, i.e., before commencement of a transaction. An APA will be valid for a period up to three years. Before filing the application a taxpayer is allowed to request a preliminary meeting with the Revenue Service.

If a taxpayer violates the terms or critical assumptions set in the APA, the agreement can be revised, terminated or annulled.

The Instruction and the Tax Code also refer to a possibility of conclusion of a bilateral or a multilateral APA. Procedures related to such APAs may differ from those outlined for a unilateral APA. Further clarifications regarding the details and the way of application for a bilateral or a multilateral APA may follow from the Georgian Competent Authority.

Avoidance of double taxation

Taxpayers will have the right to obtain a corresponding adjustment upon written request filed to the Georgian Revenue Service. The request must include the information necessary for the Revenue Service to examine consistency of the adjustment with the arm's length principle. The Revenue Service could reject a taxpayer's request in part; such rejection decision, if any, must be supported in writing or electronically. The Revenue Service shall make decision on adjustment within six months from the filing of application and supporting documents thereof.

Finally, subject to the provisions of the applicable tax treaty, where a Georgian enterprise becomes aware that the actions of the Georgian Competent Authority or a tax treaty partner will result in taxation not in accordance with the provisions of the relevant tax treaty, the Georgian enterprise may present the case to the Georgian Competent Authority and request that the case be resolved by mutual agreement procedure. Detailed procedure regarding the mutual agreement procedure is further expected.

Action required

Companies with businesses in Georgia are encouraged to review their intercompany transactions with their Georgian enterprises and to prepare contemporaneous transfer pricing documentation. It is possible that transfer pricing documentation may be requested already starting 2014.

Future Alerts will cover developments regarding Georgian transfer pricing rules.

For additional information with respect to this Alert, please contact the following:

EY Georgia LLC, Tbilisi
  • Zurab Nikvashvili
    +995 32 243 9375
Ernst & Young (CIS) B.V., Moscow
  • Evgenia Veter
    +7 495 660 4880

EYG no. CM4048