Transfer Pricing regulations in Georgia

From 2011 in Georgian tax code were introduced articles referring to Transfer Pricing matters and in 2013 minister
of finance of Georgia introduced instruction #423 on pricing international controlled transactions, which is based on OECD Guidelines 2010. The same year Revenue Service of Georgia created Transfer Pricing division in Audit department, which is responsible for auditing Georgian entities engaged in international controlled transactions.

Georgia is not a member state of OECD, but local TP regulations follow OECD Guidelines and the matters that are not regulated by the Instruction shall be regulated by the OECD Guidelines, as it’s stated by the Instruction.

Transfer Pricing rules in Georgia are applicable to companies which have carried out transactions with non-resident related entities and/or entities registered in preferential tax jurisdictions. For the purposes of Georgian tax code preferential tax jurisdictions are determined by Decree #615 of the minister of finance of Georgia and are those which have less than 5% rate of tax on income; For purposes of Georgian Transfer Pricing regulations two entities are related if:
a)one person directly or indirectly participates in the management, control or capital of the other person.
b)the same persons directly or indirectly participate in the management, control or capital of two persons.

According to the related articles in Georgian Tax Code a person participates in the management, control or capital of an enterprise if he/she directly or indirectly owns over 50% of an enterprise. Furthermore, two persons shall be deemed related if facts prove that business decisions of one of them is controlled by the other or the total amount of loans received by an enterprise from or under guarantee of the other entity/person is more than 50 percent of the enterprise’s total assets.

Georgian TP instruction determines 5 methods of transfer pricing as it’s suggested by OECD Guidelines:

  • Comparable Uncontrolled Price Method
  • Cost-Plus Method
  • Resale Price Method
  • Transactional Net Margin Method
  • Profit Split Method

The three traditional methods have first priority over the TNMM and profit split methods. Some other method can be applied if abovementioned methods can not 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 proof that the abovementioned
requirements have been satisfied. A taxpayer should select the most appropriate method according to the nature of its business, comparability factors and the availability of relevant information. If there is a lack of internal comparables or these internal comparables are not reliable enough, the taxpayer may use external comparables from the foreign markets. It’s acceptable to use information of foreign comparable companies in order to determine arm’s length range butin case of differences between economic or other factors, comparability adjustments should be made in accordance with the TP instruction.

There is not determined any specific form(tax return)for submitting information regarding controlled transactions.

And taxpayers which have carried out controlled transactions are not automatically obliged to submit details of the transaction to the tax authority. However, in profit tax return taxpayers shall indicate if they have carried out controlled transactions and afterwards they may receive an official request from tax authority to prepare and provide TP documentation. Full transfer pricing documentation shall be provided within 30 days upon official request.

For all controlled transactions transfer pricing documentation should contain:

  • Organizational structure of the tested party and information regarding parties relevant to the controlled transaction.
  • Description of business operations of the tested party including an analysis of the economic factors that may affect prices of goods and/or services it provides.