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Transfer Pricing Aspects in Business Restructurings across Balkans

By Anastasia Sagianni
Posted: 19th November 2014 09:36
Due to tremendous changes in the global economy scene, companies seek opportunities for developing corporate restructuring plans.  The term “Corporate Restructuring” entails the reorganisation of a company in order to attain efficiency and adaptation to new markets. 
It is not enough anymore for companies to develop their defence strategies; they should be seeking opportunities that will eventually optimise their growth potentials.  In line with the above, business restructuring aligned with innovation is the answer to an increasingly strong competitive market.  The term “innovation” is closely linked to the development and the adaptation of sustainable technology.  This leads us to assume that innovation demands investment and therefore expenses.  However, Multinational Enterprises (MNEs) are keen to search for ways to grow and develop while reducing costs and changing their debt structure.
The adaptation of new technology often requires organisations to make risky investments with incomplete information on technology performance, scalability and future technology advances while facing highly uncertain government incentives and regulations (Girotra and Netessine 2013).
Given both the uncertain governmental environment in some countries across Balkans and the market forces, business restructurings end up being one way for MNEs that desire either to retain their profit margins or achieve sustainable growth levels.  Therefore, every legal and tax consultant should not ignore the impact of Chapter IX of the OECD guidelines regarding the transfer pricing aspects of business restructurings.
Within the scope of the said chapter, “Business Restructuring” is defined as the cross-border redeployment by a multinational enterprise of functions, assets and/or risks.” (9.1, Chapter IX). 
Cross-border transfers of tangible or intangible assets and/or the termination or renegotiation of existing valuable arrangements are usually embodied in business restructurings.  On that case, the relevant question under Article 9 of the OECD Model Tax Convention and the arm’s length principle is whether an independent party would require/pay for such a transfer.
In order to determine the compensation payable within a MNE group, it is important to examine the pre and post-restructuring period regarding the assets transferred, functions performed and risks undertaken by each party. 
Business restructurings primarily consist of internal reallocation of functions, assets and risks within an MNE.  Companies who choose the way of a “corporate restructuring” are driven usually by the wish to maximise synergies and economies of scale and to improve the efficiency of the supply chain.  However, as previously analysed, one major reason for entering in business restructurings is the need to cut down costs while sustaining its profitability (9.4, Chapter IX). 
According to Chapter IX one very important step of the Business Restructuring Process is to analyse and understand the reasons for restructuring (including synergies) while at the same time expected benefits should be also analysed and documented.
Choosing the Best Alternative
The arm’s length principle is based on the notion that when independent parties estimate the option to enter in a transaction, unavoidably they will evaluate also other options realistically available to them and they will only enter in the transaction if no other alternative is more attractive than the first one.
Applying the arm’s length principle in business restructuring is not an easy task.  All possible circumstances in a transaction have to be reviewed (including an “Exit Clause” in a contract).  Apart from direct tax issues in business restructurings, VAT and custom duties should be taken into consideration. 
The pressure of competition in a specific geographical area like Balkans is intense and MNEs operating in those countries are trying to avoid risks by centralising both their functions and their activities.  In Balkan countries, like Croatia, Albania, Serbia and Bulgaria among others, there are no specific provisions applicable to any of the forms of restructuring.  General transfer pricing rules will apply in a case of Business Restructuring.
For example, Bulgaria’s legislative regime does not provide the legal definition of what is considered as business restructuring for transfer pricing purposes.  Nevertheless, there are specific provisions regarding the transfer of intangibles in Chapter 13 of The Transfer Pricing Manual (TPM). 
Under the TPM there are four methods regarding the valuation of an intangible asset:

 - the market-based approach;
 - the approach on the development costs;
 - the comparable approach; and
 - the approach based on the rate of return. 
In Serbia, apart from the lack in domestic law of the specific rules to be applied in CBBR, there are also no decisions of the Tax and Judicial authorities that could provide guidance for the implementation of the arm’s length principle in cases of business restructuring.  On the other hand, Croatia has had a structured Tax System only since 1991 and this justifies the fact that only general TP rules apply in CBBR cases.  The Recently adopted law in Albania regarding TP does not include any provision regarding TP issues that may arise in Business Restructurings.
Anastasia Sagianni is the Head of Eurofast Transfer Pricing division. 
During her professional career, Anastasia was involved in financial audits and preparation of financial statements in accordance with IFRS.  Anastasia specialises in transfer pricing and with her interdisciplinary know-how on tax, business and markets, she advises on designing the transfer pricing model that suits to each business. 
Anastasia obtained her Bachelor in Economics from the National and Kapodistrian University of Athens with major in Economics and Business Finance, where she also pursued her postgraduate degree in Applied Economics and Finance.  In 2010, Anastasia obtained her professional qualification in Audit from the Institute of Certified Public Accountants of Greece (IESOEL) and since January 2014, she is regarded CPA, according to the Greek legislation. 

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