Initial Note: This article is written by Gela Barshovi, a Transfer Pricing specialist and former tax inspector of the Transfer Pricing division of Georgia’s Revenue Service (GRS—tax and customs administration). This article draws on both Georgian Transfer Pricing law and the author’s personal experience with applicable practices in Georgia, where many transfer pricing issues are governed by established practice.
Transfer Pricing regulations in Georgia
Georgian Transfer Pricing (TP) legislation has been fully in force since 2013. The following legal norms regulate Transfer Pricing issues in Georgia:
- Georgian Tax Code: Articles 126-129, prima 1.
- Decree of the Ministry of Finance of Georgia: Decree #423, dated December 18, 2013.
- OECD Guidelines: If Georgian TP law does not cover a specific issue, reference is made to the final version of the OECD Transfer Pricing Guidelines for regulation.
- Georgia Revenue Service (GRS) Guidelines: The GRS also has an internal guideline for the practical implementation of Georgian TP law.
A dedicated Transfer Pricing division was established at the Georgia Revenue Service in 2015. Notably, the author of this article served as a leading inspector within this division from its inception.
More details about Georgian Transfer Pricing rule you can read in another article of the Author HERE.
Transfer Pricing documentation requirement in Georgia
According to Georgian transfer pricing law, if a Georgian company conducts controlled transactions (business operations between a Georgian company (or a branch) and its associated foreign entity or any person based in a tax haven jurisdiction), it has an obligation to prepare transfer pricing documentation on an annual basis. This documentation must be submitted upon request by the GRS within 30 days of such a request.
Georgian transfer pricing documentation typically follows a similar format to that of the local file.
When a Georgian is Entity obliged to Prepare Transfer Pricing Documentation?
In Georgia, companies (e.g. Georgian LLC part of multinational group) and permanent establishments (branches) of foreign entities are required to prepare transfer pricing documentation for controlled transactions. This documentation must be submitted to the Georgia Revenue Service upon request.
Controlled transactions typically involve business operations such as:
- Transactions with associated foreign entities, including purchases or sales of goods, loans, royalty payments, service provision or receipt.
- Transactions with persons based in tax havens, regardless of association. The list of tax haven jurisdictions is published by the Government of Georgia.
Examples where a Georgian company must prepare transfer pricing documentation include:
- A Georgian company purchasing products from its parent or another group member foreign company for resale in Georgia.
- A Georgian company providing services (like intermediation, software development, technical support, call center service, etc.) to its parent foreign company or other group members abroad.
- A Georgian company receiving intra-group services from its parent foreign company or other group members.
- A Georgian company engages in a business transaction with a company based in tax heaven jurisdiction.
- A permanent establishment of a foreign company receiving services from its head office.
Transfer Pricing Reporting obligation in Georgia: Annual Local File Requirements
A Critical Requirement in Georgian Transfer Pricing Law
Under Georgian law, a local company or the Georgian branch (Permanent Establishment) of a foreign entity must submit transfer pricing documentation to the Georgia Revenue Service (GRS) within 30 days of receiving a request. However, there is an intriguing paradox: the law stipulates that this documentation must already be prepared at the moment GRS makes its request. This peculiar requirement underscores the importance of proactive compliance.
Moreover, preparing high-quality transfer pricing documentation within 30 days after receiving a request from GRS can be difficult. To avoid potential complications, it is strongly recommended to prepare this documentation before the end of the fiscal year or shortly after it concludes. This approach ensures readiness in case GRS requests the documentation.
Relevant Legal Framework
For further details on these requirements, refer to relevant articles within Georgia’s Transfer Pricing legislation:
Article 17 Transfer Pricing Documentation (paragraph1)
“For the purpose of Article 129(1) of the GTC, a request by the Revenue Service to provide an explanation regarding the ground based on which it considers its profit consistent with the market principle shall be considered satisfied where:
- The Georgian enterprise has prepared transfer pricing documentation in accordance with this article and
- The documentation is provided to the Revenue Service within 30 calendar days of receipt of the request in writing.”
In practice, there were cases when the Georgia Revenue Service (GRS) issued transfer pricing documentation requests with as little as five days’ notice to Georgian companies. These abrupt demands were justified by citing provisions in Article 17 of Decree #423 (the phrase “has prepared “as cited above).
Therefore, it is crucial for companies to proactively prepare their transfer pricing documentation in advance of any potential request from the GRS.
Transfer Pricing Compliance in Georgia: When Companies Can Prepare Transfer Pricing Documentation Every 3 Years Instead of Annually
As an only exception, the Georgian Transfer Pricing law stipulates that if a Georgian entity’s annual turnover is less than 8 million Gel (approximately 2.7 million euros), it is required to update its benchmark using external comparables only once every three years, provided there have been no significant changes in the business operations of the Georgian enterprise, comparable companies, or relevant economic conditions. However, this provision poses a paradox: without conducting annual benchmarks, how can one be certain that no changes have occurred in the operations of comparable companies? In the author’s view, relying on this exception places a burden of proof on taxpayers. In practice, tax authorities may still scrutinize each year independently.
Consequently, despite this clause, it may be advantageous for companies not to utilize this exception and instead update their transfer pricing documentation annually rather than every three years. This approach allows them to maintain full awareness of external comparables’ interquartile range each year and ensure their margins align within it. Otherwise, if significant changes are discovered by tax authorities during those three years, enjoying this exception will not shield a Georgian company from additional taxes, penalties, and late payment interest.
Key reasons why annual preparation of Transfer Pricing (TP) documentation may be the preferred approach, even for entities that fall under the above exception:
Better Control: Companies might prefer updating transfer pricing documentation annually for better control over comparable data.
Burden of Proof: Taxpayers must prove no material changes occurred during those three years.
Risk Management: Annual updates help avoid potential penalties by ensuring compliance with current market conditions.
Waivers from Transfer Pricing Documentation in Georgia: What You Need to Know
Under Georgian Transfer Pricing law, there is no specific threshold for turnover or the volume of controlled transactions that would exempt a Georgian company from preparing Transfer Pricing documentation.
However, in the author’s opinion, if the volume of controlled transactions is so minimal that the benefits of preparing such documentation are outweighed by its costs, this could serve as a valid argument for avoiding these expenses.
In such a case, it is recommended to consult a transfer pricing expert for a general analysis of your Transfer Pricing case rather than preparing full transfer pricing documentation. This can help identify potential risks.
Submission Language of Transfer Pricing documentation in Georgia
The documentation can be submitted in either Georgian or English. However, if requested by the Revenue Service, English documents must be translated into Georgian at the entity’s expense
What Are the Penalties for Non-Compliance with Transfer Pricing Documentation in Georgia?
If a Georgian company fails to prepare and submit Transfer Pricing documentation upon request, it faces fiscal sanctions (Fiscal sanctions are relatively small in amount, yet they can be applied endlessly and repeatedly).
More critically, the burden of proof shifts to the company, allowing GRS to assess cases at their discretion. This can lead to additional taxes, with 50% penalties and late payment interest (0.05% daily).
To minimize this risk, it’s crucial for companies to maintain proper TP documentation. This way, GRS must first prove that the company’s approaches are incorrect before imposing additional taxes or penalties.
Benefits of preparing of Transfer Pricing documentation for Georgian companies
Preparing Transfer Pricing documentation for a Georgian company offers two key advantages:
- Detecting and addressing tax risks related to Transfer Pricing,
- Fulfilling reporting obligations.
Firstly, Transfer Pricing documentation allows companies to identify and mitigate potential Transfer Pricing risks during the preparation process. This proactive approach is crucial because merely fulfilling legal obligations with subpar documentation can still lead to additional tax assessments by the Georgian Revenue Service (GRS). In other words, simply shifting the burden of proof to GRS may not prevent a Georgian company from facing additional tax and penalty assessments if the documentation lacks high-quality and objective analysis.
To maximize benefits from Transfer Pricing documentation:
- Objective analysis must be conducted by highly qualified professionals knowing TP practices in Georgia as well as TP law, to find and address tax risks before GRS identifies them.
- The burden of proof must be shifted effectively to GRS by complying with legal requirements.
Only by satisfying both conditions can Georgian companies truly benefit from their Transfer Pricing documentation.
Specificities of Georgian Transfer Pricing Law: Key Differences from OECD countries’ practices and OECD Regulations
It is strongly recommended that the Transfer Pricing Documentation for any Georgian company be prepared by a local, Georgian Transfer Pricing specialist. This is due to the unique aspects inherent in Georgian TP law and practices, established by GRS which may not be familiar to specialists from foreign countries.
Georgia has distinct approaches in several key areas of Transfer Pricing, including but not limited to:
- Search Criteria,
- Geographic Location,
- Selection of Foreign Tested Party,
- Selection of Methods,
- Benefit Test Regarding Intra-group Services,
- Accepting Companies with Losses,
The Importance of Local Expertise in Georgian Transfer Pricing Documentation
Therefore, it is crucial that any Transfer Pricing documentation for a Georgian entity be either prepared or thoroughly reviewed (if it has already been drafted at a group level ) by a local service provider such as TPsolution LLC. For high-quality documentation, it is essential that the local specialist not only have an in-depth understanding of both Georgian transfer pricing regulations and OECD guidelines but also be well-acquainted with practices established at Georgia Revenue Service. This ensures that approaches used in the documentation align with GRS practices and do not lead to contradictions.
Transfer Pricing in Georgia: A Comprehensive Guide to Documentation and Compliance
The article illuminates the requirements for preparing Transfer Pricing documentation in Georgia. It underscores that any Georgian company involved in substantial controlled transactions must annually prepare this documentation. Although the law permits companies with a turnover below 8 million GEL to update their Transfer Pricing benchmarks every three years instead of annually, the author strongly cautions against adopting this approach. Even for medium companies, preparing annual reports yields greater benefits.
The key takeaway from the article is profound: a company truly reaps benefits from Transfer Pricing documentation only if it is prepared objectively by a qualified expert. This process must identify and address potential risks during the preparation of both the local file and supporting documentation. Moreover, submitting these documents to GRS upon request within deadlines shifts the burden of proof to them, providing critical protection for businesses.
Key Points concluded from the article:
Annual Preparation: Transfer Pricing documentation must be prepared on an annual basis. Even if legally allowed to update less frequently (every three years), annual preparation offers superior protection.
No Waiver: Georgian Transfer Pricing law does not provide an exemption or waiver from preparing Transfer Pricing documentation.
Objective Expertise Required: Documentation must be prepared by qualified experts, preferably those with local expertise.
Risk Management Essential: Identifying and addressing risks during preparation of Transfer Pricing documentation is crucial.
Timely Submission Important: Submitting documents on time shifts legal burdens away from your company.
About the author: Gela Barshovi is a Georgian and international tax adviser, specialized in Georgian tax law and Transfer Pricing aspects, founder of a Tbilisi-based accounting/consulting firm TPSolution LLC. Gela has gained 12 years working experience in Transfer Pricing area in Georgia (At GRS and private sectors) in Austria and Germany. For preparation of Transfer Pricing documentation or for consultation you can reach out to the author at Gela.barshovi@tpsolution.ge or fill in the following contact form: https://tpsolution.ge/contact/
