International taxation has always caused many headaches for national tax authorities. They are mainly caused by the so-called related persons belonging to the same international company but having their headquarters in different countries. Related parties trade with each other according to the so-called transfer prices – these are incorrectly determined prices or prices that do not reflect the real prices on the market, with which legal entities optimally transfer the profit, with the aim that it would not be taxed in the country of origin. With this, legal entities transfer profits to countries where the tax rate of tax on the income of legal entities is lower.[ Šutanovac, L., Tax focus: What are transfer prices and how are they regulated in Slovenia?
The issue of transfer prices was also dealt with in the Organization for Economic Cooperation and Development (hereinafter: OECD), when they adopted measures to prevent the transfer of profits from the countries where they are generated. They must be so, in transactions between related parties regarding goods, financial services, intangible assets, services, etc. conditions are met which ensure that taxes are paid in the countries where the profits are actually generated.
INDEPENDENT MARKET PRINCIPLE
The basic rule that most countries rely on when preparing national regulations in the field of transfer pricing is the independent market principle, which is defined in Article 9 of the OECD Model Convention on the Avoidance of Double Taxation (KIDO)[ Quote by KIDO ]. The arm's length principle thus states that when conditions are established between two related companies in commercial or financial relations that are different from those that would be established between independent persons, any profit that would have accrued to one of the companies in the absence of such conditions may was, but precisely because of such conditions it did not grow, it is included in the person's profit and taxed accordingly. The use of the independent market principle is also defined in detail in the OECD Guidelines for determining transfer prices for international companies and tax administrations (hereinafter: OECD Guidelines)[ Republic of Slovenia, Ministry of Finance, FURS, TRANSFER PRICING: Detailed description, 2022, p. 3].
WHO ARE THE RELATED PERSONS?
First of all, it is necessary to define who are related persons according to Slovenian legislation. Article 16 of the Corporate Income Tax Act (ZDDPO-2)[Corporate Income Tax Act (Official Gazette of the Republic of Slovenia, No. 117/06, 56/08, 76/08, 5/09, 96/09, 110/09 – ZDavP-2B, 43/10, 59/11, 24/12, 30/12, 94/12, 81/13, 50/14, 23/15, 82/15, 68/16, 69/ 17, 79/18, 66/19, 172/21 and 105/22 - ZZNŠPP)] states that a resident or non-resident taxpayer and a foreign legal entity or a foreign legal entity without legal personality that is not a taxpayer are considered related persons if :
-the taxpayer directly or indirectly owns at least 25% of the value or number of shares or stakes in the capital, management or control or voting rights, in a foreign person or controls a foreign person on the basis of a contract, or the terms of the transaction differ from the terms that are or would have been reached between unrelated persons under the same or comparable circumstances or
- a foreign person directly or indirectly owns at least 25% of the value or number of shares or holdings in the capital, management or control or voting rights in the taxpayer or controls the taxpayer based on a contract, or the terms of the transaction differ from the conditions that are or would be were reached in the same or comparable circumstances between unrelated persons or
- the same person simultaneously directly or indirectly owns at least 25% of the value or number of shares or stakes in capital, management or control in the obligee and a foreign person or two obligees or controls them on the basis of a contract or the terms of the transaction differ from the terms, which are or would have been reached between unrelated persons under the same or comparable circumstances or
-the same natural persons or their family members directly or indirectly own at least 25% of the value or number of shares or stakes in capital, management or control in the taxpayer and a foreign person or two residents or control them on the basis of a contract or the terms of the transaction differ from the conditions that are or would be reached between unrelated persons in the same or comparable circumstances.
According to the second paragraph of the same article, family members are considered to be a spouse or a person with whom a natural person lives in a long-term cohabitation, which according to the Family Code has the same legal consequences as a marriage, or a partner with whom a natural person lives in a registered same-sex partnership, a child, adopted child and stepchild or child of a person with whom the natural person lives in a long-term cohabitation or same-sex partnership and parents and adoptive parents of the natural person.
ZDDPO-2 further, in Article 17, determines the prices between related resident persons, who must also follow the independent market principle, but the law here stipulates that when determining the resident's income and expenses from transactions between two residents who are related a person's tax base does not increase or decrease, unless one of the residents in the tax period for which income and expenses are determined shows an uncovered tax loss or pays tax at a rate of 0% or at a specially determined rate, lower than the general rate, which according to ZDDPO-2 amounts to 19% of the base or is exempt from paying tax.
SPECIFIC REGARDS TO NON-RESIDENTS
The Financial Administration of the Republic of Slovenia also monitors the activity of foreign companies in the aforementioned area, among other things, with the aim of determining whether their activity constitutes a permanent business unit, since in such a case the Republic of Slovenia has the right to tax a non-resident[ Transfer prices, URL: https: //podjetnik.aktualno.si/transferne-cene/ (September 1, 2023)].
A non-resident's business unit is a place of business in which or through which a non-resident wholly or partially carries out activities or business in Slovenia (Article 6 ZDDPO-2). In particular, the following are considered permanent business units:
-office, branch, factory, workshop, mine, quarry or other place where natural resources are extracted or exploited;
-construction site, construction, assembly or installation project or supervision related to them, if the activity or business lasts longer than 12 months;
-intermediary (agent) acting on behalf of a non-resident, in relation to any activities or transactions for the non-resident, if he has and usually uses the authority to conclude contracts on behalf of the non-resident, unless the activities or transactions of the intermediary are limited to those from 7 of Article ZDDPO-2 (e.g. of a preparatory, auxiliary nature...), as a result of which this place of business would not be considered a business unit;
-broker who acts on his own behalf for a non-resident, within the scope of his regular activity as a stockbroker, a broker with a general authorization or any other independent broker, when he acts entirely or mainly on behalf of a non-resident and the conditions and circumstances in the business and financial relationships between this non-resident and this intermediary differ from those that would exist in relationships between unrelated persons.
RULE ON TRANSFER PRICES [Rule on transfer prices (Official Gazette of the Republic of Slovenia, no. 141/06 and 4/12)]
The Regulation on Transfer Pricing as a by-law in a specific area partially summarizes the OECD Guidelines and determines the manner of implementation of Articles 16 and 17 of the ZDDPO-2. In the area of determining transfer prices, we know of two safe harbors in Slovenia, namely in the area of the interest rate for loans between related parties (Article 19 ZDDPO-2 in conjunction with the Rulebook on recognized interest rate[ Rulebook on recognized interest rate (Official Gazette of the Republic of Slovenia, No. 141/06, 52/07, 123/21 and 195/21)]) and in the area of thin capitalization, where the ratio between loans from related parties and capital is determined (Article 32 ZDDPO-2). Insofar as the taxpayer proves values outside the safe harbor, he is obliged to submit documentation proving that the interest rate or the ratio between loans and capital is in accordance with the independent market principle (the proof is made on the basis of the submission of the documentation listed on page 6 of the document at link https://www.fu.gov.si/fileadmin/Internet/Davki_in_druge_dajatve/Podrocja/Mednarodno_obdavcenje/Opis/Transferne_cene.docx )[ Republic of Slovenia, Ministry of Finance, FURS, p. 4].
Determining the comparable market price must be done using the most appropriate method according to the circumstances of the case. The methods available to subjects are specified in the fifth paragraph of Article 16 of the ZDDPO-2 and can be used independently or in combination. When choosing the appropriate method, it is necessary to take into account the advantages and disadvantages of each method, the suitability of each method in relation to the nature of related transactions, the availability of reliable data required by each method and the degree of comparability between related and unrelated transactions, as well as the reliability of any adjustments made to comparable unrelated transactions necessary for eliminating the differences between them.