Turning the Tables: A Major Win Against a EUR 2.5M Tax Adjustment

Case overview

Our client is a Bulgarian manufacturer and distributor, part of a multinational group that operates in the metals and mining industry. The Client was subject to a tax audit covering the period 2017 – 2018, focused on transfer pricing (TP) matters.  The dispute concerned the arm’s length nature of several of the client’s transactions with related parties, challenging the analyses in the Client’s TP documentation.

The tax authorities disagreed with a number of approaches applied in the Client’s TP documentation, including: the calendar years used for comparability analysis purposes, calculation of cost base for the calculation profit level indicator as well as several other technical matters.  The tax authorities also did not appear to act in line with certain court decisions on similar matters taken in the prior years. As a result, the tax authorities determined a tax adjustment with penalty interest in the total amount of approximately EUR 2.5 mln.

Our solution

Our team prepared an appeal against the conclusions of the tax audit, presenting profound arguments to confirm the correctness of the approach to the TP analysis – both in terms of Bulgarian tax legislation and the OECD TP Guidelines. We also made a clear reference to the past court practice in Bulgaria, advocating for consistency in the interpretation and application of TP matters.

Outcome of the dispute

Our appeal led to the annulment of the initial tax audit assessment by the Appeals Director within the Bulgarian tax authorities, and the assessment was returned for a second audit by a different audit team. The decision of the Appeals Directorate is in full agreement with our arguments in the appeal and compels the tax authorities to take them into consideration in the next tax audit.