Transfer Pricing Documentation — Why It Is Decisive
Transfer pricing documentation is the foundation on which a taxpayer defends its prices: in relations with the tax authority a bare declaration is not enough — an explanation and analysis is needed which shows why the price of controlled transactions conforms to the arm's length principle. The Georgian Tax Code regulates this field through distinct norms: the concepts of controlled transactions, the general principles of valuation, the valuation methods, and the special provisions establishing the taxpayer's duty of explanation. This page explains what a taxpayer needs to know when preparing documentation.
The importance of documentation becomes clear the moment the tax authority begins to examine an operation: properly prepared material reduces the risk of adjustment and strengthens the taxpayer's position in a dispute. Documentation should therefore not be treated as a formality — it is an instrument of tax security.
Controlled Transactions — What the Documentation Must Capture
The first task of documentation is to show which transactions are controlled and why. Under the Code, two persons are related if one participates directly or indirectly in the management, control or capital of the other, or if the same persons participate in the management, control or capital of two persons. Participation means directly or indirectly holding more than 50 percent of the enterprise or practically exercising control over its entrepreneurial decisions.
Any transaction between related persons is controlled, while a transaction between independent persons is independent. Moreover, a transaction in which one party is a resident of a country with preferential taxation is treated as controlled regardless of relatedness. Documentation must therefore reflect the group structure, participation shares and functional roles — it is precisely this that determines which transactions fall within the controlled category.
The Arm's Length Principle and the Burden of Explanation
The general principle of valuation is the arm's length principle: a Georgian enterprise conducting financial or commercial operations with a related foreign enterprise determines its taxable profit in accordance with that principle. Taxable profit is considered conforming if the conditions of the operation do not differ from the conditions which would be agreed between independent enterprises in comparable circumstances. Otherwise, the lost profit may be included in taxable profit.
The burden of explanation is established by the Code directly: at the request of the tax authority, the taxpayer is obliged to explain on what basis it considers the profit received to conform to the arm's length principle, and is entitled to submit sufficient information and analysis to support that explanation. This means that documentation must accumulate the evidence on which the explanation will rest.