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Transfer Pricing (TP) law in Georgia (Country)

Transfer Pricing (TP) law in Georgia (Country)

transfer pricing in georgia tpsolution

The article was initially published by Gela Barshovi on Forbes Georgia

Transfer Pricing rules applicable in Georgia (in brief)

Georgia is one among few developing countries with quite a long experience in Transfer Pricing. Georgian Transfer Pricing legislation which is quite similar to the OECD guideline with minor (but sometimes important) is published earlier than most of other countries in the Caucasus region.

In this article, based on my knowledge of Transfer Pricing and 11 years working experience in taxation field (including as chief tax inspector in Transfer Pricing division of Georgian Revenue Service), I will briefly overview transfer pricing rules and the practice in the country of Georgia. The most accent will be made to the provisions which deviates from OECD TP rules and/or internationally accepted practice.

Please note, besides knowing the law of Transfer Pricing in Georgia, it is crucially important also to know the approaches/practice adapted in Georgian tax authorities regarding transfer pricing documentation to avoid deviations between your approaches and approach of Georgian tax inspectors, regarding: selected TP methods, profit level indicator, tested parties, geographic areas of comparable companies, etc. Only knowing OECD TP guideline might not fully help in creating Georgian TP documentation.

Before moving to the brief description of Georgian Transfer Pricing law, I will shortly overview my experience in the field of transfer Pricing to give you understanding about from there I know about the practice applicable in the TP division of Georgia Revenue Service (GRS-Georgian tax and customer administration).

Transfer Pricing rules applicable in Georgia

Transfer Pricing consultant in Georgia country

I’ve started my career in taxation in 2010 at Georgian Revenue Service. Since 2012 I’ve been concentrated in Transfer Pricing issues (together with Georgian taxation and tax treaty application), when I was participating in creating the Georgian transfer pricing legislation and going through multiple, long trainings on Transfer Pricing topics conducted by international TP experts.

The law of Transfer Pricing is fully applicable since 2013 in Georgia (when the TP decree was published) while the TP division at GRS was created almost 2 years later, in 2015. Since then I’m concentrated in Transfer Pricing as a chief tax inspector, group leader. Thus, I was personally involved in creation of Georgian Transfer Pricing practice.  

In 2017 I started master degree of international tax law (including transfer pricing) in Vienna, Austria which I successfully graduated in 2018. While studding in Vienna, I worked in BDO Vienna as a Transfer Pricing specialist, after which I continued my career in Leipzig, Germany again in Transfer Pricing field. My career has given me a good mix of experience of working in Georgian and European Transfer Pricing (there are some important differences between them).

Now, having my accounting firm based in Tbilisi, Georgia, I provide taxation services including tax consultation, preparation Transfer Pricing documentation and international tax planning.

Georgian Transfer Pricing legislation (legislative norms)

Georgia has inserted Transfer Pricing rules in its local tax code (GTC) since January 2011. In particular, articles 126-1291 has been dedicated for transfer pricing. However, those articles were unused as they made reference to a transfer pricing decree of ministry of finance which has been issued and published only after 3 years: 18th December 2013, decree #423.

So, the main source of Georgian TP legislation is article 126-1291 of GTC which make reference to the decree #423 while later one makes reference to OECD transfer pricing guideline 2017 for cases which are not regulated by the decree.

Notably, the decree does provide very limited information with regard to intra-group services, Intangibles, no-information is provided on business restructuring and cost contribution arrangement, in addition, the decree #423 does limitedly cover topics provided in updated chapter 1 of OECD transfer pricing guideline. So, Chapter 6, 7, 8 and 9 of OECD TPG almost fully applies for Georgian TP cases while chapter 1 is partly applicable. 

It is important to note that the reference was made to OECD TP guideline 2010 until December 2019.

Definition of Controlled transactions according the Georgina Transfer Pricing rules

Holding more than 50% of shares is required to be qualified as associated party for purposes of Georgian TP rules. In addition, transactions with offshore-based persons are considered as controlled transaction regardless of association of the parties.

Government of Georgia provides a list of jurisdictions considered as offshore/tax heaven for Georgian tax law purposes.

in addition to the TP rules, Georgian tax code (GTC) article #18 provides the rules of application market prices. This article is called Georgian market price rule and applies to both, cross-border and local controlled transactions.

For purposes of the Georgian local market price rule, holding of 20% of shares is enough to be qualified as associated parties (controlled transaction). Meaning that if there is a case when one party holds shares in another company less than 50% but more than 20%, there is still a risk that transfer pricing will be applies for such transactions with reference to a local market price clause, article 18 of GTC.

Transfer Pricing documentation in Georgia (country)

Georgian Transfer Pricing does not have requirement of Local and Master files as such, however the decree #423 implies that TP documentation (which is similar to local fine by the requirements) shall be provided within 30 days upon the request.

In case of failure of provision of TP documentation, no special penalty applies (only general penalty for non-provision the requested info: 400 Gel, 1000 Gel in a second attempt), but the burden of proof is shifted to a taxpayer if the requested TP documentation is not provided within the given timeframe.

The practice showed that shifting burden of proof to a taxpayer due to non-provision of TP documentation within the given deadline might have more negative fiscal results for companies than any penalty could have.  

I strongly advise you to have Transfer Pricing documentation prepared and ready for the provision in case GRS requests it.

Transfer Pricing methods under Georgian TP rules

Transfer Pricing methods under Georgian TP rules

All five TP methods are applicable according to Georgian TP legislation. 6th method can be chosen if the applicability will be well proved.

According to the decree #423, the methods have hierarchy. CUP method is the most preferential method, followed by Resale Price and Cost Plus methods, last preference is given to TNMM and profit split, however, in practice the TNMM is mostly used by Georgian tax inspectors with a local tested party.

Selected years according to Georgian TP law

Differently from internationally adapted practice of calculating an average result of last few years prior to the fiscal year where the controlled transaction has taken place, Georgian TP law has strong preference to the same financial year where the controlled transaction happened.

Information on comparable companies from previous years can be selected only in absence of financial information in the current year.

Selection of foreign comparable companies according to the Georgian TP law

Georgian Transfer Pricing legislation accepts possibility of selecting foreign comparable companies if no local ones are available.

Usually in practice, companies in eastern European countries are searched with no market risk adjustment because very limited (or no) information is available on Georgian local companies in the databases like Amadeus, Orbis.

Georgian tax authorities now use the database “Orbis Europe” when applying profit-based TP methods.

Selection of foreign tested party under Georgian Transfer Pricing rules

According to the Georgian Transfer Pricing law foreign tested parties also can be accepted; however, the strong preference is made to the local tested parties.

It will be a high burden of proof for a tax-payer to select foreign tested party while preparation of a Transfer Pricing documentation when local one could also be selected. For example, if a foreign party is limited risk distributor, while Georgian associated company is a fully fledged distributor, it is still a burden of proof for a tax-payer to select foreign tested party with lass functions rather than Georgian one with more complex activities.

The reliability of information about foreign tested party is the biggest barrier for Georgian TP inspectors. Georgian tax authorities do not easily trust all information which they cannot cross-check. As a minimum, the information should be detailed and proved by international audit firms and/or tax authorities.

Even in case of proven documentation, if the information on foreign tested party is not detailed per controlled transactions (e.g. financial results of controlled and non-controlled transactions are not separated), it might be still rejected.  

Acceptance of overall financial results by Georgian tax authorities for Transfer Pricing purposes

If a tested party has other business operations in addition to the controlled transactions under the question, it is preferred that the profit (including net operating profit) is calculated separately for the controlled and uncontrolled transactions.

Generally, Georgian tax authorities do not accept profit level indicator (PLI) based on company’s overall profit and always try to separate PLIs, by allocating operating expenses of a company separately, to controlled transactions and to non-controlled transactions.

Overall profitability of a company might be accepted by GRS only in case if the reasonable allocation of expenses between controlled and non-controlled operations is not possible and portion of non-controlled transactions are small compared to controlled transactions, so that non-controlled transactions will not have important impact on overall profitability of a company. Also, in some other exceptional cases.

Intra-group services in Georgia, country

With regard to intra-group services, the most important issue for Georgian TP inspectors is the proof of the actual receipt of the service. Therefore, it needs to be well-documented by a taxpayer to prove that intra-group services have been used in economic activities, brought economic benefits to the company and that those expenses were not duplicated.

Another issue is price but as practice showed, tax authorities of Georgia are not as resistant regarding the price on intra-group services as they are with regard to “benefit test”.

“Country Ceiling” principle regarding financial transitions might be applied by Georgian tax authorities

With regard to Transfer Pricing on financial transactions, Georgian tax authorities have applied “country ceiling principle” in practice.

“Country Ceiling” means that a company’s individual credit rating should not exceed to the country’s rating.

For example, if a Georgian bank has a credit rating BBB while the country’s rating is B+, the tax authorities most likely will search comparable loans/bonds for B+ rating instead of BBB assuming that according to “Country Ceiling” principle, the bank’s individual rating should not exceed B+ (manual adjustment). Usually, “Bloomberg” database is used by them for benchmark of financial transactions.

Georgian Transfer Pricing rules in brief-sum up

Georgian transfer pricing rules are in force since the end of 2013. The legislation is consistent with OECD TP guideline with some deviations some most important ones are described above. In addition, Georgian tax administration has adapted some practice which is not fully in line with what has been done in EU countries. For example, strictly splitting the net profit to allocate to the controlled transactions, barriers of selecting foreign tested parties and application of “country ceiling” principle.

For preparation Transfer pricing documentation or/and consultation regarding Transfer Pricing policy,  you can contract me at or fill in the contract forms here: