The recent controversy resolved by the Supreme Administrative Court of Bulgaria in the case between the Bulgarian tax authorities and Cargill Bulgaria EOOD sets an important precedent in the area of transfer pricing within Europe. Beyond the specific discussion on tax adjustments, the decision focuses the debate on three fundamental technical issues: the correct selection of the method, consistency in the comparability analysis, and the appropriate distribution of the burden of proof in tax litigation.
The dispute arose from a tax audit covering the 2016, 2017, and 2018 fiscal years, during which the Bulgarian subsidiary carried out intra-group transactions involving the sale of agricultural commodities—wheat, corn, barley, sunflower, and rapeseed—to related entities of the multinational group. The tax authorities questioned the pricing policy applied, concluding that the margins obtained by the local company did not reflect arm’s length conditions and proceeding to make adjustments that increased the tax base and the corresponding tax burden.
The technical core of the dispute: methodological selection and economic consistency
The point of contention was not limited to the existence of differences in margins, but focused on the methodology used to test the transactions. In particular, the suitability of the Cost Plus method versus the Transactional Net Margin Method (TNMM) was debated in the context of the functions performed by an entity operating as a marketer of agricultural products within a global supply chain.
From a strictly technical perspective, the choice of transfer pricing method is not a discretionary matter, but rather the result of a robust functional analysis that accurately identifies:
- the economically significant functions,
- the assets used (including intangibles),
- and the risks assumed by each party.
In the case analyzed, the controversy revolved around whether the Bulgarian entity should be characterized as a low-risk service provider (which could justify a Cost Plus approach) or as a distributor/marketer with greater exposure to market risks, which would make a test based on comparable net margins under TNMM more appropriate.
The Supreme Court did not limit itself to validating or rejecting a specific method; its intervention was more profound: it questioned the sufficiency of the judicial reasoning in the previous instance as to why one method should prevail over another. This aspect is critical, as it reaffirms that judicial review in transfer pricing matters requires a standard of technical analysis comparable to that required in administrative proceedings.
Comparability: beyond form, the economic substance
Another central element was the analysis of comparables. In agricultural commodities, market variables—international price volatility, logistical conditions, contractual terms, and inventory risk exposure—take on decisive relevance. It is not enough to identify seemingly similar companies in databases; the analysis must incorporate reasonable adjustments that reflect material differences.
The discussion highlighted a common tension in transfer pricing audits: the tendency of the tax authority to favor a set of comparables with higher margins, as opposed to the taxpayer’s defense based on wider interquartile ranges or exclusions due to lack of functional comparability.
The court decision implicitly emphasizes that comparability analysis cannot be reduced to a mechanical selection of industry codes or quantitative filters. The expected standard requires consistency between the functional characterization and the set of comparables chosen. When that consistency is not properly substantiated, the risk of nullity or return for further analysis increases substantially.
Burden of proof and due process in transfer pricing adjustments
One of the most relevant contributions of the case lies in the treatment of the burden of proof. In many jurisdictions, including the European context, the tax administration has the power to adjust results when it considers that the conditions agreed between related parties are not in line with the arm’s length principle. However, this power does not exempt the authority from technically and economically substantiating the proposed adjustment.
The Supreme Court noted deficiencies in the evidentiary assessment made by the lower court, pointing out that the reasoning should explicitly explain:
- why the taxpayer’s technical arguments were rejected,
- how the expert reports were weighted,
- and on what grounds the methodology applied was considered incorrect.
This approach is particularly relevant for multinational groups, as it reinforces the idea that transfer pricing documentation is not merely a formal compliance requirement, but rather a piece of evidence that can be decisive in litigation.
Implications for multinational groups with commodity operations
The case is of particular interest to companies operating in commodity markets, where international price fluctuations can significantly impact local margins. In these sectors, the precise delineation of risks—price, credit, inventory, logistics—is essential to support the allocation of profits within the group.
Likewise, the precedent shows that tax authorities tend to examine with particular rigor those structures in which a local entity reports persistently low margins or negative results, especially when it is part of a global value chain in which other entities obtain higher returns.
The practical lesson is clear: consistency between functional analysis, intragroup contractual policy, and observed financial results must be verifiable and defensible.
Any dissonance between these elements increases the likelihood of adjustments and disputes.
Judicial standard and trend in the European region
The Supreme Court’s intervention did not definitively resolve the economic substance of the case, but rather returned the file for further review. Such decisions have a systemic effect: they raise the standard of reasoning required of both the tax administration and the lower courts.
More broadly, the case reflects a trend observable in various European jurisdictions: courts are willing to scrutinize technical reasoning on transfer pricing more deeply, avoiding automatic validation of administrative adjustments when the reasoning is insufficient or technically inconsistent.
For taxpayers, this means that defending transfer pricing disputes requires a multidisciplinary approach that combines economic analysis, legal argumentation, and robust documentary evidence.
Methodological consistency and technical defense as strategic axes
The case of Bulgaria v. Cargill Bulgaria EOOD reaffirms that in transfer pricing, it is not enough to formally comply with the documentation required by local regulations. The true test of the soundness of an intra-group policy occurs when it is subjected to technical scrutiny in an audit and, eventually, in court.
The correct selection of the method, consistency in the comparability analysis, and a well-structured evidentiary strategy are determining factors in sustaining the defense against tax adjustments. In highly regulated and supervised markets, methodological improvisation or a lack of alignment between functions and results can translate into significant economic contingencies.
In this context, having a company specializing in transfer pricing is not simply a regulatory compliance decision, but a strategic risk management measure. At TPC Group, we assist our clients in structuring, documenting, and defending their transfer pricing policies, integrating advanced economic analysis with a solid legal perspective.
If your multinational group operates with related entities in multiple jurisdictions and needs to strengthen the technical consistency of its intra-group policy or prepare for a possible audit process, now is the time to review your strategy. A preventive, structured, and technically defensible approach is the best guarantee for mitigating contingencies and preserving the fiscal stability of your organization.
Source: TPCases