Selecting the most appropriate method is not just a technical step, but the cornerstone of any audit defense. A recent ruling by the Bulgarian Supreme Administrative Court (Case No. 1142, February 2026) has reignited the debate on the importance of properly justifying why one method is chosen over another in goods transactions.
Challenges in the consistency of price adjustments
Conflict arises when there is a discrepancy between the method applied by the taxpayer and that preferred by the tax authority. While the former may opt for traditional methods such as Cost Plus, the administration often favors methods based on net profitability, such as the Transactional Net Margin Method (TNMM). This lack of alignment can lead to significant adjustments if it cannot be demonstrated that the chosen method better reflects the reality of the functions, assets, and risks of the transaction.
The Cargill case and the controversy over the most appropriate method
In this litigation, Cargill Bulgaria EOOD used the Cost Plus method for its sales of goods. However, the Bulgarian tax authority rejected this approach, applying instead the TNMM with a profit-on-sales indicator (EBIT/Sales), establishing an interquartile range of 1.21% to 1.79%.
The authority argued that Cost Plus was not applicable because the transaction consisted of the sale of goods and not production with added services. The Supreme Court overturned the first instance ruling, considering that the contracts had not been properly analyzed and that no comprehensive comparability analysis had been carried out to support the choice of method.
Burden of proof and valuation criteria
The ruling highlights a critical lesson on the burden of proof. The trial court was questioned for failing to correctly assign which facts each party had to prove. In transfer pricing, it is not enough to declare a method; the taxpayer must present specific evidence, such as contracts and comparable analyses, demonstrating why the selected method is the “most appropriate” according to the OECD Guidelines.
Evolution of international tax enforcement
This case reflects a global trend: tax administrations are increasingly challenging the application of traditional methods when they believe that profit methods provide a more accurate view of market profitability. The judicial review in Bulgaria highlights that courts are demanding much greater technical rigor, including expert opinions and detailed analysis of the economic substance of sales functions.
Recommendations for multinational companies
To strengthen the defensive position in the selection of methods, it is advisable to:
- Robust justification: It is not enough to apply a method; you must document why the other available methods were ruled out.
- Detailed comparability analysis: Ensure that, if Cost Plus is used, contracts and market data are available to validate the gross margin applied.
- Consistency with Actual Activity: Validate that the chosen method matches the functional characterization (is it a simple marketer or a manufacturer?).
- Specialized Advice: Have experts who can anticipate which method the local authority will prefer and prepare the technical defense in advance.
Conclusion
The choice between traditional methods and profit methods remains one of the most contentious issues in international audits. The Cargill case in Bulgaria reminds us that the lack of a solid comparability analysis and the absence of supporting contracts can invalidate even the best-intentioned pricing strategy. Solid documentation is the only guarantee to avoid adjustments based on assumptions by the tax authority.
TPC Group, as a company specializing in transfer pricing, advises multinational groups on the selection and validation of the most appropriate method for their operations, ensuring that their technical documentation complies with OECD standards and withstands the scrutiny of the most demanding tax administrations.
Source: TPcases