What are intangible assets?
Intangible assets are non-physical assets that hold significant value due to the economic benefits they provide. Unlike tangible assets such as machinery or buildings, intangible assets do not have a physical presence but are crucial in driving a business’s profitability and market position.
Intangible assets are generally classified into as trade intangibles and marketing intangibles, routine and non-routine intangibles. Few examples of items that are considered as intangible assets are patents, trademarks, copyrights, brand names, customers list, know-how, trade secrets, goodwill, licenses.
Consideration and Treatment under the Transfer Pricing Regime:
From a Transfer Pricing perspective, it is crucial to determine the entity or entities within an MNE Group that are entitled to share in the returns derived from exploiting the intangibles. The identification and examination of intangibles are relevant in two general types of transactions:
The framework for analysing the transactions involving intangibles requires taking the following steps:
Key takeaways:
The treatment of intangibles under transfer pricing requires careful consideration of valuation methods, compliance with guidelines, and local regulations. Companies should strive for transparency and consistency in their approaches to minimize disputes with tax authorities. Best practices include:
Cash Pooling - Treatment under the UAE Transfer Pricing regime
What is a cash pooling arrangement?
Cash pooling is a financial management technique used by multinational companies to optimize their liquidity and reduce the cost of borrowing. It involves the consolidation of cash balances of various subsidiaries or business units into a single account or in a few accounts, typically held by a parent company or a designated treasury entity.
Such centralization of cash enables companies to gain a comprehensive overview of their cash position and make better use of surplus funds. When managed efficiently, it can reduce reliance on external borrowings and the associated costs.
Broadly, there are two basic types of cash pooling arrangements:
Applying the Arm’s Length Principle to CCAs
Cash pooling arrangements involve transactions between related parties, making it crucial to align these arrangements with the Arm’s Length Principle. The compensation for a cash pool leader should reflect the specific facts and circumstances, including the functions performed, the assets used, and the risks assumed in managing the cash pooling arrangement.
Typically, a cash pool leader handles routine tasks such as coordination, forecasting, reporting, and basic analysis, and should be remunerated accordingly as a routine service provider.
In more complex cash pools, where responsibilities may include risk management, interest optimization, and external banking relationships, the leader’s compensation may be higher to reflect these additional duties. The level of remuneration should be directly related to the activities and services, assets, and risks involved. The appropriate transfer pricing method should be selected based on a thorough analysis of these factors.
For cash pool members, remuneration is determined by applying the arm’s length interest rates to the debit and credit positions within the pool. This process allocates the benefits of the cash pooling arrangement among the members and is typically carried out after calculating the compensation of the cash pool leader.
Key takeaways:
Cash pooling is unique to multinational enterprises (MNEs). Further, even though a third-party bank may be involved, it is essential to apply the arm’s length intercompany interest rates between the cash pool leader and the participating entities. External bank rates alone do not fully capture the synergistic benefits of the cash pooling arrangement. The key aspects to ensure compliance with the arm’s length principles include:
Cost Contribution Arrangements - Treatment
under the UAE Transfer Pricing regime
What is a cost contribution arrangement (“CCA”)?
A CCA is a contractual agreement between
businesses to share the contributions and risks associated with the joint
development, production, or acquisition of intangibles, tangible assets, or
services, with the expectation that these will benefit each participant’s
individual business.
Types of CCAs:
Applying the Arm’s length principle to CCAs:
A core principle of any CCA is that participants expect to receive mutual and proportionate benefits from their pooled resources and efforts, while also sharing the associated risks and rewards. From an arm's length perspective, contributions should reflect what independent entities would agree to in similar situations, based on their anticipated share of benefits.
Applying the arm’s length principle
(“ALP”) to a CCA involves: (a) calculation of the value of each participant’s
contribution to the joint activity, and (b) determination of whether the
allocation of CCA contribution align with the respective share of expected
benefits, for the participants.
CCA termination and Balancing Payments:
Changes to a CCA require adjustments to participants’ shares of costs and benefits. New participants must make a “buy-in payment” for prior work, while departing participants receive a “buy-out payment” for their share. The CCA must be documented specifying contributions, activities, and benefit allocation.
If a CCA terminates, participants retain
interests proportional to their contributions and are compensated accordingly.
In a few cases, balancing payments ensure that each participant’s share of
benefits aligns with their contributions, and proper documentation is crucial
for compliance with the ALP.
Key takeaways:
CCAs are particularly useful in complex
projects where resources, risks, and rewards are shared among multiple parties,
allowing them to pool their expertise and resources. The key aspects in a CCA
include:
As per Article 20 of the Federal Decree Law No.47 of 2022 (“UAE Corporate Tax Law”), the taxable income is determined by making certain tax adjustments to the accounting income. Such tax adjustments inter-alia include those with respect to transactions with related parties.
Ministerial Decision No. 134 of 2023 issued by the Federal Tax Authority (“FTA”), provides a detailed clarification on the adjustments to be made for transfer of any asset or liability between related parties.
Highlights of the Ministerial decision
The tax adjustments with respect to related party transactions triggers where the consideration is in excess or below the arms’ length price (“ALP”).
Article 3 of this
Ministerial Decision prescribes the adjustments to be made to the transactions
and arrangements with related parties to achieve the arms’ length result under
both the scenarios. The transferor shall adjust the consideration to the ALP
while computing the taxable income. The tax adjustments for the transferee are
as set out in the table below:
Scenario |
Adjustment in cases other than upon realization |
Adjustment upon realization |
Consideration in excess of Market Value i.e., ALP |
Exclude depreciation, amortization or other changes in value to the extent related to the difference between net book value and the market value. Or Recognise the difference between the net book value and Market Value as an adjustment in the taxable income. |
Include any excess amount of the net book value over market value when calculating the gain or loss. |
Consideration lower than the Market Value i.e., ALP |
Exclude any change in the value of asset or liability to the extent related to difference between market value and net book value.
|
Reduce the gain by the difference between market value and net book value at the time of transfer. |
Key Takeaway
The Federal Tax Authority (“FTA”) has issued a public clarification on 22 July 2024 providing a detailed clarification on the definition of "related parties" under the Federal Decree-Law No. 47 of 2022 (“UAE Corporate Tax Law”). The clarification essentially provides guidance on classification of related parties where there is common ownership and/or control through a government entity.
Overview of related party definition
Article 35 of the UAE Corporate Tax Law states that juridical persons would be considered related to each other if:
The above definition indicates that common ownership or control of any person in two juridical persons qualifies such juridical persons as related to each other.
Highlights of the public clarification
The Public Clarification states that common ownership and/or control by a Federal Government or a Local Government (i.e. Emirate-level government) is not in itself a basis for being related parties for the purpose of Article 35 of the UAE Corporate Tax Law.
Illustration
Based on the public clarification, entities in Group 1 and Group 2 are not considered as related parties of each other. Consequently, the arm’s length requirement under Article 34 of the UAE Corporate Tax Law does not apply to transactions between Group 1 and Group 2.
However, any transaction between entities within the same Group, for example any transaction between Entity A and Entity B would qualify as a related party transaction and would be subject to transfer pricing requirements.
Conclusion
This public clarification aims to assist taxpayers in understanding the application of the definition of related parties, especially in the context of government ownership and control. The clarification states the common ownership of the Government entity by itself will not establish a related party relationship. However, the entities can be regarded as related parties if the other criteria provided under Article 35 are met
Transfer Pricing Documentation and Compliances in the UAE
What is Transfer Pricing (“TP”) Documentation?
TP documentation refers to the set of records prepared by the taxable persons to demonstrate their compliance with the Arm’s Length Principle (“ALP”) in their related party transactions.
TP documentation requirements in the UAE
The statutory TP documents prescribed by the UAE Federal Tax Authority (“FTA”) includes the below:
Applicability of TP documentation
SR |
TP documentation |
Conditions for applicability |
Applicable due date |
1 |
TP Disclosure form |
All taxable persons having related party transactions above a materiality threshold. |
To be submitted within 9 months from the end of the relevant tax period along with the annual tax return. |
2 |
Master File |
Taxable persons revenue exceeds AED 200 million in the relevant tax period or Taxable person is part of a MNE Group whose annual consolidated group revenue exceeds AED 3.15 billion. |
Should be submitted within 30 days upon request of the FTA. |
3 |
Local File |
||
4 |
CbCR |
MNE Groups headquartered in the UAE with consolidated group revenue exceeding AED 3.15 billion in the year immediately preceding the reporting year. |
CbCR notification to be filed by the end of the relevant financial year. CbCR to be filed within 12 months from the end of the relevant financial year. |
Other key considerations
1. FTA may request additional documents (other than the statutory documents) to support the ALP.
2. FTA may request certain information from taxable persons not subject to master file and local file requirement.
3. FTA would make adjustments if the related party transactions does not comply with the ALP.
4. Taxable persons would face penal consequences for non-compliance with TP.
Key take aways
With the evolving TP regulations, it shall be crucial for the UAE taxable persons to familiarize themselves with the TP law and take necessary steps to adapt to the TP requirements. A proactive approach must be adopted to implement necessary strategies and policies to avoid any adverse implications under the corporate tax law.
Reimbursements /Pass-through costs - Treatment under the UAE Transfer Pricing regime
What are pass through costs/reimbursement of expenses?
The term “pass through costs or reimbursement” has not been defined in the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“UAE Corporate Tax Law”). However, the Transfer Pricing (“TP”) Guide issued by the Federal Tax Authority describes a pass-through cost or reimbursement arrangement as an arrangement wherein a Group company arranges and pays on behalf of its “Related Parties or Connected Persons” for goods or services acquired from various vendors.
Treatment of pass-through costs as per the UAE TP Guide
A primary step in relation to pass-through costs is to determine whether the cost to be reimbursed should be charged at a mark-up/profit element or at the actual cost incurred by the provider.
As per section 7.2.2.3 of the UAE TP Guide
and in accordance with the Organisation for Economic Co-operation and
Development (“OECD”) TP Guidelines, the group service provider may pass on the
costs of the acquired services to its related parties or connected persons
without a mark-up, provided that:
a. The acquired goods or services are requested by and for the benefit of the related parties or connected persons;
b. The Group service provider is merely the paying agent and does not enhance the value of the acquired goods or services in the process whatsoever; and
c. The costs of the acquired goods or services is the legal or contractual liability of the related parties or connected persons. This condition can be met even if the Group service provider is legally or contractually liable to pay for the acquired goods or services through an inter-company agreement.
The Group service provider should
nonetheless charge an appropriate arm’s length mark-up for its function in
arranging and paying for the acquired goods or services on behalf of its
related parties or connected persons especially when the group service provider
adds significant functions or provides value-added services. The mark-up should
be based on the aggregate costs of performing the function and should reflect
the nature of its own services as well as the extent of the value-addition
generated for the related parties or connected persons.
Insights into practical implications
A. Reimbursements paid
In the case of reimbursements paid by a UAE entity to its foreign related party, if it can demonstrate the existence of a back-to-back arrangement with sample copies of invoices, the transaction of reimbursement may generally not be subject to intense scrutiny by the FTA. However, it important to note that where payments are, in effect, for services rendered by related parties or as global cost allocations, taxpayers must demonstrate actual receipts of services and the benefits derived.
B. Reimbursements received
Reimbursements received by an UAE entity from its related parties could be subject to a detailed scrutiny as compared to the reimbursement paid. Further, if such recoveries are for some services provided by the UAE taxpayers to their foreign related parties, the UAE entity is expected to charge a mark-up on the value of such recoveries.
C. Arms’ length value for reimbursements
Pure reimbursements of third-party costs, where the UAE entity or the foreign entity (as the case maybe) does not add any value can be cross charged without any mark-up and the same shall be accepted to be at arm’s length.
While there exist contradictory views with regards to benchmarking of reimbursement transactions to demonstrate their arms’ length nature, where the expenses are reimbursed on a cost-to-cost basis, no independent benchmarking is required. Instead, demonstrating the reasonableness of the allocation keys applied could be accepted by the tax authorities as adequate.
Furthermore, in addition to demonstrating
that a transaction of reimbursement is at cost, it is also equally important to
demonstrate that the reimbursement has arisen out of a business need and is
“wholly and exclusively” connected with the taxpayer’s business.
Key take aways
While the TP guidelines suggests that reimbursements or pass-through costs can be cross charged on a cost-to-cost basis without an added markup, such a cost-to-cost approach heavily reliant on the unique facts and circumstances of each case. Hence, cross-recharge arrangements require a detailed analysis, and the taxpayers must maintain sufficient TP documentation and other supporting evidence to demonstrate that indeed the arrangements represents recovery of cost without any value addition.
In this edition, we have covered the Transfer Pricing updates of Denmark, Thailand, Paraguay and OECD for the month of February 2022.
1. Denmark - Updated guidance on Transfer Pricing Documentation
On 31st January 2022, Ministry of Finance, Denmark issued updated guidance on amendments to Transfer Pricing rules. which require the submission of transfer pricing documentation within 60 days of due date for filing tax return (unless extension is provided).
Recent guidance allowed the taxpayer to submit the prior year’s master file as preliminary master file when master file for the current fiscal year is not yet ready on submission deadline and when prior year’s master file is less than one year old. Having said this, taxpayer is required to broadly highlight significant changes concerning taxpayers that are not covered in the local file.
Crowe UAE’s comments:
It is a welcome move by Ministry of Finance, Denmark to provide relaxation to taxpayers. This would certainly help those taxpayers who are not able to complete the master file document on or before deadline.
2. Thailand - Additional Requirement for Country-by-Country Reporting Submission
Recently, Thailand Revenue Department provided additional requirement for country-by-country submission, vide Notification of Director General No. 419.
As per the above Notification,
Crowe UAE's comments:
Taxpayers having operations in Thailand are required to take note of afore-mentioned update on CbC process. While e-filing portal for CbC reporting are available for registration, Thai Revenue Department has provided guidance for registration and submission process.
3. Paraguay - Transfer Pricing Disclosure require in Income Tax Return
Recently, Paraguayan Tax authorities released income-tax return format which includes certain disclosures required with respect to related party transactions.
Tax return form also includes separate section to disclose Transfer Pricing adjustments made by taxpayers to reflect arm’s length results.
Crowe UAE’s comments:
Paraguay has introduced Transfer Pricing regulations in 2019 in it’s domestic tax legislation and thereafter, also released certain guidance. Every Paraguayan who enters related party transactions is required to prepare local Transfer Pricing documentation and justify arm’ s length principles.
Therefore, multinational organisation operating in Paraguay are required to take note of this important update and advisable to take pro-active measures to maintain relevant transfer pricing documentation and inter-company agreement.
4. OECD - Transfer Pricing country profiles updated
On 28th February 2022, Organisation for Economic Co-operation and Development (OECD) released third batch of updated/ new transfer pricing country profiles of 30 jurisdictions. These countries include the following:
Brazil |
Canada |
Chile |
China |
Croatia |
Dominican Republic |
Estonia |
Finland |
Greece |
Honduras |
Hungary |
Iceland |
Israel |
Jamaica |
Kenya |
Korea |
Liechtenstein |
Lithuania |
Luxembourg |
Malta |
Panama |
Papua New Guinea |
Poland |
Portugal |
Slovenia |
Senegal |
Ukraine |
United Kingdom |
United States |
Uruguay |
The updated country profiles add new information on countries’ legislations and practices regarding the transfer pricing aspects of financial transactions and the application of the Authorised OECD Approach (AOA) on the attribution of profits to permanent establishments. In addition, the country profiles reflect updated information on a number of transfer pricing aspects such as methods, comparability, intra-group services, cost contribution agreements, transfer pricing documentation and administrative approaches to prevent and resolve disputes.
Crowe UAE’s comments:
Recently, in August 2021 and December, OECD released the first and second batch of updated transfer pricing country profiles. Third release of updated/ new profile brings the total number of updated Transfer Pricing countries profile to 90+. OECD is also encouraging those countries who have not yet shared their profile to share in a manner/ format prescribed by OECD. It is learnt that further updates to the Transfer Pricing profile is expected in first half of 2022.
In this edition, we have covered the Transfer Pricing updates of United Arab Emirates, OECD, Cyrus, and Montenegro for the month of January 2022.
1. United Arab Emirates - Introduction of Corporate Tax and Transfer Pricing
On 8th October 2021, the United Arab Emirates (UAE) (amongst 137 countries) agreed to implement the Organisation of Economic Co-Operation and Development's (OECD) Two-Pillar approach to reform its International Tax framework and to implement a minimum Corporate Tax rate starting 2023.
Following this development, on 31st January 2022, the Ministry of Finance of the UAE announced the introduction of a Federal Corporate Tax regime on business profits effective for Financial Years starting on or after 1st June 2023. Read our detailed insights on the topic.
Consequently, Ministry of Finance UAE has also announced Introduction of Transfer Pricing in a country. It is announced that Transfer Pricing rules and documentation requirements will now be aligned with the OECD Transfer Pricing Guidelines i.e., Master File and Local File. Additionally, announcement mentions exemption for certain qualified intra-group transactions and other compliance requirement. Having said this, we wait for further details/clarifications on this aspect.
Crowe UAE's comments:
Undoubtedly, this is a historic tax reform in UAE's tax regime to introduce a Corporate Tax and Transfer Pricing for all businesses (subject to certain exceptions) in UAE. It is a welcome move by the UAE ministry of finance to provide ample time to taxpayers for preparing for tax regime before the effective date of applicability.
Moreover, multinational enterprises having intra-group transactions are required to re-assess their existing pricing policy to ensure it meets with the arm's length principles. In the absence of robust transfer pricing documentations, intra-group transactions can be considered to not meet arm's length price test and taxpayers may be subject to significant addition to their taxable income which may result in additional burden of taxes and penalties.
While we await the detailed law/regulation, businesses operating in UAE are recommended to proactively commence analysing the impact of Corporate Tax and Transfer Pricing on their business.
2. OECD - New Transfer Pricing Guidelines 2022 Edition
On 20th January 2022, The Organisation of Economic Co-Operation and Development (OECD) has released 'Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2022'.
2022 edition of the guidelines consolidates into a single publication the changes to the 2017 edition resulting from:
Crowe UAE's comments:
OECD Transfer Pricing Guidelines was first issued in 1995 and thereafter, it has regularly published updated guidance on important topics. Guidelines are intended to help both multinational enterprises as well as tax administrations in evaluating transfer pricing issues. In fact, many of the Countries have relied on OECD Transfer Pricing Guidelines while publishing their Transfer Pricing regulations.
2022 edition of OECD Transfer Pricing Guidelines would be helpful to multinational enterprises and tax authority as a single report which has consolidated recent reports and guidance.
3. Cyprus - FAQs released on back to back intra-group financing transactions
On 24th January 2022, the Cyprus Tax Department released frequently asked questions (FAQs) that clarify provisions of Circular 3 - "Tax treatment of intra-group back-to-back financing transactions" (Circular 3), which was published in June 2017.
Circular 3 is applicable to tax resident in Cyprus and to permanent establishments of foreign companies carrying out intra-group back-to-back financing transactions. This includes providing loans or finances to related parties that are financed through debt. Moreover, Circular 3 also sets requirements to transfer pricing analysis of such transactions.
We have summarised key points that are clarified in FAQs as under:
Crowe UAE's comments:
Recently, Cyprus authority is taking active steps in publishing guidance and clarification on Transfer Pricing issues. Financial transactions are at a centre-stage for most tax authorities across the world and therefore, releasing on FAQs by Cyprus authority is a welcome move. Therefore, multinational organisation operating in Cyprus are required to take note of this important update and advisable to take pro-active measures to maintain relevant transfer pricing documentation and inter-company agreement.
4. Montenegro - Amendment in Transfer Pricing Rules
On 31st December 2021, The Montenegrin Parliament has announced certain amendments fin existing transfer pricing rules. We have summarised the key amendments as under:
Crowe UAE's comments:
It is a welcome move by Montenegro authority in providing relief to taxpayers not falling under category of 'Large taxpayers' for allowing condensed form of documentation subject to threshold. This would help many of the taxpayers to reduce their efforts and time. Moreover, clarification for 'Large taxpayers' to submit transfer pricing documentation along with corporate tax return shall also help them to take appropriate action in advance to comply with regulation.
In this edition, we have covered the Transfer Pricing updates of Organisation of Economic Co-Operation and Development, Malta, South Africa and Portugal for the month of December 2021.
1. OECD - Transfer Pricing country profiles updated
On 13th December 2021, Organisation for Economic Co-Operation and Development (OECD) announced the updated/ new transfer pricing country profiles of 21 jurisdictions. These countries included the following:
Austria |
Georgia |
Italy |
Peru |
South Africa |
Belgium |
Germany |
Latvia |
Poland |
Sweden |
Bulgaria |
Indonesia |
Malaysia |
Syechelles |
Albania (New) |
France |
Ireland |
Mexico |
Singapore |
Kenya (New) |
Maldives (New) |
|
|
|
|
These country profile focuses on countries domestic regulation regarding transfer pricing principles, including the arm's length principle, transfer pricing methods, comparability analysis, intangible property, intra-group services, cost contribution agreements, transfer pricing documentation, administrative approaches to avoiding and resolving disputes, safe harbour, and other implementation measures.
Crowe UAE’s comments:
Recently, in August 2021, OECD released the first batch(20 countries) of updated transfer pricing country profiles. Second release of updated/ new profile brings the total number of Transfer Pricing countries profile to 63. OECD is also encouraging those countries who have not yet shared their profile to share in a manner/ format prescribed by OECD. It is learnt that further updates to the Transfer Pricing profile is expected in first half of 2022.
2. Malta - Consults on draft Transfer Pricing Rules and APA Program
On 20th December 2021, Maltese government opened a consultation seeking feedback on draft transfer pricing rules. It is learned that Maltese government intends to finalise transfer pricing rules by late 2022 with an aim to implement by early 2024.
We have summarised the key points of draft regulations as under:
Crowe UAE's comments:
This move of Maltese Government is in line with it’s commitment to implement OECD’s Base Erosion and Profit Shifting (BEPS) project. Implementation timeline from 1st January 2024 also seems to be reasonable. Therefore, multinational organisation operating in Malta are required to take note of this important update and advisable to take pro-active measures such as revisiting group pricing policy and preparation of inter-company agreement
3. South Africa - Proposes model legislation to introduce APA Program
On 10th December2021, South African Revenue Service(SARS) published a high-level model and draft legislation for the introduction of an Advance Pricing Agreement (APA)program.
We have summarised the key points as under:
Crowe UAE's comments:
Over the years, South Africa tax authority has adopted aggressive approach while scrutinizing the intra-group transactions and many of the taxpayers have also faced significant tax additions and penalties. Publishing of APA model legislation will certainly help many multinational corporations to opt for this program in order to get certainty and to reduce tax.
4. Portugal - Updation in Transfer Pricing guidance on documentation and APA
Recently, Portugal issued detailed additional guidance to provide updates for 2 areas as under:
Transfer Pricing documentation requirement
APA Guidance
Crowe UAE's comments:
Increase in exemption threshold is a welcome move by Portugal authority. Moreover, guidance provides additional tax certainty and clarity regarding transfer pricing matters. Taxpayers are recommended to review these updates to ensure compliance as per updated requirement.
In this edition, we have covered the Transfer Pricing updates of Dominican Republic, European Union, OECD, Australia and Denmark for the month of November 2021.
1. Dominican Republic – Updated Transfer Pricing Documentation and Compliance Requirement
In October 2018, Dominican Republic has joined Organisation of Economic Co-Operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
As a signatory, recently, Tax Administration of Dominican Republic has published General Rule No. 08- 21 complementing Presidential Decree No. 256-21 to update the Transfer Pricing documentation and compliance requirement. We have summarised the updated requirement as under:
a) Country by Country (CbC) Report
b) Informative Declaration of Related Party Operations (DIOR)
c) Master File
d) Local File
Exemption from local file and master file
Additionally, following taxpayers are provided exemption to prepare the master file and local file documentations as under:
Crowe UAE’s comments:
It is interesting to witness that more and more countries who have signed OECD’s BEPS Inclusive Framework are adopting Transfer Pricing documentation and compliance requirement. Multinational corporations having operations in Dominican Republic are recommended to revisit transfer pricing policy to comply with regulations
2. European Union – Formally adopts ‘public’ country by country reporting
On 11th November 2021, European Parliament adopted a directive for ‘public’ country by country (CbC) reporting. Reporting is applicable to multinational groups operating in the EU with consolidated group revenue of at least Euro 750 million.
Adoption of directive by European Parliament was the last step in the directive’s adoption process and it is expected that the directive could be published in December 2021. Subsequently, European Union Member States will have 18 months to implement the directive into domestic law and thereafter, public CbC rules will be effective.
If the afore-mentioned directive is published in Journal in December 2021, the implementation deadline for EU Member States would be 30th June 2023 and the rules may be applicable from June
2024.
Crowe UAE’s comments:
The Council of EU makes continuous efforts to increase tax transparency and eliminate base erosion and profit shifting. The afore-mentioned directive may entail many of the large multinational corporation to publicly disclose tax related information and therefore, it is advisable to be cautious while preparing/ disclosing the requisite information.
3. Australia – Extension of timelimit to submit Transfer Pricing documentation
On 18th November 2021, Australian Taxation Office (ATO) announced that taxpayers who are required to submit country-by-country (CbC) reporting on or before 31st December 2021 can submit the same upto 4th February 2022.
This extended time limit is applicable not only for CbC Reporting but allos applicable for filing Master file and Local file which was due on or before by 31st December 2021.
Crowe UAE’s comments:
It is a welcome move by ATO to provide relaxation to the taxpayers in extending the time-limit on account of on-going COVID-19 pandemic. This would help the taxpayers to get additional time to prepare the transfer pricing documentation.
4. Denmark - Amendment to Transfer Pricing documentation requirement
On 25th November 2021, Danish Tax authority updated the legislation supplementing transfer pricing documentation rules. We have summarised the key points of updated rules as under:
Crowe UAE’s comments:
In last few years, it is experienced that Denmark tax authority is aggressively scrutinizing the past intra- group transactions of the taxpayers and cases are heard upto Supreme Court level frequently.
Those taxpayers who are not preparing robust documentation or benchmarking search analysis are facing stringent penalties and tax addition.
With the updated rules, many of the taxpayers would be mandatorily required to submit transfer pricing documentation within prescribed time. Moreover, rules have also prescribed stringent penalties for non-compliance and therefore, it is recommended to taxpayers operating in Denmark to keep note of this update and undertake timely compliance in accurate manner.
In this edition, we have covered the Transfer Pricing updates of OECD, Thailand, Serbia and Austria for the month of October 2021.
1. OECD – Statement on Two-Pillar Solution to address tax challenges arising from digitalisation of the economy
On 8th October 2021, OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) has agreed a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. We have briefly outlined the agreed component of each pillar as under:
Pillar One
Pillar Two
We have outlined brief timelines of the program as under:
Agreement |
Adoption into Law |
Implementation |
Review |
1 July 2021 – Agreement by 134 signatories on new international tax framework
8 October 2021 – Finalized the July agreement and joined by 136 signatories –
Early 2022 – Finalization of Multilateral Convention (MLC), Explanatory Statement, and model rules for domestic legislation Mid 2022 – Development of STTR multilateral instrument (MLI)
End of 2022 – Progress of GloBE implementation framework and Final Amount B deliverables |
Mid-2022 – Signing of MLC for Amount A
2022-2023 – Adoption of GloBE Rules in domestic legislation, signing and ratification of MLC
2023 – Domestic ratification of MLC for Amount A; some countries may also require domestic legislation changes 2023 – Adoption of STTR MLI |
2023 – Effective date for implementation of Amount A and IIR
2024 – Effective date for implementation of UTPR |
2030 – Review of Pillar One agreement and possibly reduction of the scope threshold from Euro 20 billion to Euro 10 billion |
Crowe UAE’s comments:
All OECD and G20 countries have now signed on to the agreement. The four Inclusive Framework members did not sign on to the agreement are Kenya, Nigeria, Pakistan, and Sri Lanka. While we may receive further clarifications on rules in coming days, multinational enterprises are recommended to follow these updates carefully to understand how this new international tax framework may affect their business model and overall structuring plan.
Moreover, implementation of minimum corporate tax by many of the countries may require countries to change their domestic legislation and again, this may significantly affect many of the multinational to relook their arrangement.
2. Thailand – New requirement for Transfer Pricing Documentation
On 30th September 2021, Director-General of the Revenue Department (“TRD”) released a Notification of the Director-General No. 407 on the Transfer pricing documentation requirements for (a) information/documents to be included in a local file; and (b) criteria for benchmarking study exemption. This notification is effective for all accounting periods starting on or after 1st January 2021. We have summarised the key points of the notification as under:
A) Information/documents to be included in a local file
Importantly, it is clarified that local file must be prepared in Thai.
B) criteria for benchmarking study exemption
The afore-mentioned notification has provided exemption to taxpayers for preparing the benchmarking study on satisfying any of the below criteria. provided following criteria
Crowe UAE’s comments:
The afore-mentioned notification will certainly help the taxpayers while preparing the transfer pricing documentation. At the same time, few taxpayers would be able to claim exemption while undertaking benchmarking search analysis in certain scenario. Taxpayers are recommended to relook their existing documentation to ensure if it there are any gaps or it needs to be updated considering the afore-mentioned notification.
3. Serbia – Amendment to Rule Book on Transfer Pricing
On 1st October 2021, Ministry of Finance of Serbia has made certain amendments in Rule Book. It was published in Official Gazette of the Republic of Serbia No. 95/2021 and enters into force on October 9, 2021.
Amendments to the Rulebook on Transfer pricing is mainly related to more detailed regulation of the conditions, content and manner of submitting the annual report on controlled transactions of the international group of related legal entities – i.e. Country by Country Report.
As per Article 61v of the Corporate Income Tax Law, taxpayer is obliged to provide following information in the documentation on transfer pricing within the analysis of a group of related parties:
The obligation to submit an annual report was introduced with effect from 2020 and it is required to be submitted only by the ultimate parent entity of the international group of related entities, if it is a tax resident of Serbia and consolidated turnover of the group is at least EUR 750 million annually.
4. Austria – Updated Transfer Pricing Guidelines released
On 7 October, Austrian Ministry of Finance released the final version of updated transfer pricing guidelines, replacing the 2010 Austrian transfer pricing guidelines. We have summarised the key points of the updated guidelines as under:
Crowe UAE’s comments:
Updated Austrian Transfer Pricing Guidelines is a welcome move by Austrian Ministry of Finance. Interestingly, updated guidelines have relied on OECD Transfer Pricing Guidelines and also considered complex topics such as intra-group financing, intangibles, etc. which would definitely help taxpayers in terms of preparing documentation and conducting robust transfer pricing analysis.
In this edition, we have covered the Transfer Pricing updates of Jordan, Singapore, Cyprus and European Union for the month of September 2021.
1. Jordan – Executive Instructions of Transfer Pricing Regulations released
On June 7, 2021, the Hashemite Kingdom of Jordan published its official Transfer Pricing Regulations in the official gazette under regulations No. 40 of 2021.
Subsequently, on 16th September 2021, Hashemite Kingdom of Jordan published Executive Instructions No. 3 of 2021 providing additional clarification regarding the transfer pricing requirements in Jordan. We have summarised the key insights of instructions as under:
Crowe UAE’s comments:
Jordan, in line with other Middle East and Africa countries, are taking active steps to implement OECD’s BEPS minimum standards and Transfer Pricing provisions in the country. We recommend taxpayers to pro-actively start analysing the impact of Transfer Pricing Regulations to them and how intra-group transactions can be substantiated.
2. Singapore – 6th Edition of Transfer Pricing Guidelines released
Recently, Inland Revenue Authority of Singapore (IRAS) has released 6th edition of e-tax Guide (New Guidelines) on Transfer Pricing. We have summarised the key updates in the edition as under:
Crowe UAE’s comments:
IRAS is taking continuous efforts to update it’s Transfer Pricing guidance in line with OECD guidelines and other globally best practices. Moreover, IRAS is also scrutinizing the intra-group transactions of taxpayers aggressively to evaluate adherence to Singapore Transfer Pricing Regulations/ guidelines. Therefore, taxpayers having operations in Singapore are recommended to relook transfer pricing policy to mitigate potential transfer pricing risk.
3. Cyprus – Transfer Pricing legislation to be commenced
Recently, new legislation on Transfer Pricing is proposed in Cyprus parliament and we have provided key points of proposed legislation as under:
Crowe UAE’s comments:
Traditionally, Cyprus was recognised as tax haven by many of the multinational corporations and was commonly used location for tax structuring purpose. With Transfer Pricing legislation may be implemented soon, taxpayers having operations in Cyprus need to be cautious of intra-group arrangement and pro-actively evaluate potential implication to them.
4. European Union Council – Proposed directive on publicly releasing Country by Country Report information
On 28th September 2021, the Council of the European Union adopted its position on the proposed directive that would require large multinationals operating in the European Union (‘EU’’) to publicly disclose information on the income taxes they pay on a country-by-country basis.
It is learnt that the Council had reached a provisional agreement with the European Parliament on the proposed directive and therefore, the European Parliament is required to formally approve the agreement before the directive can enter into force.
This directive would mainly apply to multinationals with total consolidated revenues of EUR 750 million (approximately USD 875 million) if they are operating in more than one country in the EU. These multinationals would be required to publicly disclose income tax information on a country-by-country basis for EU member states as well as for non-EU “black list” and “gray list” jurisdictions.
It is learned that EU member states would be required to incorporate the directive into national law within 18 months once it is approved and enters into force. The reporting would be due within one year of the end of the fiscal year being reported.
Crowe UAE’s comments:
The Council of EU makes continuous efforts to increase tax transparency and eliminate base erosion and profit shifting. The afore-mentioned directive may entail many of the large multinational corporation to publicly disclose tax related information and therefore, it is advisable to be cautious while preparing/ disclosing the requisite information.
1. Hong Kong – Guidance on Transfer Pricing issues on account of Covid-19 situation
Recently, Inland Revenue Department (IRD) of Hong Kong has published guidance on Transfer Pricing related issues arising from COVID-19. IRD’s approach are broadly in line with the Guidance issued by Organisation for Economic Cooperation and Development (OECD) in December 2020 on the same topic.
It is clarified that guidance issued by IRD only represents the general views (and not legally binding) and therefore, each case is required to be assessed based on its fact pattern.
We have summarised below the key points of guidance as under:
Crowe UAE’s comments:
It is a welcome step by Hong Kong IRD to publish guidance on Transfer Pricing on account of Covid-19 pandemic. Many of the industry/ businesses have been significantly impacted on account of Covid-19 pandemic and this has resulted in substantial changes in structure, functions/ risks of taxpayer and group entity, profitability/ losses, etc.
This guidance would certainly help the taxpayers in terms of preparing their documentation and analysis considering the points mentioned by IRD.
2. OECD – Transfer Pricing country profiles updated
On 3rd August 2021, Organisation for Economic Cooperation and Development (OECD) announced the publication of updated/ new transfer pricing country profiles of 20 jurisdictions. These countries include the following:
Angola (New) |
Costa Rica |
Japan |
Norway |
Spain |
Argentina |
Czech Republic |
Netherlands |
Romania (New) |
Switzerland |
Australia |
Denmark |
New Zealand |
Russian Federation |
Tunisia(New) |
Colombia |
India |
Nigeria |
Slovak Republic |
Turkey |
These country profile focuses on countries domestic regulation regarding transfer pricing principles, including the arm's length principle, transfer pricing methods, comparability analysis, intangible property, intra-group services, cost contribution agreements, transfer pricing documentation, administrative approaches to avoiding and resolving disputes, safe harbour, and other implementation measures.
Crowe UAE’s comments:
While OECD has already updated Transfer Pricing profile of 20 countries, it is learnt that it is planning to update profile of other countries. Moreover, OECD is also encouraging those countries who have not yet shared their profile to share in a manner/ format prescribed by OECD.
This would help multinational organisation to refer ready-made material on key transfer pricing principles in other country.
3. China – Simplifies procedure for Unilateral APA
Recently, The State Administration of Taxation issued Announcement No. 24 providing guidance on simplified procedure for unilateral advance pricing arrangements (APAs). New simplified procedure will be in effect from 1st September 2021 onwards.
General procedure for applying for an APA in China includes six steps such as pre-filing meeting, letter of intent, analysis and evaluation, formal application, negotiation and signing, and implementation and monitoring.
The simplified procedure terminates the pre-filing meeting step and consolidates the steps of letter of intent, analysis and evaluation, and formal application. Therefore, simplified process will reduce the whole process into only three steps such as application and evaluation, negotiation and signing, and implementation and monitoring.
Guidance mentions that to qualify for the simplified procedure, applicant must have related-party transactions of more than CNY 40 million (approx. USD 6.2 million) for the three years before the year in which the application was made. Additionally, applicants must meet one of following three conditions to qualify for the simplified procedure:
Crowe UAE’s comments:
Advance Pricing Agreement is significantly important mechanism to ensure certainty and mitigate risk from Transfer Pricing perspective. In fact, APA is quite popular option amongst multinational corporation in countries like China, India, USA, etc because of the aggressive nature of tax authorities. However, at times, on account of substantial time require to finalise APA, it practically reduces the importance of APA. Simplifies procedure provided by China will help certain taxpayers to eliminate the hurdle of excessive time involved in multiple process and thereby, finalising the APA in a reasonable time frame.
4. Germany – New Administrative Transfer Pricing Guidelines
Recently, German Ministry of Finance published Administrative Principles Transfer Pricing (APTP). APTP has incorporated recent legislative changes of Transfer Pricing regulation which is effective for fiscal years starting from 1st January 2022. Further, APTP is merely additional guidance document for interpretation of regulation and not binding on taxpayer/ tax authority and it is effective immediately.
We have summarised the key points of APTP as under:
Crowe UAE’s comments:
Guidance issued by Germany on Transfer Pricing is a welcome note for German taxpayer in terms of applying Transfer Pricing principles. Many of the practical aspects were addressed in the guidance which would help taxpayers to take appropriate action while demonstrating intra-group transactions.
5. Ukraine – Transfer Pricing applicability for certain unrelated party transactions
Recently, Ukraine’s state tax service has published a tax ruling No 2891/IPK/99-00-21-02-02-06 regarding transactions between a Ukrainian taxpayer and a US limited liability company located in Texas.
As per Ukrainian Transfer Pricing regulations, controlled transactions include not only taxpayer’s transactions with foreign related parties, but also transactions with unrelated parties if they are situated in low-tax jurisdictions or are fiscally transparent entities. Recently, Limited Liability Company of Texas is included in the Ukrainian list of fiscally transparent entities. Therefore, Ukrainian taxpayers having transaction with unrelated Texas based Limited Liability Company are subject to Transfer Pricing Regulations in Ukraine. However, as an exception, if the Texas Limited Liability Company has been paying corporate tax in the fiscal year concerned, transaction with them will not be under purview of Transfer Pricing.
Having said this, it may still be subject to General Anti-Avoidance Rules. As per GAAR, the taxpayer shall increase its taxable income by 30% of the transaction value, unless the taxpayer can demonstrate that the transaction is undertaken at arm’s length.
Additionally, Ukrainian list of fiscally transparent entities also include general partnerships and Limited Liability Partnerships established in Delaware, California, Nevada, New Jersey, New York, and Florida. Therefore, any transactions of Ukrainian taxpayer with unrelated party situated in these jurisdictions would also apply Transfer Pricing principles.
Crowe UAE’s comments:
Afore-mentioned tax ruling of Ukraine is treating certain fiscally transparent entity (even though unrelated parties) at par with related parties. Therefore, any transactions with these unrelated party is required to be justified from Transfer Pricing perspective as if it was entered with related party. Many of the times, fiscally transparent entities are used by multinational corporation to reduce the overall tax burden and therefore, tax ruling of Ukraine is a welcome step in discontinuing the loophole and require justifying any transactions with them.
1. UAE – Ministry of Finance comments on OECD Statement of Inclusive Framework
On 1st July 2021, OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released a statement concerning a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.
Out of 139 members of OECD Inclusive Framework, 132 member countries have agreed to a detailed implementation plan together with remaining issues that will be finalised by October 2021.
As per Pillar-One, formulaic share of the consolidated profit of multinational corporation will be allotted to those jurisdictions where the sale arises. This Pillar-One will apply to only those multinationals whose profitability is above 10% and global turnover is exceeding Euro 20 billion. In this case, profit to be re-allocated will be 20% to 30% of the profit in excess of 10% of revenue. Having said this, sectors such as extractive industry and regulated financial service sector have been carved out from this at the moment.
Further, as per Pillar-two/ Global Anti-Base Erosion Rules (Globe rules), members have agreed for enacting minimum effective tax rate of at least 15%. While this would be applicable for multinational having global turnover exceeding Euro 750 million, countries are free to apply this rule to MNEs headquartered in their country even if they do not meet the threshold.
Subsequently, Ministry of Finance, UAE has also issued a statement on supporting a global consensus approach to combat aggressive tax avoidance and profit shifting and it’s commitment to work collaboratively with OECD and other IF members to advance the technical discussion for achieving fair and sustainable outcome. Ministry also mentioned that successful implementation of Economic Substance Regulation (BEPS Action Plan 5) and transparency rules is a testament to the UAE’s ability to adapt its practices to meet global standards.
Crowe UAE’s comments:
Statement from Ministry of Finance, UAE re-iterates UAE government’s positive approach towards supporting OECD and IF members in implementing new international tax standards. Moreover, with this development, we may also witness introduction of corporate tax by UAE government to implement minimum corporate tax suggestion of pillar two of OECD. We are expecting to get more clarity in coming months.
2. UAE – Guidance on Mutual Agreement Procedure (MAP)
On 1st July 2021, UAE issued a guidance on MAP which provide dispute resolution mechanism to resolve tax treaty related disputes. This is in line with UAE’s commitment to comply with OECD BEPS standards and one of the Plan (Action Plan 14) pertains to dispute mechanism.
Taxpayers may request MAP if they believe that action of tax authority is not in accordance with tax treaty and therefore, they are being taxed or will be taxed. Generally, such issue must related to a country with whom UAE has entered into double tax treaty in order to request MAP. Moreover, most of the double tax treaty of UAE stipulates period of 3 years to request for a MAP from receiving the notification of the action which is not in line with tax treaty
UAE competent authority will evaluate the request and may ask for additional information/ clarification and also consult a competent authority of another country with whom the issue has been requested by taxpayer. If both competent authorities reach common conclusion, taxpayers in UAE may accept or reject the said conclusion.
Crowe UAE’s comments:
UAE joined OECD BEPS Inclusive Framework in 2018 and is progressing well in terms of its commitment to comply with OECD measures to restrict profit shifting. In line with its objective, UAE has taken significant steps by introducing/ implementing country by country regulation, economic substance regulation and MAP. In continuation with this, we may witness many more measures in future too and therefore, taxpayers in UAE are suggested to keep close eyes on these developments to avoid any challenges in future.
3. Oman – Clarification on suspension of country by country reporting in certain cases\
On 7th July 2021, Oman’s Tax Authority announced a suspension of the requirement to file a Country by Country (CbC) report with the OTA until further notice.
CbC rules are applicable in Oman since September 2020, requiring all covered tax resident entities in Oman to file a CbC notification on or before the last date of the relevant reporting fiscal year. Additionally, regulation also required filing of the detailed CbC report if the tax resident entity in Oman is an ultimate parent entity, surrogate parent entity or local constituent entity (in certain situation).
Subsequently, on 14th July 2021, tax authority clarifies that above suspension is applicable only to those Multinational Enterprise (MNE) Groups with Ultimate Parent Entity resident outside Oman. In other words, CbC Report requirement continues to be applicable for Oman Headquartered entities. Additionally, CbC notification requirement would continue to be applicable for all covered Oman tax resident entities (i.e. Oman headquartered entity as well non-headquartered entity).
With the above development, we have summarised the CbC filing requirement of Oman for the year 2021 and its timeline as under:
Sr. No. |
Compliance Requirement |
Where MNE is headquartered in Oman |
Where MNE is not headquartered in Oman |
1 |
CbC Notification for FY 2021 |
Yes – on or before 31st December 2021 |
Yes – on or before 31st December 2021 |
2 |
CbC Report for FY 2020 |
Yes – on or before 31st December 2021 |
Suspended basis above clarification |
Crowe UAE’s comments:
In the absence of active exchange agreement by Oman with other countries, local Oman constituent entity would have also required to file CbC Report. Therefore, it is a welcome move by Oman tax authority to suspend CbC Report filing for these Oman constituent entities and reduce their burden of additional compliance in Oman.
4. European Union Court – Rejects Nike’s challenge of Transfer Pricing state aid investigation
On 14th July 2021, European Union (EU) Court dismissed Nike’s application challenging the decision of EU Commission to investigate issue of unlawful state aid from Advance Pricing Agreement (APA) of Nike with Netherlands tax authority.
The afore-mentioned APA was entered on royalty payment by Nike Netherlands Subsidiary entities to overseas Nike Group entities.
European Commission undertaken a provisional assessment and determined that APA resulted in a level of profit for the Netherlands subsidiaries that was lower than it would have been if the transactions were priced at arm’s length. In order to further examine the alleged preferential corporate tax treatment amounted to unlawful state aid, the European Commission opened a formal investigation in 2019.
Against the above investigation, Nike made an application in EU Court to revoke the investigation which is dismissed by EU Court in July 2021.
Crowe UAE’s comments:
Under European Union rules, it is illegal for EU countries to give financial help to some companies and not others in a way which would distort fair competition. This help is called state aid. In last few years, we have witnessed many cases being caught up in net of unlawful state aid and many of these cases relates to transfer pricing. Therefore, taxpayers operating in European Union countries need to be cautious while framing their Transfer Pricing policies and recommended to maintain robust documentation to demonstrate.
5. Kenya – Introduced Country by Country Reporting
Kenya’s Finance Act 2021 was signed into law on 29th June 2021 and thereafter, published in official gazette on 1st July 2021
Amongst other amendments/ introduction, one introduction is Country by Country Reporting to be applicable from 1st January 2022 with an intention to align its Transfer Pricing Regulation with OECD BEPS Action Plan 13.
Regulation would be applicable for the multinational group having ultimate parent entity in Kenya. Detailed regulation are still awaited.
Crowe UAE’s comments:
Kenya is progressing well in terms of implementing and aligning transfer pricing regulation in line with OECD. At the same time, it is learnt that tax authority in Kenya is scrutinizing intra-group transactions aggressively. With introduction of CbC Report, tax authorities will get access to insights of large multinational group and they are recommended to revisit their transfer pricing policies at the earliest in line with arm’s length principles.
6. Madagascar – Guidance on Transfer Pricing documentation
Recently, Ministry of Economy and Finance of Madagascar issued a guidance note on Transfer Pricing documentation for taxpayers. We have summarised few key points of the guidance as under:
Crowe UAE’s comments:
Madagascar is not a signatory to OECD’s Base Erosion and Profit Shifting Inclusive Framework. In spite of being non-member, guidance issued by Madagascar tax authority demonstrates their commitment in ensuring compliance of arm’s length principles in the country. Having said this, submission of local file as well as master file without any threshold on transaction/ turnover, would increase the compliance burden of the taxpayers. Taxpayers operating in in Madagascar are recommended to be cautious of this new requirement to avoid challenges in future.
7. Iceland – Penalty provisions introduced for non-compliance of Transfer Pricing
Iceland regulation requires mandatory preparation of Transfer Pricing documentation for taxpayers who has entered into cross-border related party transactions and having income or assets exceeding ISK 1 billion (apprx USD 8 million).
Recently, Iceland parliament modified the tax regulation to empower tax authorities in imposing penalties for any non-compliance undertaken by taxpayers in preparing/ maintaining Transfer Pricing documentation. Penalty amount may be as under:
Sr. No. |
Nature of non-compliance or default |
Penalty amount (in ISK) |
1 |
Failure to fulfil TP documentation requirement for any year |
ISK 3 million (approx USD 24,500) |
2 |
Failure to fulfil TP obligation within 45 days from request of tax authority |
ISK 3 million (approx USD 24,500) |
3 |
Failure to make correction in TP documentation as per tax authority’s requirement within 45 days |
ISK 1.5 million (approx USD 12,250) |
Further, it is mentioned that penalties may be imposed for a maximum of six income years immediately preceding the year for which the penalty was imposed and maximum penalty that may be levied would be ISK 6 million (apprx USD 50,000). Additionally, it has been clarified that penalty amount may be reduced to 90%, 60% or 40% if taxpayer complies with the requirement within 30 days, 60 days or 90 days from the tax authority’s decision to levy the penalty.
Crowe UAE’s comments:
With penalty provisions in place, taxpayers in Iceland need to be careful in ensuring that Transfer Pricing compliance is undertaken within prescribed time. Non-compliance may entail stringent penalties.
In this edition, we have covered the Transfer Pricing updates of Organisation of Co-Operation and Development (OECD), Jordan, Qatar and Argentina for the month of June 2021.
1. OECD – Statement of Inclusive Framework on two-pillar solution addressing tax challenges of digital economy
On 1st July 2021, OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released a statement concerning a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.
Out of 139 members of OECD Inclusive Framework, 130 members have agreed to a detailed implementation plan together with remaining issues that will be finalised by October 2021. 9 countries which did not sign the consensus include Hungary, Ireland, Kenya, Nigeria, Barbados, Peru, Sri Lanka, Saint Vincent and Grenadines.
As per Pillar-One, formulaic share of the consolidated profit of multinational corporation will be allotted to those jurisdictions where the sale arises. This Pillar-One will apply to only those multinationals whose profitability is above 10% and global turnover is exceeding Euro 20 billion. In this case, profit to be re-allocated will be 20% to 30% of the profit in excess of 10% of revenue. Having said this, sectors such as extractive industry and regulated financial service sector have been carved out from this at the moment.
Further, as per Pillar-two/ Global Anti-Base Erosion Rules (GloBE rules), members have agreed for enacting minimum effective tax rate of at least 15%. While this would be applicable for multinational having global turnover exceeding Euro 750 million, countries are free to apply this rule to MNEs headquartered in their country even if they do not meet the threshold.
Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds are not subject to the GloBE rules.
The above statement mentions that Pillar One and Pillar Two will come into effect in 2023.
Crowe UAE’s comments:
Introduction of Pillar One and Pillar Two is a significant change in international tax dynamics. While this is a substantiate step forward, it would be interesting to witness how the implementation will take effect of this plan.
Interestingly, signatories include countries like United Arab Amirates and Bahrain wherein corporate tax regime does not exist at the moment. Considering that they have agreed to implement above pillars, it would be interesting to witness steps taken by these countries in coming time.
2. Jordan – Introduction of Transfer Pricing Regulation
In October 2019, Jordan has signed Organisation of Economic Co-Operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Thereby, Jordan was actively taking steps to implement minimum standards of BEPS and introduce Transfer Pricing regime in a country.
Recently, Jordan has introduced Transfer Pricing (TP) Regulation in a country vide Regulation No 40 of 2021 in Official Gazette in June 2021.
TP Regulations would be applicable to all taxpayers who has entered into related party/ intra-group transactions. Having said this, relaxation is provided to small taxpayers to comply with TP Regulation if quantum of related party transaction does not exceed JOD 500,000 (equivalent to USD 700,000 approximately) during the reportable period.
In case TP Regulation is applicable, taxpayers are required to prepare and maintain local file as well as master file documentation. However, submission of document would be required only upon request from tax authority.
Multinational Group is required to prepare and submit CbC Report if consolidated turnover of group exceeds JOD 600 million (equivalent to USD 840 million). CbC Report needs to be submitted within 12 months from the end of reportable period.
In addition to the Transfer Pricing documentation, Taxpayers are mandatorily required to furnish Related Party Disclosure Form along with annual tax return.
Crowe UAE’s comments:
Jordan, in line with other Middle East and Africa countries, are taking active steps to implement OECD’s BEPS minimum standards and Transfer Pricing provisions in the country. While it is expected that tax authorities will provide further guidance on the subject matter soon, taxpayers may pro-actively start analysing the impact of TP regulation to them and how intra-group transactions can be substantiated.
3. Qatar – Deadline to furnish master file and local file extended
On 17th June 2021, General Tax Authority (“GTA”) of Qatar issued Decision No. (8) of 2021 to announce the extension of deadline for furnishing Master File and Local File for the year ended 31 December 2020.
While original deadline was 30th June 2021, the deadline has been extended by 3 months i.e. upto 30 September 2021. Having said this, deadlines for filing Tax Returns and Transfer Pricing Declaration for taxable and tax exempt entities remain same i.e. 30th June 2021.
Crowe UAE’s comments:
Submission of master file and local file is applicable for the first time in Qatar for the year ended 31st December 2020. While most of the taxpayers are grappling to prepare master file and local file for the first time, this extension provides much needed relief to them.
Preparation of first time Master File and Local File documentation requires significant efforts and therefore, we highly recommend the taxpayers to proactively work towards collating the necessary details and identify gaps. Non-submission of master file and local file may not only attract penalties but also entail tax additions in the hands of taxpayers on account of failure to justify intra-group transactions.
4. Argentina – Introduction of Simplified Transfer Pricing Reporting
On 18th June 2021, Argentina’s tax agency introduced simplified regime for Transfer Pricing information vide General Resolution 5010/2021. This new rule modifies the transfer pricing regulations released last year in General Resolution 4717/2020.
In order to apply simplified reporting regime, following conditions need to be fulfilled:
Taxpayers that qualify to adopt simplify reporting regime, may submit disclosures in a Form F2672, international operations simplified regime.
Having said this, qualifying for the simplified disclosure regime will not exempt the taxpayer from preparing the transfer pricing report or local file.
Crowe UAE’s comments:
While new rule will provide relaxation to many of taxpayers who are qualified as per afore-mentioned criteria, conditions/ criteria mentioned for applicability seem to be quite comprehensive. Therefore, it would be interesting to witness feasibility of new regime for the taxpayers in Argentina.
In this edition, we have covered the Transfer Pricing updates of Africa, Singapore, Australia, Kenya, Nigeria, Malta and Qatar for the month of May 2021.
1. Africa – 3rd edition released on Tax Transparency and Exchange of Tax Information
Given the high levels of illicit financial flows from African countries and recognising the potential of tax transparency and exchange of information to raise resources for development, African members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) decided to create an African focused programme: the Africa Initiative in 2014. The objective was to unlock the potential of tax transparency and exchange of information for Africa by ensuring that African countries are equipped to exploit the improvements in global transparency to better tackle tax evasion.
The Africa Initiative is open to all African countries and currently has 32 African member jurisdictions. It is supported by 11 partners and donors.
Recently, 3rd edition (2021) report was published on progress made by African countries (34 countries surveyed) in utilising tax transparency and Exchange of Information (EOI) to tackle tax evasion in 2020.
This report contains six chapters as under:
Source: Tax Transparency in Africa 2021 - Africa Initiative Progress Report
The number of EOI requests sent by African countries in 2020 increased by 21%. For the first time, African countries turned the tide in 2020 and became net senders of EOI requests. However, most African countries are still behind their potential of EOI. More efforts need to be put into the operationalisation of EOI.
African countries identified more than USD 43 million (EUR 34.8 million) in additional taxes due to EOIR in 2020. Since 2009, EOI has enabled African countries to identify over EUR 1.2 billion of additional revenues (tax, interest and penalties).
Crowe UAE’s comments:
African countries are taking significant efforts in increasing tax transparency and exchange of information with the intention to increase their tax revenue. In last decade, many African countries have already issued Transfer Pricing regulations/ guidance and taking actions to implement the same effectively.
Therefore, both companies headquartered in Africa or foreign multinational group having presence in Africa needs to revisit their operational structure to align with Transfer Pricing principles to mitigate the risks.
2. Singapore-Transfer Pricing Guidelines for centralised activities
Recently, Inland Revenue Authority of Singapore (IRAS), has issued Transfer Pricing guidelines for centralised activities of multinational group in Singapore. Guidelines not only focus on large number of headquarters situated in Singapore but also include other entities who provide centralised services to their group entities.
We have summarised the key points of the guidelines as under:
1. It is clarified that there are diverse functional profiles of headquarters which define their contribution to value chain analysis. It is imperative to evaluate the operations of the Group and accurately delineate the intra-group transaction in order to determine the intensity of activities undertaken by headquarters, and the corresponding arm’s length transfer price.
2. Guidelines discusses four categories of activities undertaken by headquarters such as
3. Guidelines has emphasized on robust functional analysis having regard to the characterisation of the headquarter entity and basis that appropriate transfer pricing methodologies may be adopted.
Crowe UAE’s comments:
Intra-group service charge or management fees is one of the most prone transfer pricing issue across world. In multinational group structure, it is quite routine to have such kind of cross charge for centralised activities provided by headquarter. In most countries, tax authority always challenges such cross charge on account of following:
Guidance provided by IRAS will certainly help taxpayers in evaluating the intra-group arrangement in detail and determining appropriate arm’s length price. Having said this, taxpayers are recommended to document robust analysis to justify at later stage.
3. Australia-ATO released draft guidelines on intangible arrangements
Recently, Australia Tax Officer (ATO) has released PCG 2021/D4, a draft Practical Compliance Guideline, in relation to cross-border intra-group arrangements of intangibles. We have summarised key findings of the guidelines as under:
1. Draft guidelines covers all types of intangible arrangement, including but not limited to
2. Further, guidance focuses not only transfer pricing risk of intangible but also other Australian tax laws that may be relevant, including capital gains tax, withholding tax, the general anti-avoidance rules (GAAR) and diverted profits tax (DPT).
3. Draft guidelines provides a framework as to how ATO examines intangible arrangements and categorises in high, medium or low risk. Additionally, taxpayers having intra-group intangible transaction may need to furnish Reportable Tax Position (RTP) Schedule along with annual income tax return and may also need to self-assess the risk relating to intangible in RTP disclosures.
Crowe UAE’s comments:
Over the years, ATO is considered to be one of the most aggressive transfer pricing authorities in terms of issuing guidance to taxpayers as well as scrutinizing intra-group transactions. Frequent guidance on complex issues published by ATO shows their seriousness in ensuring Transfer Pricing compliance in a country.
Moreover, it is often a complex exercise to determine arm’s length price for intangible arrangements and it is advisable to undertake detailed exercise to evaluate DEMPE functions of entities involved in the transactions. While this draft guidelines will certainly help to taxpayers, self assessment of risk may trigger challenges. We recommend taxpayers to prepare/ maintain robust analysis for intangible transactions including benchmarking analysis to demonstrate fair allocation of profitability.
4. Kenya-Proposed Country by Country Reporting Regulation
On 5th May 2021, Kenya has introduced Finance Bill 2021 (the Bill) before reading the budget in June 2021. Amongst other tax related amendments proposed, the Bill proposed requirement for multinational group to submit group’s financial activities in Kenya as well as other countries. This is akin to country by country (CbC) report.
The information required to be submitted by the ultimate parent entity would include jurisdiction-wise amount of revenue, profit or loss before tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash or cash equivalents for all the jurisdictions where the group has presence.
The return would be required to be submitted not later than 12 months from the last day of the group’s financial year and it is proposed to commence the regulation from 1st January 2022. Interestingly, turnover threshold for applicability of Regulation is yet to be provided.
Crowe UAE’s comments:
While Kenya is a signatory to Organisation of Economic Co-Operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS), it has not yet signed Multilateral Competent Authority Agreement on Country by Country Report. Having said this, it is learnt that Kenya is progressing on ensuring Transfer Pricing requirement in country and tax authority too scrutinizing the case to evaluate profit shifting cases.
With the proposed introduction of CbC Reporting Regulation, the taxpayers are required to prepare additional transfer pricing documentation (if applicable) and therefore, it is recommended to relook their intra-group transactions policy at early stage to avoid challenges in future.
5. Nigeria-Suspension of Country by Country Report for subsidiaries and branches
In 2018, Federal Inland Revenue Service (FIRS) of Nigeria has published The Income Tax (Country by Country Reporting) Regulations S.I. No. 6 of 2018. Based on this, subject to revenue threshold, following persons were required to submit CbC Report in Nigeria:
However, recently, FIRS has issued a public notice suspending CbC obligation for Nigerian branches/ subsidiaries of multinational group. Having said this, these entities are required to continue to comply filing of annual notification under CbC Regulations.
Further, filing obligation of ultimate parent entity of multinational group headquartered in Nigeria will remain continue.
Crowe UAE’s comments:
The above suspension of CbC report filing obligations of Nigerian branches and subsidiaries will reduce the compliance burden significantly.
Further, this step is in alignment of Nigeria’s current status as a “non-reciprocal jurisdiction.” In other words, as a non-reciprocal jurisdiction, while Nigeria has agreed to provide CbC reports to other countries, it does not intend to receive any CbC reports from other countries.
6. Malta-Penalty for Country by Country Reporting non-compliance
Malta has published amendment in Cooperation with Other Jurisdictions on Tax Matters (Amendment) Regulations, 2021 wherein it has introduced penalty provisions for non-compliance of CbC Reporting regulations.
As per Malta CbC Reporting Regulations, all constituent entities are required to submit notification whether their multinational group is required to file CbC Report and if yes, jurisdiction in which multinational group is filing the report. This notification is required to be filed on or before last day of filing tax return of Malta constituent entity for preceding fiscal year.
Recently, Malta authority has provided that failure to notify/ inform that which entity entity will be filing CbC Report or whether constituent entity falls under the obligation to file the CbC Report will invite penalty of Euro 200 and Euro 50 for every day of non-compliance to each stated obligation separately. Having said this, total penalty is restricted at Euro 5,000 for each non-compliance activity.
Crowe UAE’s comments:
African countries are significantly progressing towards achieving tax transparency and with this intention, countries are adopting stricter norms in implementing transfer pricing provisions in country.
7. Qatar-Published FAQs on Transfer Pricing documentation
Earlier in December 2019, Qatar’s General Tax Authority (GTA) has issued Executive Regulation to Law No. 24 of 2018 by way of Decision No. 39 of 2019 published on 11th December 2019 introducing substantive changes in Tax and Transfer Pricing Regulation.
Subsequently, GTA has issued additional Transfer Pricing guidance on documentation and compliance requirement by way of President’s Decision No. 4 of 2020.
Recently, GTA has released Frequently Asked Question (FAQ) to address the concerns of taxpayer on Transfer Pricing Regulation. FAQ is dividend in two parts i.e. (1) Transfer Pricing declaration form (2) local file and master file documentation.
Click here to read our detailed alert providing insights on FAQs.
Crowe UAE’s comments:
Qatar, in line with other Middle East and Africa countries, are frequently providing guidance for taxpayers before their first compliance for FY 2020 due in 30th June 2021. FAQ’s are a welcome step to provide much needed clarity to taxpayers. Now, the taxpayers in Qatar are recommended to –
Ensure accurate/ appropriate disclosures to be submitted in Transfer Pricing Declaration form and local file/ master file documentation within prescribed time.
On 27th April 2021, United Nation’s (UN) released 2021 edition of practical manual on Transfer Pricing for developing countries replacing it’s 2017 edition. Similar to previous edition, 2021 edition is also organised in four parts as under:
Part A – overview of multinational enterprises, their operation and structure, and the management of their transfer pricing function.
Part B – Designing principles of Transfer Pricing such as arm’s length principle, comparability analyses, transfer pricing methods and policy considerations for certain arrangements/ transactions. Interestingly, this edition has also included separate chapter providing guidance on financial transactions. This was expected in line with guidance released by Organisation of Economic Co-Operation and Development (OECD) on Financial transactions in 2020.
Part C – Focuses on designing transfer pricing legislation and practical implementation of regulations, documentation requirements, risk assessment, conducting audits/ dispute resolution mechanism.
Part D – Provides latest country practices in few developing countries such as Brazil, China, India, Mexico, South Africa and Kenya.
Crowe UAE’s comments:
Over the years, both OECD and UN have been front-runner organisation sharing guidance on implementation of Transfer Pricing principles. Content of the manual is contributed by a UN sub-committee whose members also include few government tax/ policy officials, representatives of private sector, subject experts, etc. While Transfer Pricing regulation of many countries do not directly refer UN manual, it would be a good reference/ source for taxpayers/ tax officials while analysing the topic in-depth.
In 2017, Indian adopted 3-Tier Transfer Pricing documentation in line with OECD recommendation.
Earlier, Country-by-Country (CbC) Reporting was applicable if the consolidated turnover of multinational group exceeded INR 5500 crore. On 5th April 2021, Central Board of Direct Tax (CBDT) has increased the threshold to INR 6400 crore for applicability of CbC Reporting. This new threshold corresponds to OECD and other global standard and thus, will help multinational group to avoid hardship by filing CbC Report in India in spite of non-applicability at group level.
Further, in relation to master file compliance, Regulations allowed the multinational group to designate 1 resident entity on behalf of all other resident constituent entities of group to comply with regulation. However, all non-resident entities were required to comply with master file compliance separate in India. CBDT has relaxes the compliance burden to designate 1 entity on behalf of all group entity (resident as well as non-resident) to undertake master file compliance in India. This will significantly reduce the compliance burden for non-resident entities in India and avoid duplicating their efforts.
These changes are applicable with effect from 1st April 2021.
Crowe UAE’s comments:
These are welcome move by CBDT and changes are in line with Indian Government’s continuing efforts in easing the compliance burden on taxpayers.
Unlike many other countries, United Kingdom (UK) has not adopted OECD’s recommendation for 3-Tier Transfer Pricing documentation requirement. Presently, UK only requires Country by Country Reporting to be filed and there is no formal requirement to prepare/ submit local file/ master file. While routine documents/ records maintained fulfils the requirement to justify intra-group transactions, multinational group often prepares this documentation on suo-moto basis.
Recently, HM Revenue and Customs (HMRC) has issued consulting paper to evaluate if large multinational group with UK operations should prepare standard Transfer Pricing documentation in line with OECD recommendations.
Additionally, HMRC has proposed requirement to submit international dealing schedule to be filed along with tax return. This is akin to related party disclosure schedule wherein details like nature of intra-group transactions, details of related party with whom transactions entered, amount, transfer pricing methodology, etc need to be submitted. It is expected that this schedule will be applicable only for cross-border transactions and also exclude small and medium enterprise from compliance requirement. Possibly, threshold for cross-border transaction may also be prescribed while complying with the schedule to focus on only significant transactions.
The consultation paper seeks comments from public on or before 1st June 2021. Basis the comments received from public, HMRC will issue final guidance on this aspect.
Crowe UAE’s comments:
Consultation report has mentioned that in last 5 years UK has earned over £6 billion tax from Transfer Pricing stream. HMRC believes that with the proposed move of standard documentation to be prepared, tax revenue from Transfer Pricing may further increase in country.
Going forward, we may witness aggressive approach from HMRC to scrutinize documentation requirement and evaluation of Transfer Pricing risk amongst UK taxpayers. Therefore, it is recommended to UK taxpayers to pro-actively commence the Transfer Pricing documentation preparation and revisit their model (if required) to analyse if any gaps to be fulfilled.
On 26th April 2021, Danish Supreme Court (five-judge bench) upholds the judgement of Danish Western High Court in case of Tetra Pak Processing Systems A/s (Case BS-19502/2020-HJR) (Part of Tetra Laval Group) (“Taxpayer”) wherein it concluded that tax authority has rightly made discretionary assessment since taxpayer has not maintained adequate Transfer Pricing documentation. We have summarised the facts of the case as under:
Facts:
Crowe UAE’s comments:
In last few years, we have witnessed ample rulings from Danish authority wherein it has highlighted the importance of adequate Transfer Pricing documentation to justify intra-group transactions. Most of countries have placed onus on taxpayer while substantiating the documentation maintained by them and therefore, it is imperative for taxpayers to incorporate robust factual and comparability analysis while preparing Transfer Pricing documentation. Analysis should be more in-depth wherein taxpayers has suffered losses since this would immediately catch attention of tax authority for potential tax adjustment.
Moreover, Danish authority has made their Transfer Pricing Regulation stricter from years beginning from 1st January 2021 wherein taxpayers are mandatorily required to furnish local file and master file to tax authority within 60 days of tax return deadline unlike previously where documentations were required to be submitted only upon request from tax authority.
With this move, we expect increase in Transfer Pricing scrutiny for Danish taxpayer and therefore, it is recommended that taxpayers maintain adequate documentation to avoid challenges in future.
Maldives Inlands Revenue Authority has published Regulation Number 2021/R-42 introducing Advance Pricing Agreement (APA) mechanism in a country. We have summarised key requirement of APA mechanism as under:
Crowe UAE’s comments:
Over the years, APA mechanism is quite popular amongst many countries, especially multinational corporations are inclined towards opting for APA to ensure certainty on Transfer Pricing rather than to possess potential risk.
We have witnessed the high-pitched tax addition on account of Transfer Pricing matters in numerous matters in last couple of decades. Nowadays, tax authorities are scrutinizing intra-group transactions to evaluate value creation activity instead of traditional manner of merely verifying profitability of taxpayer. Therefore, APA will remain attractive option to save time/ efforts and avoid litigation.
On 23rd March 2021, Internal Revenue Service (IRS) issued Announcement 2021-6 providing the Advance Pricing and Mutual Agreement (APMA) program’s 22nd annual report on advance pricing agreements (APAs) for 2020. Report also provided few interesting statistics on APA program for the year 2020 which is as under:
Particulars |
Unilateral |
Bilateral |
Multilateral |
Total |
Applications filed |
15 |
103 |
3 |
121 |
APAs executed |
19 |
105 |
3 |
127 |
Open APAs as on 31st December 2020 |
43 |
384 |
21 |
448 |
Renewals executed |
11 |
64 |
0 |
75 |
Pending renewals as on 31st December, 2020 |
25 |
154 |
8 |
187 |
Applications revoked/ cancelled |
0 |
0 |
0 |
0 |
Applications withdrawn |
2 |
5 |
0 |
7 |
While most of the transactions covered in APA executed in 2020 involve the sale of tangible goods (35%) or provision of services (38%), interestingly, Annual Report mentions that approximately 25 percent of transactions covered in APAs executed in 2020 involve the use of intangible property, which can be among the most challenging transactions in APMA’s inventory.
Crowe UAE’s comments:
APA has been one of the most popular program amongst multinational in many developing and developed countries. Saving of litigation cost and time as well as certainty received by multinational on Transfer Pricing policy for 3-5 years (even more in few countries) is a key advantage as to why multinational prefers to opt for APA.
Mauritius Revenue Authority (MRA) has issued a communique dated 26th March 2021 informing taxpayers that due date for filing country by country (CbC) report/ notification for the accounting period ended 31st March 2020 has exceptionally been extended from 31st March 2021 to 20th April 2021.
Extension has been announced as a result of national sanitary lockdown in the country in the country in March 2021.
Crowe UAE’s comments:
This relaxation will definitely help the taxpayers in undertaking their CbC compliance on timely basis and without suffering any monetary penalty or other consequences.
On 18th March 2021, Belgian tax authorities have announced the extension in filing corporate tax return for the financial year ended between 31st December 2020 and 28th February 2021 upto 28th October 2021. The extension is on account of difficulties faced by taxpayers due to Covid-19 pandemic.
This extension of deadline is also applicable for filing local file reporting that is required to be submitted in Form 275LF. Submission of local file is required by each Belgian entity of multinational group if any of the following threshold meets:
Crowe UAE’s comments:
Extension would help the taxpayers in undertaking their compliance on timely basis. It takes substantial efforts in preparing local transfer pricing documentation, taxpayers would have additional time to collate/ prepare the documentation for this year.
On 19th March 2021, Ministry of Finance has published a Rulebook in Official Gazette of Serbia No. 24 providing arm’s length interest rates for 2021 for intra-group loans.
As per tax regulation of Serbia, in order to determine the arm’s length rate of interest, taxpayers may either (i) adopt interest rates as prescribed by ministry of finance in Rulebook; or (ii) apply OECD method for determining arm’s length interest rates. Taxpayers may need to follow any of this option on consistent basis for all inter-company loans.
Arm’s length prescribed by ministry of finance for 2021 is as under:
Credit/ loan currency |
Banks/ Financial leasing company |
Other companies |
||
Short term loan |
Long term loan |
Short term loan |
Long term loan |
|
RSD |
0.67% |
3.79% |
3.69% |
3.90% |
EUR |
2.83% |
2.32% |
2.83% |
|
USD |
3.94% |
1.57% |
4.01% |
|
CHF |
2.61% |
- |
6.86% |
|
SEK |
3.96% |
- |
- |
|
GBP |
1.88% |
- |
- |
|
RUB |
2.56% |
- |
- |
Crowe UAE’s comments:
Determination of arm’s length price for the financial transactions is much talked topic in recent years. Infact, OECD has released guidance on financial transactions in 2020 wherein they have emphasized on credit rating approach while determining arm’s length interest rates.
In Covid-19 pandemic situation, it is expected that intra-group financing will significantly increase amongst multinational group and therefore, it is recommended to taxpayers to relook their transfer pricing policy of financial transactions.
Zambia Revenue Authority published a Statutory Instrument No. 117 of 2020 to introduce country by country (CbC) reporting regulation to be effective from 1st January 2021. CbC Regulation is applicable for a MNE Group if the consolidated group revenue exceeds Zambia Kwacha 4,795 million (equivalent to EUR 750 million).
Regulation requires two-fold compliances as under:
Sr. No. |
Compliance required |
Deadline |
Required by whom |
1 |
Filing of notification |
On or before last day of Group’s reporting accounting year |
Constituent entity tax resident in Zambia |
2 |
Filing of CbC Report |
Within 12 months from last day of Group’s reporting accounting year |
Ultimate parent entity or surrogate parent entity |
Tax resident constituent entity that is not the ultimate parent entity or surrogate parent entity may also be under the obligation to file a CbC report where
Crowe UAE’s comments:
CbC Reporting Regulation in Zambia is mainly in line with OECD requirement and thereby, Zambia has also adopted 3-Tier Transfer Pricing documentation approach of OECD. Further, it is learnt that Zambia Revenue Authority is quite aggressive in scrutinizing the intra-group transactions of multinational group. Therefore, it is recommended for multinational having presence in Zambia to revisit their Transfer Pricing policy of intra-group transactions and maintain robust documentation to demonstrate arm’s length principles.
In 2017, Qatar signed Organisation of Co-Operation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and thereby, committed to align its domestic regulation with global tax rules.
In 2018, it introduced Country by Country (CbC) Regulation and subsequently, it published new income tax law and corresponding Executive Regulation for Transfer Pricing documentation requirements.
In September 2020, General Tax Authority of Qatar (GTA) launched tax portal “Dhareeba” wherein taxpayers are required to file income tax return as well as other declarations. This also mandates the taxpayers to submit Statement on Transfer Pricing subject to certain threshold. The statement requires information such as
Recently, in February 2021, it is learnt that GTA verbally confirmed that afore-mentioned Transfer Pricing declaration to be filed by those taxpayers whose either total value of assets or revenue exceeds the threshold (which is expected to be QAR 10 million equivalent to USD 2.75 million)
Crowe UAE’s comments:
Transfer Pricing is relatively a new regime in Middle East region. While many countries have signed OECD’s BEPS Inclusive Framework, only few countries (like Kingdom of Arabia, Egypt and now Qatar) have introduced 3-tier documentation requirement in a country.
Additionally, Qatar also requires taxpayer to submit statement on Transfer Pricing along with tax return which is added compliance requirement. Since this is the first year of Transfer Pricing compliance in Qatar, it is recommended to take timely action in revisiting existing transfer pricing policy and preparing comprehensive Transfer Pricing documentation to avoid challenges in future.
Bahrain has signed Multilateral Competent Authority Agreement for Country-by-Country Reporting in 2019. Recently, vide publication in official gazette on 28th January 2021, Bahrain ratified Multilateral Competent Authority Agreement for CbCR.
The ratified agreement will come into force from immediately next day of its publication
Crowe UAE’s comments:
With this move, it is expected that Bahrain will soon publish CbC Regulation in a country. While most other Gulf Co-Operation Council (GCC) countries have already implemented CbC Regulation, Bahrain too will commence the Transfer Pricing regime soon. Therefore, companies operating in Bahrain are required to proactively re-assess their Transfer Pricing policies and restructure their business model, if required, in order to be compliant with arm’s length policies.
Recently, Malaysia’s Inland Revenue Board (IRB) updated Malaysia’s Transfer Pricing Guidelines.
Previously, Transfer Pricing documentation in Malaysia was not required to be submitted to IRB along with tax return filing. Instead, documentation was required to be submitted within 30 days from the request from IRB to submit the same. IRB
In this context, IRB has updated the guidelines to reduce the number of days to 14 (from 30) in order to submit Transfer Pricing documentation for Transfer Pricing audit cases commending on or after 1st January 2021. Corresponding amendments were also made in penalty provision.
Crowe UAE’s comments:
Generally, many taxpayers adopt the approach to prepare the Transfer Pricing documentation only upon request from IRB even though it is supposed to be kept ready while filing tax return. Considering the fact that time limit is reduced to only 14 days, it is recommended to taxpayers to keep their Transfer Pricing documentation ready in order to timely submit (if required) the same.
In our experience, Malaysia’s tax authority generally adopts aggressive approach while scrutinizing the Transfer Pricing case and therefore, non-compliance may entail stringent penalties.
Previously, Canada’s Revenue Agency (CRA) required taxpayer to pay cost recovery charges when applying for the Advance Pricing Agreement (APA). This charge was mainly to cover the estimated expenses of during APA process including travel cost to taxpayer’s location. Subsequently, any excess amount not incurred by CRA was refunded to taxpayer at the end of APA process.
Recently, on 5th February 2021, CRA announced that going forward taxpayers will not be required to pay such cost recovery charges.
Crowe UAE’s comments:
Most of the developed and developing countries have APA mechanism in place wherein taxpayer can enter into an agreement with tax authority in advance for certain period (generally 3-5 years) on Transfer Pricing policy to be adopted. In last many years, APA has remained attractive mechanism for multinational corporation in order to get certainty as well as on saving time and cost on Transfer Pricing matters. Moreover, in today’s scenario wherein most of taxpayers have been severely affected by Covid-19 pandemic and thus, grappling with transfer pricing compliant policy, it is expected that APA mechanism will remain attractive option for taxpayers.
Therefore, CRA’s move to revoke cost recovery charges from taxpayers is a welcome move for those who wish to apply APA soon.
Recently, Tax Court in South Africa upheld the transfer pricing adjustment for taxpayer who failed to prepare Transfer Pricing documentation to justify arm’s length nature of intra-group transactions. We have summarised the facts of the case as under:
Case - ABC (Pty) Ltd v. Commissioner for the South African Revenue Service (14305) (2021) (ZATC 1)
Facts:
Tax Court’s decision:
Crowe UAE’s comments:
Transfer pricing is a term used to describe intra-group pricing arrangements amongst the multinational corporations. Transactions may relate to intellectual property, tangible goods, services, loans or other financing transactions.
Interestingly, Transfer Pricing mechanism is used by many multinational enterprises to reduce the overall tax effect by exploiting gaps and mismatches in tax rules of different jurisdictions.
With increase in cross border transactions amongst multinational corporations and stringent norms imposed by many countries, the risks pertaining to Transfer Pricing has significantly increased. In 2015, Organisation for Economic Co-Operation and Development (OECD) has also introduced Base Erosion and Profit Shifting (BEPS) Actions Plans (one of the Action Plan 13 being Transfer Pricing Documentation and Country by Country Reporting) in order to restrict tax avoidance practice and allocate fair share of tax to respective countries.
In response to these factors, tax authorities around the world have become more aggressive in the transfer pricing arena, introducing stricter penalties, new documentation requirements, increased information exchange requirement.
This intense scrutiny implies significant risks for the unwary and the unprepared, particularly in a complex field such as transfer pricing where each transaction must be analysed under its own unique facts and circumstances.
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