Transfer Pricing Services in UAE

Transfer Pricing Considerations for Intra-Group Services

Introduction
Intra-group services are vital for group entities, driving efficiency through centralized expertise, cost optimization, and standardized processes. They offer a strategic advantage by promoting synergy and improving resource allocation. However, from a UAE tax perspective, intra-group services pose significant Transfer Pricing (“TP”) challenges, and it is essential to ensure that the intragroup services adhere to the arm’s length standard, regardless of the thresholds.

What are Intra-Group Services?

Intra-group services refer to the services provided by one or more group entities to other entities within the same group.

What are the TP concerns in case of Intra-Group Services?

1. Whether the intra-group services are actually rendered?
2. If yes, whether the charge for the intra-group service is in accordance with the Arm’s Length Principle (“ALP”)?

Key parameters for assessing the ALP of Intra-Group Services

The following are the key parameters for assessing whether the intra-group service is at ALP:

1. Benefit test: The primary test to determine whether intra-group service is at ALP is to assess whether the services are indeed provided and whether such services provide economic or commercial value to the service recipient.

2. Arms’ length service fee test: The next step shall be to assess whether the service payments align with the ALP. For this purpose, a comprehensive functional and benchmarking analysis to determine the appropriate ALP of the service fee to be charged and implementing such pricing policy in practice.

Other key considerations for Intra-Group Services

1. Shareholder activities: The activities conducted by a group entity, such as a parent entity or holding company, solely due to its ownership interest in other group entities does not qualify as an intra-group service. Consequently, such services do not warrant charge of service fee.

2. Pass through costs/ Reimbursement of expenses: A group entity may arrange and pay for goods or services acquired from various vendors, on behalf of its related parties or connected persons. The group service provider may pass on the costs from the vendors without a profit element or 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; and (c) the cost of the acquired goods or services is the legal or contractual liability of the related parties or connected persons.

3. Duplication: Duplication of services occurs when a service is provided to a related party who has already incurred costs for the same activity performed either by itself or on its behalf by an independent service provider. In such a scenario, no service fee can be charged with respect to the related party services.

4. Incidental benefit: The intra-group services intended to provide benefits only to some group members but incidentally provides benefits to other group members, it would not be appropriate to raise a charge for such services to unintended group members.

5. Intra-group services rising from several layers of management: Multinational enterprises (“MNEs”) group can have several businesses and service lines leading to several layers of management oversight and supervision. Therefore, a close evaluation should be undertaken to ensure that multiple layering in management does not result in duplication in allocation of cost to the members of the group.

6. Centralized services: Centralized services including planning and coordination, IT services, HR services, financial services, legal services, customer services and support functions provided by one or more group entities to other group entities will ordinarily be considered as intra-group services because they are the type of activities that independent parties would be willing to pay for or perform in-house.

Key Takeaways

1. Group entities must ensure that the intra-group services provide economic value to the service recipient and meet the benefit test.
2. Shareholder activities should not be misclassified as services, and pass-through costs must be cross charged without markup unless there is a value addition.
3. Avoid duplication of services and unjustified charges for incidental benefits.
4. Multi-layered management structures should not result in duplication or inflation of cost allocations.

The Importance of Functional Analysis in Transfer Pricing: Functions, Risks, and Assets

What is functional analysis?

An analysis aimed at identifying the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed by the related parties or connected persons in a controlled transaction. The functional analysis offers a foundational step in evaluating each company’s contribution to profit and determining appropriate pricing for intercompany transactions.

Why should a functional analysis be performed?

Understanding the functions performed, assets used, and risks assumed (“FAR”) by the parties to the transaction through a Functional Analysis assists in understanding the contribution of these parties to the value chain and, therefore, in arriving at the appropriate compensation for their activities.

Also, Article 34 of the UAE Corporate Tax Law emphasizes performing a functional analysis to determine the arm's length price (ALP) of related party transactions. Functional analysis plays a vital role in TP policy development for several reasons:

• Functions correlate with the risks assumed and assets developed or maintained.
• The FAR associated with a related party’s operations significantly influences profitability.
• The functional analysis provides insights into intercompany transactions and helps identify comparable uncontrolled transactions.

Who is subject to the functional analysis?

All UAE taxpayers having transactions with related parties and connected persons whose pricing must reflect the ALP need to undertake a functional analysis. The FAR analysis is performed to delineate the transaction and determine comparability between the controlled transaction and uncontrolled transactions.

How is a functional analysis done?

A robust FAR analysis involves gathering information from various sources to ensure accuracy and completeness. Key inputs include:

• Interviews with management and operational teams.
• Business processes, policies, standard operating procedures (SOPs), organizational matrix, and key employee details.
• Transaction terms and entities involved.
• Intercompany agreements.
• Industry details, value drivers, and competitor analysis.
• Existing Master File and Country-by-Country Reporting (CBCR), if applicable.
• Public domain information (e.g., company websites, social media, press releases).
• Financial data for both the local entity and the group.

Conclusion

• The FAR analysis plays a pivotal role in several aspects of transfer pricing as detailed below:
• Understanding business, transaction, and value drivers.
• Entity characterization and selection of tested party.
• Selection of the most appropriate transfer pricing method.
• Conducting economic analysis.

By analysing the functions, risks, and assets associated with related party transactions, businesses can ensure that they adhere to the arm’s length principle, minimize tax disputes, and optimize their transfer pricing strategies. The FAR analysis is not only a critical step in aligning transactions with the relevant market conditions but also in understanding the core business operations that drive value across a corporate group.

Transfer Pricing (“TP”) rules, practices, and approaches across the world are largely modelled based on the Organisation for Economic Co-operation and Development (“OECD”) TP Guidelines. However, there are certain country-specific TP factors provided under the respective countries’ domestic TP regulations which one should be cognizant of. In this article we have outlined certain specific TP factors as indicated under the UAE Corporate Tax (“CT”) framework.

Transaction Coverage

Wider scope of TP applicability: Unlike traditional TP rules that primarily target multinational enterprise (MNE) groups, UAE TP regulations extend to domestic groups, even if they have no international presence. This means that intra-group transactions within the UAE must also comply with the TP provisions.

Broader definition of “Related Parties”: Typically, a relationship between entities is established either through ownership or control of more than 50%. However, under the UAE TP provisions, cites certain examples wherein relationship between entities is established by virtue of significant influence. The indicative list of examples for existence of significant influence are as follows:

• Debt constituting 50% of the borrower’s capital.
• A royalty agreement entitling a party for more than 50% profits.
• A person playing a key role in the decision-making.

Introduction

The concept of “Connected Persons” is unique to the UAE Corporate Tax (“CT”) Law (Article 36) and plays a crucial role in defining the relationships between businesses and individuals within the scope of the tax regime. This concept is designed to prevent tax base erosion by regulating transactions between a taxable business and those individuals that are closely related to the business, particularly in the absence of a personal income tax system in the UAE.

In the absence of a personal income tax in the UAE, the UAE CT Law has designed a framework in relation to connected persons. Such framework links taxable persons to other persons more widely than the definition of related parties with the aim of circumventing tax evasion practices by making excessive payments to individuals. By virtue of Article 36 of the UAE CT Law, payments or benefits made to connected persons can be tax-deductible only if the payments reflect the market value, following the arm’s length principle and such payments are incurred wholly and exclusively for the business’s purposes. These conditions help ensure that the deductions are legitimate and aligned with market practices.

Definition of Connected Persons

Under the UAE CT Law, a natural person is considered “connected” to a taxable business if they fall into any of the following categories:

1. Ownership or Control: An individual who directly or indirectly has an ownership interest in or controls the taxable person.
2. Directors or Officers: A director or officer of the taxable person.
3. Partnerships: In the case of a taxable person being a partner in an unincorporated partnership, any other partner in that same partnership is also considered a connected person.
4. Related Parties: A related party of any connected person is also considered a connected person.

Exemptions for Certain Entities

Certain businesses and individuals are exempt from the definition of connected persons, which helps ensure that the CT Law does not unintentionally burden entities that are already subject to sufficient regulatory oversight or whose structure inherently limits the potential for tax base erosion:

1. Listed Entities: Publicly listed entities whose shares are traded on a Recognised Stock Exchange.
2. Regulated Entities: Businesses that are subject to the regulatory oversight of a competent authority.
3. Cabinet Decision: Entities exempted through a decision from the UAE Cabinet.

Impact of Transfer Pricing on payments to Connected Persons

As the payments made to connected persons must be consistent with the arm’s length principle, it becomes essential for a taxable person to adhere to the UAE TP provisions. This is particularly relevant when it comes to remuneration paid to individuals connected to a taxable person. Several key aspects should be considered when assessing the remuneration or benefits paid to connected persons such as:

1. Value addition: The compensation should reflect the value that the connected person adds to the business. It should not be excessive or disproportionate to the services provided.
2. Scope of services: The specific services provided by the connected person must be clearly defined. A well-defined scope ensures that the compensation aligns with the actual work done and its importance to the business.
3. Qualification and experience: The qualifications and experience of the connected person should be in line with the role they are performing. Payments should reflect industry standards for the level of expertise and experience required for the position.
4. Roles and responsibilities: The roles and responsibilities of the connected person should be clearly outlined and commensurate with the remuneration they receive. This helps ensure that the business is not inflating compensation to reduce the tax base.
5. Agreement: There should be a formal agreement in place between the business and the connected person, detailing the terms of the relationship, compensation, and other relevant factors. This agreement is essential for providing clarity and justifying payments to tax authorities.
6. Turnover analysis and industry benchmarking: A comparison with industry standards, including turnover analysis, can help ensure that the remuneration paid to connected persons is in line with what is typically paid for similar roles and services within the same industry.
7. HR and industry quotations: Utilizing HR and industry quotations for similar positions or services can help verify that the payments made are reasonable and within market expectations.
8. Fee for technical services (“FTS”) and management fees: Payments such as fees for management services or FTS should undergo a benefit analysis to ensure that the connected person’s contribution is adding tangible value to the business, thus justifying the associated costs.

Conclusion

The concept of connected persons under the UAE CT Law serves to ensure that businesses and individuals within the UAE tax system do not misuse their relationships to artificially reduce taxable income through excessive payments. By defining the criteria for connected persons and imposing strict rules on the deductibility of payments to them, the Law helps protect the tax base from erosion.

Transfer pricing regulations further ensure that payments to connected persons align with market standards and are made for legitimate business purposes. Companies must maintain a clear, documented justification for any payments made to connected individuals, ensuring compliance with both local tax law and international standards for arm’s length transactions.

Introduction

As the fiscal year draws to a close for multinational enterprises (“MNEs”) operating on a calendar-year basis, it is time to reflect on whether transfer prices need to be revisited before finalizing the books. For UAE businesses, this year is particularly significant, as the UAE Corporate Tax (“CT”) Law has taken effect for financial years starting on or after 01 June 2023. Many UAE businesses are facing their first year of compliance with Transfer Pricing (“TP”) regulations. Hence, ensuring that all related-party transactions adhere to the arm’s length standard, regardless of thresholds, is critical to streamlining TP policies and making necessary year-end adjustments.

What Are Year-End Adjustments?

Year-end TP adjustments, commonly referred to as “true-ups” or “true-downs,” are made to align the actual financial results with the intercompany pricing arrangements or the arm’s length standard. These adjustments are crucial in scenarios such as:

1. Deviation in Actual Results/Margins vs Targeted Margins

   For instance, limited-risk entities like contract manufacturers, limited-risk distributors (LRDs), or contract service providers following a fixed-return model may experience discrepancies due to:

   • Differences between budgeted and actual costs.
   • Variances in cost components used for billing and TP purposes (e.g., operating costs).
2. Margins Falling Outside the Arm’s Length Range

When the actual margin deviates from the arm’s length range established through comparability analysis, adjustments are needed to align with compliance standards.

Key Considerations for Year-End Adjustments

When performing year-end adjustments, businesses must evaluate the following:

1. UAE taxpayers’ adjustments should align with the 25th percentile, 75th percentile, or median of the dataset.
2. Cross-border transaction’s adjustments must be justifiable in both the UAE and the counterparty’s jurisdiction to avoid double taxation or legal disputes.
3. Downward adjustments in pricing may affect customs duties already paid or revenue figures reported in indirect tax filings. Companies must assess whether refunds can be claimed or if such adjustments are treated as sunk costs.
4. For MNEs subject to the OECD’s Pillar 2 global minimum tax, TP adjustments may influence their effective tax rate calculations.

Best Practices to Minimize Year-End Adjustments

Year-end adjustments should ideally be minimal. To achieve this, businesses can adopt the following practices:

1. Periodic Monitoring: Track financial performance monthly or quarterly to identify and address variances early.
2. Operational TP: Leverage technology to align TP with real-time operations.
3. Robust Documentation: Maintain detailed records of analyses, agreements, and adjustments for compliance and audit defence.
4. Stakeholder Collaboration: Align finance, tax, and legal teams for a unified approach to TP.

Key takeaways

As the UAE’s CT regime continues to evolve, year-end TP adjustments will remain a critical aspect of compliance for businesses operating in the region. By adopting proactive strategies and leveraging technology, companies can navigate the complexities of TP with confidence. As we move into a new era of CT in the UAE, businesses that prioritize effective TP management will be well-positioned to thrive.

Introduction

The Pillar Two solution developed by the Organization for Economic Co-operation and Development (“OECD”) inclusive framework aims to introduce a Global Minimum Tax (“GMT”) of 15% on large multinational enterprises (“MNEs”). The UAE being one of the members of the OECD inclusive framework has adopted the GMT within the scope of the UAE Corporate Tax (“CT”) provisions vide Federal Decree Law No.60 of 2023.

By virtue of Federal Decree Law No. 60 of 2023, the UAE has amended the provisions of the UAE CT to include a Domestic Minimum Top-up Tax (“DMTT”) that shall apply to large MNEs operating in the UAE.

Recent update

On 09 December 2024, the UAE Ministry of Finance (“MoF”) announced the implementation of a DMTT of 15% on large multinational companies operating in the UAE, effective from 01 January 2025. This is a welcome move by the UAE reflecting its commitment to implement the Pillar Two solutions to establish a fair and transparent tax system that aligns with the global standards. However, the MoF is yet to issue a formal legal framework and rules for the implementation of DMTT.

Key highlights

• The DMTT applies to MNEs with a consolidated global revenue of € 750 million or more in at least two of the last four financial years.
• The tax will ensure that profits earned in the UAE meet the 15% minimum tax rate, in line with the OECD’s Two-Pillar Solution.
• The UAE is also considering introducing CT incentives such as R&D tax incentive.
• As a global business hub, especially for multinationals in the Middle East, the UAE’s decision to adopt DMTT strengthens its alignment with international tax standards while maintaining its appeal for businesses.

Key impact

The key impact for the businesses operating in the UAE broadly includes the following:

1. Preparation for compliance: MNEs operating in the UAE need to start preparing for the new tax requirements. This includes collecting necessary data, assessing tax exposures, and creating a clear roadmap for compliance.
2. Impact on financial reporting: Affected businesses must reflect Pillar two impacts in their group financial statements including interim reports. This involves calculating potential top-up taxes and ensuring accurate disclosure.
3. Information and data requirements: Successful compliance requires gathering detailed information on tax rates, profits, and jurisdictional allocations. Strong internal reporting systems are essential to meet this demand.
4. Domestic tax policy in the UAE: The UAE’s introduction of a DMTT ensures that any additional tax revenue remains within the country. This step also prevents foreign jurisdictions from imposing taxes on UAE-based profits.

Key takeaway

1. The MNEs must take proactive steps to analyse the group’s current tax structure to identify gaps and exposure to top-up taxes.
2. The MNEs must develop an implementation roadmap to remain compliant with the Pillar Two requirements or DMTT.
3. Take necessary measures to enhance the internal reporting and the documentation process.

Multinational enterprises (MNEs) often engage in reimbursement arrangements to allocate shared costs among their group entities. These reimbursements typically include expenses for shared IT systems, personnel cross-charges, or cost-sharing arrangements for centralized services. While these transactions appear straightforward, their tax treatment requires careful attention. As such, proper compliance with Transfer Pricing (“TP”) rules is critical to avoid tax risks and ensure transparency.

Reimbursements are generally defined as repayments for costs already incurred, without any element of profit. In such cases, these payments are not considered as income and therefore, should not be subject to Corporate Taxation (“CT”). For example, if a subsidiary reimburses its parent company for IT software costs shared among the group, such payments would typically be treated as a cost recovery rather than taxable income. However, because these arrangements involve related parties, they fall under the scope of TP rules. This means that the transaction must adhere to the Arm’s Length Principle (“ALP”), a standard requiring that related-party transactions be priced as if they were conducted between independent parties.

When applying the ALP to reimbursement arrangements, the treatment depends on the nature of the expenses. Pure reimbursements of third-party costs such as payments made to an external service provider and then shared across group entities are generally accepted as arm’s length when passed on without any mark-up. For such cases, an extensive benchmarking analysis may not be required. However, taxpayers must be prepared to demonstrate that the services for which the reimbursement was made were actually received and that these services provided tangible benefits. This ensures that the reimbursement arrangement is not mischaracterized as an attempt to shift profits or evade taxes. This involves maintaining robust documentation, including service agreements, invoices, and evidence of cost allocation methods.

Despite their seemingly straightforward nature, reimbursement arrangements carry inherent risks, failure to comply with TP regulations can result in significant risks:

• Tax Adjustments: If reimbursement arrangements are not aligned with the ALP, tax authorities may make adjustments, leading to additional tax liabilities for the MNE.
• Double taxation: Inconsistencies across jurisdictions in how reimbursements are treated could result in double taxation, complicating the MNE's tax position and increasing compliance costs.
• Non-Deductibility: If reimbursements are not at arm’s length, the expenses may not be fully deductible for tax purposes, leading to disallowed deductions.
• Increased scrutiny: Non-compliance in one area of TP may trigger closer scrutiny of other related-party transactions, increasing the overall risk of tax audits.

To mitigate these risks, MNEs must adopt a structured approach to reimbursement arrangements. Key steps include:

• Clear documentation: It is crucial to maintain clear and detailed documentation that establishes the nature of the costs being reimbursed, the method used to allocate these costs, and the benefits derived by the reimbursing entity.
• Aligning with ALP: Ensuring that the terms and conditions of reimbursement arrangements align with the ALP is essential. This includes using appropriate pricing methods, demonstrating the actual receipt of services, and ensuring the cost allocation reflects the services provided.
• Tax defensibility: By adhering to TP regulations and aligning the reimbursement arrangements with market terms, MNEs can make their tax treatment more defensible, reducing the risk of disputes with tax authorities.

In conclusion, reimbursement arrangements, while simple in concept, can be complex when viewed from a TP perspective. By proactively addressing these risks, businesses can minimize their exposure to tax risks and enhance their overall compliance with TP regulation.

Introduction

Article 55(1) of the UAE Corporate Tax (“CT”) Law mandated all taxable persons having transactions with related parties and connected persons to submit a general Transfer Pricing (“TP”) disclosure form if the transactions with related parties and connected persons are above a materiality threshold.

However, there was no separate disclosure form released by the Federal Tax Authority (“FTA”). Instead, the FTA integrated the related party and connected person disclosure as a separate schedule in the CT return. The details of the related party and connected persons transactions captured under this schedule is broadly similar to the details intended to be captured in the TP disclosure form. Hence, it is believed that the FTA has replaced the TP disclosure form by inclusion of related party and connected person schedule in the CT return.

Further, the FTA recently issued a guide on the CT return wherein a detailed guidelines has been provided with respect to the filing of the annual CT return. In this guide, the FTA has also specified the threshold for filling in the related party and connected persons transactions schedule.
Key update

The FTA’s publication highlights the growing emphasis on transparency and proper transfer pricing documentation in the UAE’s tax regime. By adhering to these guidelines, businesses will not only ensure compliance but also reduce the risk of challenges to their transfer pricing practices.

Taxable persons should hence carefully review their transactions with related parties and connected persons, especially if they meet the reporting thresholds. It is also important to maintain documentation to support the arm's length pricing and market value used in the disclosures.

What is a local file?

A local file is a mandatory transfer pricing document that provides detailed information on specific controlled transactions undertaken during a given tax period. The Local File contains more detailed information and analysis of the intercompany transactions, inter-alia including the benchmarking analysis and application of the selected Transfer Pricing (“TP”) method.

The information contained in the local file supplements the master file and includes a detailed description of the local entity’s business operations, related party transactions entered during the relevant tax period including a detailed functional analysis, financial data, and the TP methods applied for determining the arm’s length price. The local file is designed to include information that helps tax authorities understand the economic and financial context of the inter-company transactions and to ensure compliance with the arm’s length principle.

Who is required to maintain a local file?

All taxpayers in the UAE having revenue exceeding AED 200 million or a taxable person who is part of a multinational enterprise whose consolidated group revenue exceeds AED 3.15 billion during the relevant tax period.

What are the intra-group transactions to be covered in local file?

1. Cross-border transactions.
2. Transactions with an exempt person.
3. Transactions with a resident person benefitting from small business relief.
4. Transactions with a qualifying free zone person taxed at 0%.

What are the intra-group transactions exempt from being covered in local file?

1. Transactions with natural persons provided they are acting as if they were independent of each other.
2. Transactions with a juridical person considered as related party or connected person solely by virtue of being a partner in an Unincorporated Partnership and they are acting as if they were independent of each other.
3. Transactions with a permanent establishment of a non-resident person provided it is subject to the same tax rate as the taxable person.

Key elements of local file

1. A description of the local entity’s business operations, including its key functions, assets, and risks.
2. Details of intercompany transactions, such as the sale of goods, provision of services, financing arrangements, and any intangible property transactions.
3. Financial information, including the local entity's financial statements and a description of the transfer pricing method used to determine the pricing of these transactions.
4. Benchmarking analyses and comparability studies to ensure compliance with the arm's length principle.

Next steps

Taxpayers in the UAE falling under the criteria to prepare a local file, must take the necessary measures to gather all the information required to draft the local file. The local file may have to be submitted to the tax authority upon their request and hence disclosing accurate information in the local file for the scrutiny of the tax authority would reduce the risk of prolonged tax disputes. Hence, it is advisable for the taxpayers to take the below proactive steps:

• Understanding the transfer pricing framework and familiarize with local regulations.
• Review intercompany transactions/policies and document intercompany agreements.
• Gather financial and operational data.
• Conduct a transfer pricing analysis.
• Review local file requirements.
• Prepare for transfer pricing audits.

The United Arab Emirates (“UAE”) Corporate Tax (“CT”) regime has conferred the benefit of 0% tax rate to all the free zone persons in the UAE subject to fulfilment of certain conditions. Amongst other conditions stipulated in the CT Law, those conditions related to TP may often be overlooked by the free zone persons.

However, it is important to be cognizant of the fact that TP plays a vital role in conferring the tax holiday benefit for free zone persons, since it has broader tax implications for a free zone person as compared to a non-free zone person. We have provided an overview of the TP requirements and their significance in the context of the “tax holiday” benefit for free zone persons.

An overview of TP related conditions under Article 18 (UAE CT Law) and its requirements

Impact of non-compliance with TP

If a free zone person fails to comply with the ALP or does not meet the TP documentation requirements, it risks losing the tax holiday benefit for the tax period in which it fails to comply with the TP and the subsequent four tax period.

Additionally, the tax authorities shall make appropriate adjustments for the related party transactions to reflect the ALP, and such adjusted value shall be considered in the computation of taxable income.

Qualifying activities having potential TP impact

1. Distribution of goods or materials.
2. Headquarter services.
3. Treasury and financing services to related parties.

Key action points

1. Undertake a TP impact assessment alongside free zone tax benefit analysis.
2. Identify the risks and gaps and take necessary actions to mitigate the potential tax risks.
3. Perform a TP analysis to determine the ALP.
4. Prepare supporting documentation such as TP policy, benchmarking study, intercompany agreements, etc.
5. Actively monitor TP policies through out the year to mitigate the risk of non-compliance.

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:

• Transactions involving the transfer of intangibles or rights in intangibles.

• Transactions involving the use of intangibles in connection with the sale of goods or the provision of services.

The framework for analysing the transactions involving intangibles requires taking the following steps:

1. Identify the intangibles used or transferred.
   
   
2. Identify the full contractual arrangements, with special emphasis on determining legal ownership of intangibles based on the legal arrangements, including relevant registrations, license agreements, other relevant contracts, and other indicators of legal ownership, and the contractual rights and obligations, including contractual assumption of risks in the relations between the related parties or connected persons.
   
   
3. Identify the parties performing functions, using assets, and managing risks related to Development, Enhancement, Maintenance, Protection and Exploitation (“DEMPE”) of the intangibles by means of the functional analysis, in order to determine the economic ownership of the intangibles.
   
   
4. Confirm the consistency between the terms of the relevant contractual arrangements and the conduct of the parties and determine whether the party assuming economically significant risks actually controls the risks in practice and has the financial capacity to assume the risks relating to the DEMPE of the intangibles.
   
   
5. Characterise the actual controlled transactions related to the DEMPE of the intangibles in light of the legal ownership of the intangibles, the other relevant contractual relations under relevant registrations and contracts, and the conduct of the parties, including their relevant contributions of functions, assets and risks.
   
   
6. Determine the Arm’s Length Price for these transactions consistent with each party’s contributions of functions performed, assets used, and risks assumed.

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:

• Robust Documentation: Maintain thorough documentation to support the valuation and pricing of intangible assets.

• Regular Review: Periodically reassess the transfer pricing policies to adapt to changing business models and market conditions.

• Collaborative Approach: Engage with tax authorities proactively to clarify the treatment of intangibles in transfer pricing arrangements.

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:

• Physical pooling: Actual cash from multiple subsidiary accounts is transferred into a single central account. This central account aggregates the funds, allowing for better liquidity management and interest optimization.
• Notional pooling: Cash balances in various subsidiary accounts are combined virtually for the purpose of calculating interest and managing liquidity. No physical movement of funds occurs; instead, the aggregation is done on paper to optimize cash flow and interest calculations.

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:

• Defining the transaction accurately.
• Assessing the functional profile of the cash pool leader.
• Identifying and allocating the synergies generated by the cash pool.
• Determining of the arm’s length pricing.
• Implementing the applicable transfer pricing policy and documentation.

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:

• Development CCAs: Involves joint development, production, or acquisition of intangibles or tangible assets. Participants contribute resources during the development phase and in return, gain rights in the resulting assets.
• Services CCAs: Involves joint acquisition of services. Participants pool resources to obtain services collectively, ensuring an equitable distribution of costs.
  

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:

• Cost allocation: Terms on how costs are allocated and reported are crucial to avoid disputes.
• Benefit Sharing: Define how the benefits (ex: revenue, intellectual property) will be distributed.
• Documentation: Proper documentation and agreements are necessary to ensure transparency and compliance with legal and tax regulations.

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:

Key Takeaway

• Adherence to ALP for any transactions/ arrangements with related parties are of utmost importance.
• Non-compliance with the ALP shall result in tax adjustments for both the parties to the transaction.
• The tax adjustments for the transferee are most likely to be made in more than one year and it shall be necessary to be cognizant of the same.
• Incorrect or no tax adjustments either by transferor or transferee results in wrongful computation of taxable income/tax liability and attracts administrative penalties.

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:

• One juridical person alone or together with its related party has more than 50% ownership interest or control either directly or indirectly.
• Any person alone or together with its related party has more than 50% ownership interest or control either directly or indirectly in both the juridical persons.

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:

•  TP Disclosure form – it includes transaction details, details of related parties, and the TP method used to determine the ALP for a particular tax period.
• Master File – it provides an overview of the Multinational Enterprise (“MNE”) Group’s global operations, TP policies and income allocation to assess significant TP risks.
• Local File – it includes detailed information on specific controlled transactions undertaken by the local country affiliates, including financial data and comparability analysis to ensure compliance with ALP.

• Country-by-Country Report (“CbCR”) – provides jurisdictional quantitative information about the MNE Group and an overview of activities undertaken by its affiliates.
  

Applicability of TP documentation

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,

• "Reporting entity" must register for e-filing for CbC Reporting purpose via one of the two e-filing systems.
• After receiving approval from one of the two e-filing systems, reporting entity can use the username and password provided by that system
• CbC report will be considered as submitted successfully when the reporting entity receives the "acceptance confirmation" from the e-filing system.

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: 

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 8^th 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 1^st 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 20^th 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:

• Revised Guidance on the Transactional Profit Split Method
• Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles 
• Transfer Pricing Guidance on Financial Transactions

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:

• It is clarified that transfer pricing study report should be prepared by a transfer pricing expert for companies undertaking back-to-back financing arrangements.
• Taxpayer which opts to apply the simplification measure (2% after tax margin) for suck back-to-back financing arrangement is at least require to prepare a functional analysis.
• Tax Department would require Transfer Pricing Study Report to assess such back-to-back financing transactions. However, in the absence of Transfer Pricing information and at its own discretion.
• It is clarified that transfer pricing study report is required to be prepared when an intra-group financing arrangement is initiated and updated when:
  • New loans are provided or availed by the taxpayer, or
  • Significant terms of the existing loans change or amended, or 
  • Functional profile of the taxpayer changes, or
  • Market and economic conditions change significantly (if applicable).

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 31^st December 2021, The Montenegrin Parliament has announced certain amendments fin existing transfer pricing rules. We have summarised the key amendments as under:

• Taxpayers who are classified as 'Large taxpayers' as per tax classification rules will be required to submit Transfer Pricing documentation along with Corporate tax return.
• Taxpayers who are not classified as 'Large taxpayers' are obliged to prepare Transfer Pricing on or before preparing corporate tax return, however, it is required to be submitted only upon request from authority. Moreover, these taxpayers are given an option to may prepare Transfer Pricing documentation in condensed manner if the quantum of transactions with related parties do not exceed the value of EUR 75,000 for the year under consideration.
• Deadline to prepare and/ or submit Transfer Pricing documentation up to 30^th June of next year for the year under consideration. 
• Bylaws for application of new transfer pricing rules are expected within one year from start of application of new rules.

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 13^th 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:

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 20^th 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:

• Rules shall be applicable to cross-border arrangements entered into between associated enterprises

• Micro, small or medium-sized enterprises shall be excluded from scope.

• The rules shall also not apply where the aggregate arm’s length value of all cross-border arrangement does not exceed a de minimis threshold that is yet to be determined.

• The rules define the “arm’s length amount” and provide for the determination of such amount on the basis of methodologies designated by the Commissioner for Revenue in guidelines yet to be published.

• Companies falling within scope must prepare and retain records for the purposes of determining whether, in relation to an arrangement, the total income of the company has been computed in accordance with the rules. Further details relating to such documentation will be included in guidelines.

• The rules also provide a formal framework for the request and issue of Unilateral Transfer Pricing Rulings and APAs (bilateral and multilateral). These are intended to provide certainty in relation to the application of these rules to a transaction or a series of transactions.

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 1^st 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 10^th 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:

• Model describes process flow for APA such as pre-application stage, APA application stage, APA processing stage and APA negotiation stage, finalisation stage, implementation and monitoring stage and final stage.

• Presently, program will only accept bilateral APA applications.

• It notes the importance of establishing an APA program to provide clarity and certainty to taxpayers.

• Feedback will be accepted on the proposed model and draft legislation until January 31, 2022.

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

• Ministerial order no. 268/2021 reviews the regulatory framework of the Portugal transfer pricing regime and revokes ministerial order no. 1446-C/2001 (December 2001).

• Most importantly, ministerial order has aligned the documentation process and content with the 2017 OECD guidelines and Action 13 of the base erosion and profit shifting (BEPS) project by introducing the two-tier documentation model such as master file and local file.

• Compliance has been reduced by increasing the exemption threshold to taxpayers with

• annual revenues less than EUR 10 million (previously EUR 3 million) and

• an exemption from reporting for controlled transactions in an amount less than EUR 100,000 (per transaction, per counter-party) and, in aggregate, less than EUR 500,000.

• The concept of a “simplified file” has also been introduced for small and medium companies, meeting certain requirements.

• The transfer pricing documentation changes are effective for tax periods beginning on or after 1 January 2021.

APA Guidance

• Ministerial Order no. 267/2021 (26 November) updates the rules for the process and procedures applicable for APA.

• It is confirmed that maximum term of APA is 4 years. It also includes the possibility of retrospectively applying the APA to previous fiscal years.

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

• CbC Report is applicable to taxpayers who are Ultimate Parent Company or an Integrating Entity of  a  Multinational  Corporation  and  also  tax  residents  of  the  Dominican  Republic,  and  having consolidated income equal to or greater than RD$ 38,800,000,000 (apprx USD 682 Millions)
• It is applicable from fiscal year 2022 and needs to be filed annually no later than 12 months from the end of fiscal year.

   b) Informative Declaration of Related Party Operations (DIOR)

• We  understand  that  DIOR  is  required  to  be  filed  by  those  taxpayers  having  related  party, irrespective if transactions are entered with them in current fiscal year.
• It is applicable from fiscal year 2022 and needs to be filed annually as a part of Form IR-2.

   c) Master File

• Master file needs to be prepared and filed by those taxpayers who are part of multinational group and having transactions with related parties.
• It is applicable from fiscal year 2021 and needs to be filed annually within 180 days of deadline of DIOR

   d) Local File

• It is applicable from fiscal year 2021 and needs to be filed annually within 180 days of deadline of DIOR.

Exemption from local file and master file

Additionally,  following  taxpayers  are  provided  exemption  to  prepare  the  master  file  and  local  file documentations as under:

• Taxpayers  whose  operations  with  related  parties,  for  a  given  fiscal  year,  do  not  exceed  RD $12,193,981.70 (apprx USD 215,000) and do not carry out transactions with residents in States or territories with preferential tax regimes with low/ no taxation, non-cooperative jurisdictions or tax havens.
• Taxpayers who only carry out transactions with fiscal residents and the transaction does not result in a tax deferral or a lower taxation rate in the country.

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:

• As per updation, transfer pricing documentation must be mandatorily submitted to the Danish tax authority within 60 days of the due date for filing tax return. This is applicable to those group with (a) 250 or more employees; or (b) revenue exceeding DKK 250 million (apprx USD 38 millions) and balance sheet total exceeding DKK 125 millions (apprx USD 19 millions).
• While the above thresholds are considered at group level, taxpayers not forming part of a group but still meeting these criteria could be subject to limited documentation requirements.
• However,  rules  have  provided  an  exemption  to  those  taxpayers  who  have   related  party transactions only with domestic related parties and are covered subject to Danish corporate tax regime.
• Updated rules are applicable for financial years starting on or after 1st  January 2021.
• Additionally, rules required to include detailed benchmarking search process as a part of local file documentation  that  needs  to  be  filed  with  tax  authority.  This  is  applicable  for  FY  2022  and onwards.
• It is provided that non-compliance of above rules such as late filings or inaccurate filings could lead to penalty of DKK 250,000 (apprx USD 38,000) per company per year plus 10% of a potential income adjustment.

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.

• The technical analysis and publication of specific parameters for Amount B, covering minimum target profitability levels for routine distribution and marketing activities within MNEs, shall be completed by the end of 2022.

• Implementation – Multilateral Convention (MLC) through which Amount A is implemented will be developed and opened for signature in 2022, with Amount A coming into effect in 2023.

Pillar Two

• It consists of

• two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR; and

• a treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.

• Scope of GloBE Rules - GloBE rules will apply to MNEs that meet the 750 million euros threshold as determined under BEPS Action 13 (country by country reporting). 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.

• Rule design - The IIR allocates top-up tax based on a top-down approach subject to a split-ownership rule for shareholdings below 80%. The UTPR allocates top-up tax from low-tax constituent entities including those located in the UPE jurisdiction. The GloBE rules will provide for an exclusion (for a period of 5 years) from the UTPR for MNEs in the initial phase of their international activity, defined as those MNEs that have a maximum of EUR 50 million tangible assets abroad and that operate in no more than 5 other jurisdictions.

• Minimum Corporate Tax - The minimum tax rate used for purposes of the IIR and UTPR will be 15%.

We have outlined brief timelines of the program as under:

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 30^th 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 1^st January 2021. We have summarised the key points of the notification as under:

   A) Information/documents to be included in a local file

• Business model, management structure, local organization chart with headcount numbers, value chain, key suppliers, customers and competitors, business strategy and economic circumstances;

• Relationship structure including shareholding information;

• Details of business restructuring between related parties and its impacts;

• Information of intangible assets acquired/ transferred from/ to related parties and their impact;

• the nature and amounts of controlled transactions including agreements;

• Functions, assets, and risks analysis;

• Selection/ rejection of the transfer pricing method applied;

• an explanation of uncontrolled comparable transactions or independent comparable companies with Benchmarking search process

• any other necessary documents or evidence not listed above but requested by assessment officers with approval from the Director-General.

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

• income from business or related business in this accounting period not exceeding THB 500 million

• no controlled transactions with related parties paying a different corporate income tax rate from the submission taxpayer

• no controlled transactions with overseas related parties

• no loss carry forward used in this accounting period and related parties in controlled transactions having no similar loss.

• taxpayer has requested an Advance Pricing Agreement or any obligations under a Double Tax Treaty with concluded agreement from government bodies during agreed periods.

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 1^st 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:

• whether the taxpayer is a member of an international group of related legal entities;

• whether it is considered the ultimate parent entity, i.e.

• information on the identity and country of residence of the ultimate parent entity if the taxpayer itself is not considered the ultimate parent entity.

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:

• Structure and chapters of the guidelines are kept same as 2010 guidelines.

• Updated guidelines place significantly more emphasize on the economic substance of the transaction.

• While adopting transaction net margin method, only operating expenses are generally to be taken into account, while taxes, interest expenses, and extraordinary expenses are to be excluded from the cost basis. Further, it is clarified that no profit mark-up should be applied on “transitory items” if third parties would calculate in the same way in comparable situations.

• Updated guidelines make a correction to median value.  In a situation, taxpayer earns a margin outside the interquartile range, the tax auditor may correct to the median value. However, if the taxpayer demonstrate that another value within the interquartile range is more reliable, the said other value shall be applied.

• For routine services, mark-ups based on the report of the EU Joint Transfer Pricing Forum between 3% and 10% may be applied. The previously mentioned range of profit mark-ups between 5% and 15% may only be referred to for business years before 1 January 2021.

• Guidelines has updated the chapter on financial transaction taking into consideration Chapter X of OECD Transfer Pricing Guidelines. With respect to loan transactions, Austrian guidelines mentioned that arm’s length test may also include debt-equity ratio and generally would require credit rating for analysis of transaction.

• Guidelines has updated the chapter on intangible transaction taking into consideration OECD Transfer Pricing Guidelines.

• OECD statement on locational advantages and group synergies were also incorporated into the Austrian guidelines. It is emphasized that Austrian research and development premium (14% premium on local qualified research and development costs) may be considered such a location saving.

• The Austrian 2021 guidelines now include the main topics arising from different types of business restructuring measures in line with chapter IX of the OECD transfer pricing guidelines. 

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 16^th 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:

• Disclosure Form – Executive Instruction has released template to submit disclosure form (consist of Section 1 and 2). Taxpayers are required to provide information of related parties and related party transactions (including non-monetary transactions) undertaken during the reportable period. 

• Affidavit from Chartered Accountant – Executive Instructions has provided a requirement to submit an affidavit from Chartered Accountant confirming the consistent application of Transfer Pricing policy of the taxpayer. However, it is not clarified the format of affidavit and deadline to submit the affidavit.

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 – 6^th Edition of Transfer Pricing Guidelines released 

Recently, Inland Revenue Authority of Singapore (IRAS) has released 6^th edition of e-tax Guide (New Guidelines) on Transfer Pricing. We have summarised the key updates in the edition as under:

• It is emphasised that appropriateness of the transfer pricing method would be a priority during transfer pricing audits.

• Service transactions – Guidelines removed a prior condition that the benefits must be “sufficiently direct and substantial” in relation to satisfying “benefit test” for service transaction.

• New Guidelines allows the application of a markup of 5 percent under the OECD’s simplified approach for low value-adding services under certain conditions and provided that the OECD’s approach is also accepted in the counterparty jurisdiction.

• It was clarified that APA applications would not be accepted for taxpayers currently under audit or investigation (including TP consultation) by the IRAS for past financial years.

• It was clarified scenarios wherein the surcharge of 5 percent on gross transfer pricing adjustments would apply and the circumstances where the IRAS may consider a partial or full remission of the surcharge.

• New Guidelines broadened the scope of the Transfer Pricing beyond loans to other types of financial transactions (including cash pooling, hedging, financial guarantees and captive insurance).

• A new chapter regarding transfer pricing considerations for Cost Contribution Agreements is introduced which is mainly in line with OECD TP Guidelines.

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:

• Any person having a direct or indirect relationship of 25% and above in other person in control of the voting rights or a share of capital or a right to the profits can be regarded as related person.

• Persons having related party transactions are required to prepare/ maintain Transfer Pricing documentation to justify related party transactions. Transfer Pricing documentation may include business overview, detailed description of related party transactions, comparability analysis, etc to support arm’s length analysis.

• Additionally, it is proposed that taxpayer having related party transaction is required to furnish summary table of related party transactions to the tax authorities no later than nine months from the end of the tax year.

• New legislation has proposed to provide a relaxation or exemption to small and medium sized taxpayers having consolidated intra-group transactions not exceeding EUR 750,000 (approximately USD 900,000) per tax year.

• New legislation also provide the option to taxpayers to apply for an Advance Pricing Agreement (APA) to get certainty on arm’s length arrangement.

• Non-compliance may invite the penalties ranging from EUR 500 (approximately USD 600) to EUR 20,000 (approximately USD 24,000).

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. 

• Many of the Government has issued relief packages or assistance to reduce the potential impact of Covid-19 in a country. Therefore, impact of relevant government assistance on controlled transaction should be identified and considered when reviewing potential comparable.

• In relation to agreed Advance Pricing Agreement, if material changes in economic conditions arises on account of Covid-19, which lead to breach of the critical assumptions, taxpayers should notify the IRD within one month of the breach.

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:

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:

• Applicant must have submitted the transfer pricing documentation to the tax authorities in accordance with the law for the three years before the year of filing the application; or

• Applicant must have implemented an APA in the past ten years before the tax year of filing the application, and the implementation result must meet the APA requirements; or

• Applicant must have been subject to a transfer pricing investigation by the tax authorities in the past ten years before the tax year in which the application is filed, and the investigation has been closed.

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 1^st 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:

• APTP has also referred the OECD Transfer Pricing Guidelines 2017 as well as Chapter on Financial Transactions of OECD Guidelines.

• The APTP emphasizes that the application of the ALP not only refers to the transfer price itself but also to the accurate delineation and the underlying conditions (e.g., prices, discounts, rebates, agreement duration including options to terminate or amend agreements, payment terms, price adjustment clauses) of an intercompany transaction (para. 1.5). Therefore, it is first required to analyse whether the intercompany transaction itself is arm’s length in principle followed by an analysis of the arm’s-length pricing. 

• Additionally, the APTP directly refers to certain publications of the Joint Transfer Pricing Forum (JTPF) of European Union that are deemed helpful for the examination of cross-border transactions, in particular transactions between Germany and EU Member States (para. 2.5). Hence, such publications are considered as additional German administrative principles.

• While APTP has referred OECD guidelines for selection of most appropriate Transfer Pricing methods, it has also mentioned the possibility to apply a combination of the methods or economically recognized valuation methods (such as capitalized income method and discounted cash flow method).

• Arm’s-length test should be performed basis the data available at the time of concluding the agreement. However, a taxpayer can also use data that is available at a later point in time, if such data refers to the period when the controlled transaction was undertaken. Moreover, if projected data is used to determine the transfer prices, a comparison between projected data and actual results should be performed at the year-end.

• APTP highlights that in an independent scenario, third parties would not continue loss-making activities if there were no economically sound expectation to earn profit within reasonable period. Considering this aspect, group entity of multinational corporation that is generating losses and continuing to operate a business, needs to be compensated appropriately by the Group.

• APTP has also provided guidance on intangible aspects as well as financial transactions aspects in line with OECD Guidelines to examine the arm’s length principle.

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 1^st 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 7^th 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:

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 29^th June 2021 and thereafter, published in official gazette on 1^st July 2021

Amongst other amendments/ introduction, one introduction is Country by Country Reporting to be applicable from 1^st 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:

• Taxpayers who has entered into cross-border related party transactions are obligated to prepare as well as submit local file as well as master file irrespective of quantum of transaction.

• Documentation can be prepared in French language. In case documentation is prepared in other language, a certified translation document also to be submitted.

• Transfer Pricing documentation may be submitted either on online portal or hard copy submission to the tax authority.

• Deadline to submit document would be 15^th day over 4^th Month following the year end of the accounting period. While deadline for 31^st December 2020 was falling due on 15^th May 2021, it has been extended up to 31^st October 2021.

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:

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 17^th 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 30^th 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. 30^th 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 31^st 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 should not have incurred recurring operating losses as per financial statement. Further, they should not have undergone business restructuring processes in last three years.
• Taxpayers should not be involved in carrying out operations involving royalties or licensing arrangements or research and development arrangements or service arrangement with related/ third parties located in non-cooperating countries or jurisdictions with low or no taxation.
• Additionally, taxpayers should not be having loans with foreign related parties, should not import/ export goods through an international intermediary, and should not belong to multinational groups that are required to furnish the country-by-country report or master file.

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, 3^rd 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:

• Chapter 1 recalls how critical tax transparency is in fighting IFFs in Africa.

• Chapter 2 provides an update of the developments Africa has attained in tax transparency since 2019 and the achievements registered despite the COVID-19 pandemic.

• Chapter 3 measures the progress African jurisdictions registered in 2020 and for the past six years since the Africa Initiative was launched, on the implementation of tax transparency and EOI standards.

• Chapter 4 presents “country safaris”, which share some country experiences in tax transparency and EOI.

• Chapter 5 looks forward to the future of tax transparency in Africa and the work the Africa Initiative intend to focus on to address existing challenges and continue translating tax transparency and EOI into more revenues for Africa’s development, including in the post COVID-19 era.

• Chapter 6 provides a snapshot of the tax transparency and EOI measures introduced by the 34 African countries surveyed and the advancement accomplished.

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

• Principal in distribution, manufacturing or research and development arrangements;

• Activities relating to core business processes;

• Activities relating to administrative, technical, financial, commercial, management, coordination and control functions);

• Shareholder activities.

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:

• Whether any actual services were availed by taxpayer?

• Whether services are received are duplicative in nature?

• Whether activities are akin to shareholders activities? If yes, whether charges were required to be paid?

• Whether mark-up on such cost were required to be paid? Can this be considered as pure cost to cost arrangement?

• What is the arm’s length value of charges paid by taxpayer?

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

• Transfer of acquisition of intangible assets

• Licensing of intangibles assets

• Development, Enhancement, Maintenance, Protection and Exploration (DEMPE) functions of intangible assets

• Characterization of transaction

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 1^st 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:

• Ultimate Parent entity of multinational group headquartered in Nigeria;

• Nigerian branches/ subsidiaries of foreign multinational group - when there is no automatic exchange of information mechanism between Nigeria and country of ultimate parent entity

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 11^th 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 30^th June 2021. FAQ’s are a welcome step to provide much needed clarity to taxpayers. Now, the taxpayers in Qatar are recommended to –

• Conduct a health-check for their intra-group transaction (domestic or cross-border) keeping in mind requirements of Transfer Pricing Regulation

• Take corrective steps, basis the risk areas identified during the health-check

Ensure accurate/ appropriate disclosures to be submitted in Transfer Pricing Declaration form and local file/ master file documentation within prescribed time.

1. United Nation – Practical Manual on Transfer Pricing for Developing Countries (2021)

   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.

    

2. India – Revise threshold for CbC; relaxes master file compliance burden

   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 1^st 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.

    

3. United Kingdom – Proposal for New Transfer Pricing documentation requirement

   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 1^st 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.

    

4. Denmark – Supreme Court upholds tax addition for inadequate Transfer Pricing documentation

   On 26^th 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:

   • Taxpayer is a part of Tetra Pak Group's (having presence in over 165 countries) business area “Processing Solutions”, which comprises approx. 10% of the group.
   • Taxpayer develops and produces industrial plants, which are sold to ice cream manufacturers. The products range from stand-alone machines, e.g. freezers, for entire production facilities.
   • Taxpayer sells these plants to sales office of Group which in-turn sells to end customers. Therefore, intra-group transaction includes sale of process plants, spare parts, service and upgrades.
   • Taxpayer adopted Resale Price Method (RPM) wherein profit of average profit (EBIT) of sales companies (i.e. 7%) was concluded to be reasonable.
   • Danish Tax Agency observed that taxpayer is incurring losses and also verified that it has not maintained adequate Transfer Pricing documentation on account of following:
     • Taxpayer have not performed comparability analysis while justifying profit of sales company
     • Moreover, profit computed for sales company also include profit made from its other controlled/ uncontrolled transaction.
     • Numbers considered to compute profit was on estimated basis and not on actual basis.
     • Thus, it was concluded that documentation couldn’t comprise sufficient information and contains significant uncertainty. Therefore, tax authority adopted Transactional Net Margin Method (TNMM) wherein profitability of independent companies were compared with taxpayer (tested party) to make discretionary addition of USD 57.5 million in taxable income.
   • Danish High Court and Supreme Court, while referring to case of Microsoft and Adecco, upholds the judgement of Danish Tax Agency.

   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 1^st 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.

    

5. Maldives – Introduction of Advance Pricing Agreement

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:

• Time-frame – APA can be entered for a duration of 5 future years (as well as possibility to enter APA for roll back period)

• Process – Before formal APA application, process requires pre-filing consultation to discuss the controlled transaction and thereafter, formal APA application can be submitted. Subsequently, several round of discussion may take place between taxpayer and tax authority owing to fact pattern to mutually determine appropriate remuneration mechanism for the proposed controlled transactions. Post APA is signed, taxpayer is required to submit annual compliance report every year along with tax return to demonstrate facts/ assumption remained same as agreed in APA.

• Roll-back provision – While tax authority has also provided a hint towards applicability of APA mechanism for roll-back years (past years where controlled transactions has already taken place), we may expect additional guidance on applicability as well as process.

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.

• United States – IRS issues annual report Advance Pricing agreement for 2020

On 23^rd March 2021, Internal Revenue Service (IRS) issued Announcement 2021-6 providing the Advance Pricing and Mutual Agreement (APMA) program’s 22^nd 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:

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 – Country by country report deadline extended

Mauritius Revenue Authority (MRA) has issued a communique dated 26^th March 2021 informing taxpayers that due date for filing country by country (CbC) report/ notification for the accounting period ended 31^st March 2020 has exceptionally been extended from 31^st March 2021 to 20^th 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.

• Belgium – Deadline for submission of local file extended

On 18^th March 2021, Belgian tax authorities have announced the extension in filing corporate tax return for the financial year ended between 31^st December 2020 and 28^th February 2021 upto 28^th 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:

• Aggregate of operational and financial income equal to or exceeding Euro 50 million (excluding non-recurring income); or
• Balance sheet total equal to or exceeding Euro 1 billion; or
• Annual average of employees equal to or exceeding 100 full-time equivalents.

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.

• Serbia – Ministry of Finance published arm’s length interest rates for 2021

On 19^th 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:

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 – Introduces Country by country Reporting

Zambia Revenue Authority published a Statutory Instrument No. 117 of 2020 to introduce country by country (CbC) reporting regulation to be effective from 1^st 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:

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

• Group’s ultimate parent entity is not obliged to file a report in its tax residence jurisdiction; or
• Country in which the ultimate parent entity is tax resident, whilst having an international agreement with Zambia, does not have a qualifying competent authority agreement with the latter; or
• there is a systemic failure in the tax resident country of the ultimate parent entity and the Commissioner-General notifies the constituent entity in Zambia.

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.

• Qatar – Transfer Pricing declaration form to be submitted

  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

• Information of related party – Basic details including country, main activity of related party, whether any changes in activity of related party during the year,
• Information of transaction - Nature of transactions, transaction currency and amount, methodology applied to justify arm’s length price, declaration as to changes in Group’s Transfer Pricing policy during the year,
• Information on intangibles - Nature of intangible owned by related party and used by taxpayer in Qatar, description of transfer pricing policy adopted by group

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 – Ratified MCAA for CbCR

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.

• Malaysia – Time limit reduce to 14 days to submit Transfer Pricing documentation

  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 1^st 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.

• Canada – Revocation of APA cost recovery charges

  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 5^th 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.

• South Africa – Transfer Pricing adjustment upheld in the absence of Transfer Pricing documentation

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:

• Taxpayer is engaged in the business of manufacturing, importing, and selling chemical products
• It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts).
• In order to manufacture catalysts, taxpayer imported Precious Group of Metals (PGMs) from its Swiss Group entity. Such PGMs was used in a manufacturing process and thereafter, final products in the form of Catalysts were sold to end customers in South Africa.
• During the audit proceedings, taxpayer failed to product Transfer Pricing documentation and therefore, tax authority conducted its own analysis.
• In fact, tax authority’s in-depth analysis included functions performed, risks assumed and assets employed (FAR analysis) by taxpayer and its related party, analysis of cost base of the taxpayer, performing benchmarking search analysis on database to identify independent comparable companies in similar business activity and adopting Transactional Net Margin Method (TNMM) with Full Cost Mark-up (FCMU) to benchmark the transaction.
• Based on the above analysis, since the taxpayer’s profitability was lower than median, it was concluded that inter-company transactions were not at arm’s length and therefore, tax adjustment was made by authorities.

  Tax Court’s decision:

• Tax Court decided the matter in the favour of tax authority and upheld the adjustment.

  Crowe UAE’s comments:

• It is recommended to prepare and maintain comprehensive Transfer Pricing documentation to substantiate intra-group transactions. In the absence of appropriate documentation, tax authority may conduct its own analysis and most probably may make adverse tax adjustment. Additionally, there is a greater risk of levying penalty for such non-compliance.
• Therefore, it is advisable for taxpayers to revisit their transfer pricing compliance for past years and proactively take steps to prepare robust documentation for future years.