Direct law covering Transfer Pricing exists already in two countries viz. Saudi Arabia and Oman. Indirectly it is covered in two other countries i.e. Qatar and Kuwait. Potentially, it can be expected in the balance two countries also namely UAE and Bahrain once Corporate taxation comes into picture for all entities in these two countries.
This note,albeit brief,is prepared to predominantly help the tax professionals in the Gulf who work in various organizations other than in consultancies and legal stream. Without going too much into detail, I would like to highlight that Transfer Price means the price at which the goods/services are transferred between two related parties. This price has to be at arm’s length.
By arm’s length it is meant that the goods/services should be sold by a related party to another related party at a price which should be higher than that at which it would be sold to a third party i.e. non-related party. Similarly, on the flip side, when goods/services are purchased from related party it should be purchased at a price which is lower than it would have paid to a third party. It is assumed in both these scenarios that the goods/services are standard one’s and environment/market in which it is sold is similar in nature to enable one transaction to be comparable to another transaction.
In any taxation matter, the ‘D’ and ‘P’ are very important. In all tax matters other than Transfer Pricing, the D refers to ‘Documentation” and the P refers to “Presentation’. Once the ‘D’ is in order then ‘P” can be taken care of with the help of D in place. In Transfer Pricing, it is ‘P’ and ‘D” which needs to be in sync to demonstrate arm’s length. Here P refers to ‘Pricing’ and D refers to ‘Documentation’ in the form of Comparable, available to evidence arm’s length nature of the transaction.
Transfer Pricing Documentation normally is quite voluminous covering lot of insights and details. However, from tax audit perspective, a short documentation covering about 15-18 pages with detailed reference of comparable for various types of transaction is required as it helps both the tax authorities in appreciating the facts of the case and also the tax consultants/lawyers where involved to present the case in an appropriate manner.
Ultimately, one should bear in mind that all evidences are based on entity’s internal documentation and based on these only the audit/appeal can be discussed with authorities and arm’s length successfully demonstrated.
Based on my experience with tax authorities in general and Gulf tax authorities in particular, I would like to state that more the comparable produced for each type of transaction, the higher the chances of no adjustment’s being made to arm’s length for the year shared with the tax authorities.
Here the comparable should not only cover each type but also cover wide range in terms of representation of more than 50% in value terms of related party of each country with which transaction has been done whether it be a small country or big one in terms of value. Tax authorities do appreciate ‘uniqueness’ or ‘customized’ nature of goods/services and allow leeway for that while accepting comparable.
Many a time enough evidences are not produced in earlier years with the result that adjustments keep piling up in value terms once the transaction volume increases substantially. So, the key is to have a system in place where at the tender or contract stage itself documents are maintained appropriately so that the trail of transactions from start to end can be traced which will also support in evidencing exceptional deviation in margin in certain cases due to special reasons.
Here comes the key role of middle management personnel as they can devise ways and means of putting up a system in place based on facts of broad type of transaction as to the type of documentation process to be set up. This will allow the top management to support in the push with other cross functional departments when things get stuck instead of getting into the routines. Lower level management and other support staff can contribute in a major way in ensuring that the documentation received are properly labelled and filed so that it becomes easily available at the time of tax audit apart from supporting the middle management in getting the documentation collated.
One must bear in mind that without proper comparable even the tax consultants and lawyers would not be able to support the audit by presenting it in a structured way. A proper presentation in a simple understandable manner helps in a big way in demonstrating to the tax authorities the arm’s length nature of the different type of transaction.
Once the comparable are compiled comes the second leg of demonstration of arm’s length in the form of selecting a suitable method from amongst the five available type which fits the particular type of transactions. Once the method is selected for each broad type of transactions, then the last step in the process would be analyzing the margin for each type of businesses and providing reasons if there are exceptional deviation from mean values on either side for each type of business.
I have only provided in a broad way based on my experience the approach to be taken to demonstrate and support by way of evidence of arm’s length nature of various transaction types. However, the type of system to be set for this and how to demonstrate arm’s length in each case would depend on the facts of each case as no one type can fit all.
One can write pages on each particular aspect of transfer pricing but the subject being highly technical one, I did not want to do the same as any subject will depend upon facts of each case to decide the type of support system to be put in place for it to be a successful one from tax audit perspective.
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You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax