Christabel Musaazi | Negotiating transfer pricing agreements
Latin America and the Caribbean countries are in a continuous and dynamic process involving transfer pricing.
In the region, different countries are either working on bills or in the process of introducing and implementing rules; and some have an experienced regulatory framework. Of these countries, 10 have included in their internal regulations the use of transfer pricing agreements - TPAs.
TPAs allow two or more contracting parties that have entities in different tax jurisdictions to negotiate the terms of taxation in order to avoid double taxation. When these agreements are signed between two parties they are called bilateral agreements, when more than two countries are involved they are multilateral agreements. In the case of an agreement between the taxpayer and the country's tax authority, this is a unilateral agreement.
Unilateral transfer pricing agreements are negotiated before entering into transactions between related parties. The advanced transfer pricing agreement - APA - will specify the market factors that will guide transactions between parties. These include market price and market margin; additionally, the comparable transactions and goods and services that will be subject to the transfer pricing methodology will have to be determined, and form part of the advanced transfer pricing analysis. This is done beforehand so that both parties are assured of compliance.
Advance pricing agreements reduce audit times, cost of compliance to the taxpayer and will help eliminate uncertainty for taxpayers when undertaking international transactions as the taxation basis would have already been negotiated. It is because of these advantages that 10 countries in the region have included the possibility of using this instrument for negotiations.
Most countries in the region that have provisions for advance transfer pricing agreements have opted to mainly include unilateral agreements as opposed to bilateral and multilateral agreements.
Dominican Republic stands out as its law provides for sectoral APAs. The law of this country does not allow for individual taxpayers to enter into agreements with the tax authority; it has to be done through an association that represents the sector and in collaboration with other members. The price and margins and all other considerations are set by the association and the tax authority.
In all countries that have APAs, you find that advance pricing negotiations and preparations of the agreements are technically complex. The time frame of this process is typically between three months and 12 months as a lot of time is required from the taxpayers and the tax administration.
The taxpayer will typically submit an advance pricing agreement proposal, which should prove that assessments of transactions with related parties are in line with the legislation. The proposal will also include information on the tax-payer and the related party, a description of what the agreement will contain as well as each of the operations to be covered by the agreement.
Some fundamental assumptions in the agreement should be explained, like economic conditions, rate of interest, sales volume, and foreign exchange rate. Detailed explanation of the proposed transfer pricing method, and the selection of comparable independent enterprises or transactions is required as well. The arm's length price range also has to be determined. This list is not exhaustive but is just a snapshot of what is typically included in the proposal.
The duration of these agreements ranges from 18 months to 60 months. In Jamaica's case, the maximum duration is 60 months.
This cannot be extended beyond the tax period beginning after the date on which this arrangement is approved.
The negotiations of these contracts tend to be long for varied reasons, including: the need to compile detailed information regarding taxpayers' compliance over a long period; the need to get detailed information of comparable companies and their transactions, which information is not always readily available.
In addition, in some countries the taxpayer and the tax authorities typically have to jointly analyse the viability of processing the agreement, its scope, the methodologies to be used and the documents required for submission.
All of this is time-consuming. In Jamaica's case, the commissioner general will consider the request and make a decision on whether or not to enter a TPA; he has the discretion to reject the request where he has sufficient reasons to do so.
When the proposal is accepted by the tax authority or the commissioner general in Jamaica, it shall be formalised into a transfer pricing agreement. This agreement will be confirmation that no transfer pricing adjustment will be made to controlled transactions that are within the scope of the arrangement. This will be the case as long as the terms agreed upon in the transfer pricing arrangement are followed.
Christabel Musaazi is an attorney-at-law. firstname.lastname@example.org