TAJ refines transfer pricing rules - TPAs seen as potential game-changer
Tax Administration Jamaica (TAJ) has published the final version of a transfer pricing agreement practice note, the TPA, outlining what it says is a mechanism to reduce disputes over the reporting of arm's length transactions.
The Jamaican TPA is a negotiated agreement between a taxpayer and Tax Administration, which identifies certain connected transactions in advance. It's sometimes referred to as an advanced pricing agreement or APA.
Local tax experts indicate that working through such an agreement could significantly reduce the complexities associated with compliance with arm's length rules under the transfer pricing laws that were enacted to prevent revenue leakage outside of Jamaica via transfers between related parties.
The refinement to the agreement published this month comes three years into efforts to establish the transfer pricing regime.
Brian Denning, lead partner for tax services at PricewaterhouseCoopers Jamaica, says that while the regime is largely targeted at large companies, it has had widespread impact, leading to high cost for some companies and individuals for advice on how to comply.
"While the regime limits the application of detailed transfer pricing documentation requirements to entities earning gross revenues over a $500-million annual threshold, the rules otherwise apply generally to all taxpayers including the requirement to adjust one's income reported annually if needed and to disclose all connected party transactions," said Denning.
"The burden to complete the required analysis is significant," he added. But as to what those costs have amounted to, the tax expert said that would have to be determined through analysis, and he was not personally aware of any local company having collated those precise costs.
Transfer pricing rules seek to counteract the proclivity of connected parties to favour each other. It requires taxpayers to determine the arm's length consideration - based on a prescribed methodology - for transactions between related outfits; and to disclose the arm's length consideration applied to every connected party transaction during the tax year.
"Where a taxpayer under-reports his chargeable income - and his associated income tax liability - as a result of failing to adjust his income appropriately to take account of related party transactions, then he shall be liable to interest and penalties on any additional tax assessed," Denning said.
Breaches of the transfer pricing reporting requirements may result in a court fine of up to $2 million or alternatively imprisonment up to one year - penalties that were crafted to incentivise compliance.
But companies are also finding compliance itself to be costly, according to Denning.
"Our experience has been that the transfer pricing regime has placed additional compliance burden on affected companies," he said.
He notes that the level of preparedness among firms varies, with larger multinationals appearing to adapt, best of all - being generally more familiar with transfer pricing since they typically have been dealing with similar requirements in a number of other jurisdictions for years.
"On this basis, some groundwork is already laid for their local operations in Jamaica to the extent that they can access and leverage transfer pricing resources and analysis already conducted overseas by these groups," said the PwC partner.
But for groups that are locally and regionally owned, they have had to start from "ground zero" in terms of collating and analysing how their operations may be impacted by the transfer pricing regime.
This, Denning said, requires significant investment of resources internally in conjunction with support from external professional advisers.
Denning said the choice of an APA - which involves agreeing upfront with Tax Administration the acceptable arm's length consideration for covered related party transactions - can be a significant game-changer.
Tax Administration said in a release on the TPA programme that it's designed as a "cooperative approach" for resolving transfer pricing issues. The TPAs are for a maximum of five years, unless otherwise agreed with the tax authority.
"Securing an APA helps to avoid disputes with TAJ in relation to these transactions during the period of the APA. It is important, however, that a taxpayer properly evaluates the matter and can support any submission to made to TAJ in seeking an APA," Denning said.