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Editorial: Transfer-pricing regime not scary

Published:Sunday | December 13, 2015 | 12:00 AM

We would be surprised if any serious investor, especially a transnational corporation, was "spooked" by having to settle a transfer-pricing agreement (TPA). For it is what they are being increasingly required to do globally, and having a TPA is better than being with some arbitrary imposition like, say, an output tax, such as exists in Jamaica's bauxite-alumina industry and about which a bit of context may be useful.

Jamaica has maintained its so-called bauxite-production levy in some form since 1974. Under it, firms that mine Jamaican bauxite for export, or for refining domestically into alumina, pay a tax on their volume of production, based on the market price of aluminium.

Michael Manley's administration had two fundamental inspirations for the tax, one being the fact that up to then, Jamaica earned little from a depleting, finite natural resource.

The second driver was related to the first. The government of the day didn't believe its recourse lay in normal profit tax arrangements, largely because it had little grasp of the transfer-pricing methodologies employed by the transnational firms, whose Jamaican operations reported little profit.

Much has changed globally over the past four decades. The hostility that was common in many developing countries to the market and big corporations has diminished. Increasingly, too, firms appreciate that it is in their interest to operate in predictable, rules-based environments in which they attempt to be as efficient as possible with their tax liabilities, even though they pay reasonable amounts.

 

IT MAKES SENSE

 

Indeed, this is part of the context within which TPAs are increasingly common, with guidelines promoted by the Organisation for Economic Cooperation and Development and embraced by more than 80 countries, including most of the world's major and emerging economies and some of the most aggressive hubs for foreign direct investment.

Jamaica is about to join the list. It makes sense. When firms do not engage in arm's-length transfer-pricing arrangements for related-party exchange of goods and services, there are two potentially deleterious consequences. One is the negative impact on government tax earnings if costs are manipulated so as to increase costs, and lessen profit, in one jurisdiction, to the benefit of another where tax liabilities are more easily managed.

Further, the absence of market pricing and a lack transparency can distort markets and undermine competition. Indeed, while firms are not to be unduly taxed, murky arrangements are not what is contemplated, as Karl Samuda seems to believe, when firms are urged to be creative to earn more income and profit.

In Jamaica's case, the guidelines for firms to enter TPAs with the tax authorities are, on the face of it, largely typical and ought not to impose any significant new burdens on affected firms, which should have established transfer-pricing methodologies for their various business segments and available for inspection by the authorities in the event of an audit - which could happen even without the new regime.

Importantly, the new regime does not impose a new tax, but will provide the opportunity to firms to explain their transfer-pricing methodologies.

Conceivably, while they might have been doing the right things all along, some firms may lack the specific documentation to verify their systems and may be wary of the time frame for the implementation of the scheme. On this point, there is perhaps room for dialogue between the finance minister, Peter Phillips, and the private sector.