Everald Dewar | Transfer pricing reset
It is a sign of the times where the trickle of taxpayers experimenting with related companies has turned into a steady stream.
Some having jumped on the bandwagon of the rocketing offshore low-tax jurisdiction had developed insatiable appetites for these vehicles known for sheltering anticipated profits.
There has been an assault on these edifices where the law was recently amended, making payment of premiums to captive insurance companies located overseas subject to withholding tax.
Recently, a bill was tabled to amend the Income Tax Act (ITA) with the intent to tackle 'transfer pricing' issues.
Generally, profits of a business are taxed in the country where 'effective management is exercised. The definition of 'taxpayer' under the Revenue Administration Act (RAA) was limited to a person liable to tax in Jamaica. This definition was broadened to include any person who "is of relevance to a treaty partner, in respect of an international tax agreement.
The RAA and the ITA now make a powerful combination - the passing of the bill will make it lawful for non-residents to have a tax liability where they have here a 'permanent establishment' or fixed place of business through which a trade is carried out. It's possible for a person who is a foreigner to become becoming liable for tax by merely using a site here to carry out business with, say, Cuba.
We are not talking here about a person who earns fees outside Jamaica, which is quite a different thing.
Tax should be assessed according to the actual profit or loss incurred in selling goods or services. There are, however, certain exceptions to this rule.
There can be a challenge by the authorities where businesses transact with offshore low-tax jurisdictions or with another business in Jamaica where the revenue authority suspects that goods or services are under or overpriced. This challenge may apply to all transactions, cross-border or domestic, and whether or not they are between related parties.
Fine or imprisonment
A taxpayer, on filing a tax return, will now have to disclose certain facts. Failing to or
falsifying the disclosure can attract a fine or imprisonment. Completely mandatory and unforgiving.
It is true that the revenue authorities cannot question or interfere with the prerogative of a company to charge for its service, whatever it thinks fit for the other part to pay.
But, Tax Administration Jamaica (TAJ), without disclosing any reason, may ask for documentation. Businesses will now have to keep certain records for no other reason but to ensure they are up to speed with the new requirements.
Modernisation of rules
Pricing arrangements are subject to challenge under the current provisions of the ITA - so what ill is the proposed amendment trying to remedy? It appears to be modernisation of transfer-pricing rules.
The language is similar to the current provisions but not identical. The aim is to ensure that price paid by the person receiving the goods or service is not below what the seller would have spent on providing them.
A word of warning - the amendment will have long tentacles and will apply to all businesses, small or large. It will affect transactions that are perceived not to be normal commercial arrangements but set up to apportion profits through connectivity or
otherwise. It will apply where non-resident companies trade through a subsidiary, agency or branch.
Management or consulting services will be the usual suspects, including an entity with small or no staff, and which it is thought could not provide services that warrant extraordinarily large fees.
With this new provision, the tax commissioner does not have to believe that a transaction was carried out with the objective of avoiding tax. Accountants and advisers know the result when the revenue authorities take a hard line - a totality that may be different from the sum of individual parts.
On the other hand, there are occasions when a new trade is being set up when buying or selling at prices below the normal expected market price may be a commercial necessity, and are entered into in good faith for better earning profits.
Some of the transfer-pricing rules are based on old concepts and reasoning that are inappropriate to modern-day conditions. It relates to a different world in 21st century terms and doing business through technological advancement.
The Government seems very set on this amendment, and nothing short of an IMF waiver will persuade it otherwise.
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.