Kelly Akin | Tax liability and transfer pricing rules

The 2015 amendment of the Income Tax Act builds on the transfer pricing provisions that have existed in our legislation since 1970.

This amendment adds the 'arm's length' principle, which requires companies that engage in transactions with connected persons to take special consideration when calculating their income tax liability.

A transfer price is adopted by a company for internal bookkeeping and reflects the price at which goods and services are provided between connected companies.

Transfer pricing can be used to value transactions at artificially low or high prices between connected enterprises in order to effect an income payment or capital transfer between those enterprises. It has become a key issue for multinational enterprises and tax authorities in the various jurisdictions as it can play a major role in relocating corporate profits to lower tax jurisdictions.

On its own, transfer pricing is not criminal or illegal. However, issues arise where connected enterprises use these prices to reduce tax liability in one jurisdiction and increase it in another, usually one in which such gains are exempt from tax liability.

The transfer pricing provisions in the law aim to have companies pay the correct tax rate in Jamaica.

THE 'CONNECTED' PRINCIPLE

The 2015 transfer pricing amendments focus on arm's length considerations in relation to connected transactions and whether those considerations were taken into account during the calculation of tax liability.

The arm's length principle is used to determine whether transactions between connected persons are assessed as though they are unrelated parties for the purposes of calculating taxes owing.

In order to determine whether arm's length considerations were made in connected transactions, all the terms and conditions of the agreement will be examined, including any feature of the agreement that has commercial value.

The objective of transfer pricing legislation is to get the price of goods and services right for the purpose of a country's tax revenue.

The 2015 amendment does not affect all companies, only those engaged in connected transactions. Companies may still use these methods for internal bookkeeping purposes, so long as they take into account arm's length consideration when they report their tax liability.

To avoid loss of tax revenue through transfer pricing, a company that does not use arm's length considerations in computing tax liability may be taxed at a rate calculated by the Tax Administration of Jamaica, using arm's length considerations.

Companies must declare whether or not they have engaged in connected transactions when filing their tax returns. If a declaration is made negligently or fraudulently, the penalty is a fine of up to $2 million or a prison term not exceeding 12 months. The designated responsible officers for the company should be aware of their possible liability under these provisions.

Companies with gross annual revenue in excess of $500 million must keep transfer pricing documentation. This documentation should verify that the conditions of any connected transactions are consistent with arm's length considerations. The process can be extensive and costly, and may have budgetary implications.

TRANSFER PRICING AGREEMENTS

The 2015 amendments also introduced transfer pricing agreements or TPAs.

The TPA between a person or company and the Commissioner General may establish a set of criteria, such as methodology, comparables and appropriate adjustments that can be used to determine whether a transaction was made at arm's length.

The TPA is reached ahead of a specific connected transaction.

Where the tax commissioner audits a company in a regular tax audit, the connected transactions that are the subject of the TPA may only be audited within the terms of the agreement.

If connected transactions happen on a regular basis it may be best to pursue a transfer pricing agreement with Tax Administration Jamaica.

- Kelly A. Akin is an attorney at law in the Corporate and Commercial Department at the law firm DunnCox. kelly.akin@dunncox.com