The 2015 Amendment of the Income Tax Act (ITA) builds on the transfer pricing provisions that have existed in our legislation since 1970. This amendment adds the “arms-length” principle, which requires companies who engage in transactions with connected persons to take special consideration when calculating their income tax liability.
Overview Transfer Pricing
A transfer price is a price that is adopted by a company for internal book-keeping purposes and reflects the price at which goods/ 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. Transfer pricing 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 ITA aim to have companies pay the correct tax rate in Jamaica.
“Connected”/”Arms Length” Principle
The 2015 transfer pricing amendments focus on arms length considerations in relation to connected transactions and whether those considerations were taken into account during the calculation of tax liability.
The “arms-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 arms length considerations were made in connected transactions all the terms and conditions of the agreement will be examined. Any feature of the agreement that has commercial value will be examined and can be assessed using arms length considerations.
What Does This Really Mean For Companies?
The objective of transfer pricing legislation is to get the price of goods/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 book keeping purposes, so long as they take into account arms length consideration when they report their tax liability. In order 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 (TAJ) using arms length considerations.
As of March 2017 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 company is liable to a fine not exceeding 2 million dollars or term not exceeding 12 months imprisonment. The designated responsible officers for the company should be aware of their possible liability under these provisions.
In addition to declaring connected transactions, every company with a gross annual revenue in excess of 500 Million Dollars must keep transfer pricing documentation. This documentation should verify that the conditions of any connected transactions are consistent with arms length considerations. Gathering transfer pricing documentation can be an extensive and costly process for many companies, which may have budgetary implications. This requirement should be seriously considered by any company that it applies to.
Transfer Pricing Agreements
The 2015 Amendments also introduces Transfer Pricing Agreements (TPA). A TPA is an agreement between a person (or company) and the Commissioner General that may determine ahead of a specific connected transaction (or transactions) a set of criteria, such as methodology, comparables and appropriate adjustments, that can be used to determine whether a transaction was made at arms length. The benefit of a TPA is where the Commissioner audits accompany 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.
Key Points From Amendments And For Tax Filings Moving Forward
- Transfer pricing provisions apply to companies engaged in connected transactions.
- All companies should use arm’s length principles when calculating tax liability, otherwise they may be taxed at a rate calculated by the Commissioner using the arm’s length considerations.
- For March 2018 tax deadline:
- Determine whether transactions for the tax assessment year are connected transactions;
- Make a declaration whether or not the enterprise has engaged in connected transactions when filing tax returns
- If connected transactions happen on a regular basis it may be best to pursue a transfer pricing agreement with TAJ.