COVID-19 what to consider from a transfer pricing perspective

Businesses are struggling to survive during the COVID-19 global pandemic and are considering many different options, especially around cash management. Transfer pricing should not be overlooked, and this is not only for compliance reasons. Transfer pricing can assist with alleviating some of the pressures that businesses are currently dealing with. Below is a summary of transfer pricing matters that should be on every multinationals (MNEs’) radar:

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Risk vs return and the effects of COVID-19

Craig Kirsten and I touch on Risk vs Return from a transfer pricing perspective during COVID-19. Please let us know your thoughts on the below in the comment section.

As COVID-19 wreaks havoc across the globe, a topic that is unlikely to have surfaced on the first page of a multinational entity (MNE) group’s red flag report is transfer pricing. That said, it will be the MNE groups who identify, confront, and mitigate material risks, including transfer pricing, that will navigate through the COVID-19 storm.

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What does the new financial transactions guidance provided by the OECD mean for you?

What is it all about?

More than 18 months after the publication of its non-consensus discussion draft on Financial Transactions (BEPS Actions 8 to 10), the OECD released its ‘final’ report on the transfer pricing of financial transactions on Tuesday 11 February 2020. The original draft left some 25 areas of disagreement, representing a non-consensus position of the OECD’s Committee on Fiscal Affairs. While those areas are largely resolved by the guidance, there remain some issues that have not been definitively addressed.

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Budget 2020: MNEs must avoid being double-taxed by government’s new proposal

In the South African Budget 2020 speech, the Minister of Finance announced that government would be restructuring the corporate income tax system by broadening the tax base in order to potentially reduce the rate in future.

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Transfer pricing in Mozambique

On 12 September 2017, the Council of Ministers approved the Mozambican transfer pricing legislation, which was published in the Official Gazette on 6 December 2017. The provisions of the transfer pricing legislation thereafter came into effect from 1 January 2018. These provisions were enacted into law to ensure that taxpayers transact on arm’s length terms and conditions with related parties, as they would with independent parties. Where a related party transaction is not arm’s length, the tax authority in Mozambique (MTA) could adjust the taxable profit of the taxpayer, as if the transaction was in fact arm’s length.

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Transfer pricing in Malawi

Effective 1 July 2017, Malawi introduced two transfer pricing (TP) related regulations. Firstly, the Taxation (Transfer Pricing Documentation) Regulation which deals with transfer pricing documentation requirements and secondly the Taxation (Transfer Pricing) Regulation which covers general aspects of TP such as approved methods, key terms, guidance on intangible property, general application and how to test related party transactions. 

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Transfer pricing in Botswana

A key talking point in the recent amendments to the Income Tax Act of Botswana, promulgated in December 2018, was the introduction of transfer pricing rules that took effect 1 July 2019. The introduction of transfer pricing requires taxpayers to transact at arm’s length with any connected person, local or foreign. However, the local transactions are limited to those involving an International Financial Services Centre company. This differs from most other jurisdictions where the transfer pricing rules only apply to cross border related party transactions.

Taxpayers also need to prepare and potentially submit relevant transfer pricing documentation to support the arm’s length nature of the transactions. The documentation requirements, as recommended by the OECD, should include detailed information about the transactions entered into, the related entities, the nature and summary of company activities as well as any agreements and an overall group transfer pricing policy. When submitting the documentation, the regulations require a taxpayer to submit a local file together with the tax return and a master file will have to be submitted if transactions with connected persons are more than BWP5 million. Should a transaction between connected persons not take place at arm’s length the Commissioner General is authorised to adjust the taxable income so that it is consistent with the arm’s length principle.

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South African transfer pricing regulations amended to amass taxpayers

The South African Draft Taxation Laws Amendment Bill (TLAB) has been released for comment. It has been a while since we’ve seen a material change to the transfer pricing regulations. The current inclusion of the “associated enterprise” definition into the transfer pricing regulations is welcomed as it aligns South African legislation to global standards.

The draft TLAB has not removed the connected person concept within section 31 but added the associated enterprise definition to the affected transaction definition. Therefore, a transaction, operation, scheme, agreement or understanding still has to fall within the four provided scenarios under section 31(1)(a), but now the persons in relation to the affected transaction can either be a connected person or an associated enterprise.

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IQR – Exclusive or Inclusive, that is the question

I have spoken a lot about the arm’s length range and when we should use a statistical tool such as the interquartile range (IQR) to derive an arm’s length range. But how do we calculate the IQR practically?

The easy answer is, Microsoft Excel or Numbers (for Mac) will do it for you, you just have to use the right formula. For Numbers this is a little easier as there is only one formula (=quartile) but for Excel users this can become a little more confusing as there are two formulas. Originally, Excel also only had one formula but now you have the option of either using =quartile.inc or =quartile.exc. The previous formula within Excel was equivalent to =quartile.inc, in case you were wondering.

So the questions are: Which formula should I use? Does it make a difference in the range? Will the tax authorities care?

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