Taxman’s new take on transfer pricing will attract foreign investments
In today’s global economy, where multinational companies do business in different geographical and tax jurisdictions, the need for arm’s length pricing of related party transactions is a growing concern for revenue authorities.
Tax bodies are increasingly requiring multinationals to document their related party transactions. Where these transactions are not well documented and the pricing justified, the revenue authorities make adjustments to the company’s income, giving rise to additional tax liability.
These documentation requirements, coupled with the additional tax burden arising from revenue adjustments, have led to the growth of advance pricing agreements (APAs).
Recently, the Kenya Revenue Authority Large Taxpayers Office commissioner Pancrasius Nyaga told a Kenya Association of Manufacturers meeting that the authority will start entering into APAs with taxpayers.
This is part of the KRA’s proposed changes to the current transfer pricing legislation to align it with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiative.
An APA is an agreement made in advance between a taxpayer and a tax authority on the prices charged on transactions between the taxpayer and related entities. Generally, the agreement describes the nature of transaction, pricing model adopted, records that must be maintained and the reporting responsibilities.
APAs deliver certainty both to the taxpayer and tax authority on the tax outcome of the taxpayer’s related party transactions. This is achieved by agreeing in advance the arm’s length pricing that will apply to the taxpayer’s international transactions.
Generally, there are three broad ways in which an APA can be structured: Unilateral APAs, bilateral APAs and multilateral APAs.
A unilateral APA is agreed upon by a tax authority and a taxpayer within its tax jurisdiction. But it may affect the tax liability of associated enterprises in the other jurisdictions.
This agreement is best suited to situations where it is unnecessary to involve another tax authority in the APA process, or where the transfer pricing method to be adopted poses little tax risk for the parties involved.
Unilateral APAs take a relatively shorter time to complete due to the involvement of only one tax authority.
Bilateral APAs are entered into through a mutual agreement between two tax authorities in the different countries. In most cases, this type of agreement will be entered into where there exist other tax treaties such as double taxation agreements between the countries involved in the controlled transaction.
The bilateral agreement ensures that there is no double taxation in respect of the transactions covered by the APA.
Multilateral APAs, on the other hand, are entered into by a taxpayer and more than two tax authorities. Such agreements take a long time to finalise due to the involvement of several tax authorities with conflicting views and interests.
Although KRA has not indicated the kind of APAs that it intends to enter into, its willingness to negotiate with taxpayers is a step in the right direction.
