MENA Transfer Pricing in a Post BEPS World
Historically, the Middle East and North Africa (MENA) region has been perceived as a region where taxation and transfer pricing initiatives are not high up on government agendas. Although this has been the case for a significant period of time, recent changes in the region such as decreases in global oil prices coupled with developments of the Base Erosion and Profit Shifting (BEPS) project by the Organization for Economic Co-operation and Development (OECD) have prodded governments across the region to consider updating their legislation and issuing guidance.
The BEPS project is a G20-led initiative that was conceptually designed to address concerns by governments about the potential artificial shift of profits by multinational enterprises to low or zero tax jurisdictions. The BEPS project has been first introduced in 2012 under an Action Plan addressing fundamental areas that reflect core aspects of international tax. In October 2015, the OECD published the final reports of the 15 action items, each containing recommendations for revising international tax laws and treaties that governments can implement in order to tackle BEPS, with the aim of ensuring profits generated are taxed where the economic activities generating the profits are performed and where value is created.
BEPS Action items 4, 8 – 10 and 13 are notably related to transfer pricing. Action 4 focuses on related party structured financing arrangements and aims at identifying solutions to address base erosion arising from interest deductions by limiting net deductions for interest to a certain percentage of Earnings before Interest Tax Depreciation and Amortization (EBITDA).
In an attempt to align transfer pricing to value creation, Action items 8 – 10 focus on the following key areas: transfer pricing issues relating to transactions involving intangibles; contractual arrangements, including the contractual allocation of risks and corresponding profits, which are not supported by the activities actually carried out; the level of return to funding provided by a capital-rich multinational enterprise group member, where that return does not correspond to the level of activity undertaken by the funding company; and other high-risk areas.
Action item 13, which is the most widely adopted by tax administrations around the world, is designed to increase transparency by providing tax administrations with sufficient information to allow them to conduct transfer pricing risk assessments. The information will be provided in a three-tier documentation package that will include a Masterfile covering the group’s operations, local files with detailed information about each local business and a Country-by-Country report that contains high level information about the jurisdictional allocation of profits.
Although these Actions have been finalized by the OECD, most of the jurisdictions across the MENA region have yet to issue clear guidance on transfer pricing. The arm’s length principle is embedded within the law (with the exception of UAE and Bahrain) and it is expected that taxpayers that carry out intragroup transactions are doing so in accordance with this principle and document their transfer prices accordingly.
In December 2015, the government of Oman proposed changes to its tax laws (i.e., Corporate Income Tax (CIT) increase from 12% to 15%, tax free threshold removal, and Liquid Natural Gas companies may be subject to CIT at 55%, in order to bring their taxation in line with oil companies), albeit without issuing clear transfer pricing regulations or documentation requirements. It has been reported that tax administrations in Oman are becoming more sophisticated and are now expecting taxpayers that perform intragroup transactions to document their transfer prices.
Egypt is an exception to the general outlook across the MENA region, it is a country which has progressed significantly in comparison to other jurisdictions in terms of transfer pricing. Egypt has had local transfer pricing rules in place since 2010 and has implemented a dedicated transfer pricing unit within the administration, whose main purpose is to ensure that Egyptian taxpayers comply with local transfer pricing rules.
Next country in line is Qatar, which has issued specific transfer pricing rules under both the State tax regime and the Qatar Financial Centre tax regime. The legislation has been influenced by the U.K.‘s transfer pricing provisions, which conform to the OECD Guidelines. The most recent tax developments in Qatar were in April 2016, the Qatar Tax Authority, the Public Revenues and Taxes Department (PRTD), has informed tax agents that from 1 April 2016, it will no longer accept paper submissions for income tax, withholding tax declarations, withholding tax refunds and approvals for the transfer of shares. The PRTD expects these documents to be submitted through the electronic Tax Administration System.
Saudi Arabia, a G20 country that generally follows Egypt’s footsteps, in March 2016 issued a new tax declaration requirement for Saudi tax/zakat payers to include in their tax return the “value difference for materials and services provided by related parties in excess of market prices”. Although there is currently no clear guidance issued by the General Authority for Zakat and Tax (GAZT), the arm’s length principle is deeply embedded within the law and the tax administrations are challenging intragroup transactions that don’t have transfer pricing documentation in place.
Furthermore, Saudi Arabia, Egypt and Pakistan are three jurisdictions across MENA included in the BEPS inclusive framework list. Members of the inclusive framework will develop a monitoring process for the four minimum standards as well as put in place the review mechanisms for other elements of the BEPS Action items. The four minimum standards include:
- Model provisions to prevent treaty abuse, including through treaty shopping that will obstruct the use of conduit companies in jurisdictions with favorable tax treaties to artificially route investments and obtain reduced tax rates (Action 6);
- Consistent Country-by-Country reporting that will enable tax administrations to see where the group’s profits, tax and economic activities are reported and to use this information when performing transfer pricing and other BEPS risks assessments, so they can efficiently redirect tax audit resources (Action 13);
- Rejuvenated scrutiny to address harmful tax practices, as well as a commitment to transparency through the mandatory spontaneous exchange of information on specific rulings (Action 5 and Action 12); and
- Agreement to secure progress on dispute resolution, with a strong political commitment for the effective and timely resolution of disputes through the mutual agreement procedure (Action 14).
Pakistan has already made public its commitment to the three-tier documentation approach detailed in Action 13 in its 2016 Finance Bill, which includes Country-by-Country Reporting requirements. It is to be seen what will be the next moves for Saudi Arabia or Egypt, but what is certain is that the transfer pricing environment will develop significantly in the region in the next few years.