Understanding transfer pricing
With recent media reports – both locally and internationally – transfer pricing has been a topic which has received quite a lot of attention lately.
Tax considerations have become quite crucial due to increased changes in the global landscape in terms commerce and the way business is performed.
Prior communication has been made by the commissioner of inland revenue that further commitment would be made to increase resources and skill sets within the department in relation to transfer pricing. This has raised expectations that IRD is planning to perform audits in this area of tax to ensure that taxpayers are adhering to the relevant requirements as set out in terms of section 95 A of the Namibian Income Tax Act.
Legislation
Namibia introduced transfer pricing legislation on 14 May 2005. The legislation (Section 95A of the Namibian Income Tax Act) is aimed at enforcing the arm’s length principle in cross-border transactions between connected persons. On 5 September 2006, the Directorate Inland Revenue issued a Practice Note (PN 2/2006) containing guidance on the application of the transfer pricing legislation.
Section 95A is aimed at ensuring that cross-border transactions between connected entities are fairly priced. This will ensure that tax profits are not stripped out of Namibia and moved to lower tax jurisdictions. Section 95A achieves this by giving the minister of finance the power to adjust tax returns and to tax Namibian entities as if these transactions were done at market-related prices.
Documentation requirements
A taxpayer is required to:
• keep documentation to support how it determines arm's length prices for TP transactions (the format of documentation is not prescribed), and
• evidence that supports the actual arm's length amounts charged between connected parties.
The documentation should generally contain a functional analysis which take into account the risks, functions and assets that each party brings to the transaction.
It should also include information gathered on comparable transactions between unconnected parties, to prove that the prices are set at arm’s length.
If such information is not documented, it will be difficult for a taxpayer to defend himself against any TP tax adjustments made by Inland Revenue.
The taxpayer must also keep in mind that regulatory requirements relating to transfer pricing was enacted in 2005 (in Namibia) and therefore Inland Revenue can go back to the date of introduction to challenge taxpayers on transfer pricing matters.
Risks
Identifying your transfer pricing risks is quite crucial and the following procedures could be considered:
• list all your cross-border transactions with connected entities,
• understand how the prices charged for these were determined, and
• review the documents that you can give to Inland Revenue to support that amounts charged were at arm's length.
* Nelson Lucas is an associate director: indirect taxes at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.
Tax considerations have become quite crucial due to increased changes in the global landscape in terms commerce and the way business is performed.
Prior communication has been made by the commissioner of inland revenue that further commitment would be made to increase resources and skill sets within the department in relation to transfer pricing. This has raised expectations that IRD is planning to perform audits in this area of tax to ensure that taxpayers are adhering to the relevant requirements as set out in terms of section 95 A of the Namibian Income Tax Act.
Legislation
Namibia introduced transfer pricing legislation on 14 May 2005. The legislation (Section 95A of the Namibian Income Tax Act) is aimed at enforcing the arm’s length principle in cross-border transactions between connected persons. On 5 September 2006, the Directorate Inland Revenue issued a Practice Note (PN 2/2006) containing guidance on the application of the transfer pricing legislation.
Section 95A is aimed at ensuring that cross-border transactions between connected entities are fairly priced. This will ensure that tax profits are not stripped out of Namibia and moved to lower tax jurisdictions. Section 95A achieves this by giving the minister of finance the power to adjust tax returns and to tax Namibian entities as if these transactions were done at market-related prices.
Documentation requirements
A taxpayer is required to:
• keep documentation to support how it determines arm's length prices for TP transactions (the format of documentation is not prescribed), and
• evidence that supports the actual arm's length amounts charged between connected parties.
The documentation should generally contain a functional analysis which take into account the risks, functions and assets that each party brings to the transaction.
It should also include information gathered on comparable transactions between unconnected parties, to prove that the prices are set at arm’s length.
If such information is not documented, it will be difficult for a taxpayer to defend himself against any TP tax adjustments made by Inland Revenue.
The taxpayer must also keep in mind that regulatory requirements relating to transfer pricing was enacted in 2005 (in Namibia) and therefore Inland Revenue can go back to the date of introduction to challenge taxpayers on transfer pricing matters.
Risks
Identifying your transfer pricing risks is quite crucial and the following procedures could be considered:
• list all your cross-border transactions with connected entities,
• understand how the prices charged for these were determined, and
• review the documents that you can give to Inland Revenue to support that amounts charged were at arm's length.
* Nelson Lucas is an associate director: indirect taxes at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.
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