Higher admin costs to hit with new transfer pricing regime

As the Government of Jamaica moves on its agenda to prevent revenue leakage through transfer pricing legislation, local companies are still waiting to see what impact the changes will have on their operations.

The new law allows for the detailed examination of the accounts of companies with associates and branches abroad to see that monies paid for services between them is at market or ‘arm’s length’ rates. If judged to be less than arm’s length, companies will be expected to give back to the Jamaican revenue authorities, Tax Administration Jamaica (TAJ), for new taxes assessed.

All companies earning $500 million or more annually are expected to comply and report. The measure is retroactive to January 1, 2015.

Don Wehby, group chief executive officer of GraceKennedy (GK) Limited, told the

Jamaica Observer on Wednesday that while higher administrative costs are expected due to the high levels of documentation required, the full impact is one which requires more assessment. “The GOJ should not rush the implementation or this could have a far-reaching negative impact on businesses,” Wehby told the

Caribbean Business Report.

Christopher Levy, president and CEO of the Jamaica Broilers Group, said that the complexity of the taxation change required more assessment. “We are not yet in a position to evaluate the impact, if any, on the company. This is a very involved process which will take time and much-detailed analysis.”

The secretariat of the Private Sector Organisation of Jamaica (PSOJ) indicated on Wednesday that another meeting with Minister of Finance Peter Phillips was set for the end of the week.

“We are in discussions with the tax authorities on it and we are scheduled to meet with them tomorrow. We won’t have a final position on it until after this meeting,” an e-mailed answer directed to the

Caribbean Business Report and copied to PSOJ CEO Dennis Chung, stated.

Wehby said Wednesday that, while the company has complied with transfer pricing regimes abroad, the Jamaican model appears a bit more complex.

“We have done transfer pricing exercises in other regions in which we operate with PwC (PricewaterhouseCoopers) as our advisors and, therefore, transfer pricing, while challenging, is not new to us. It is very complex, which will require consultation with the stakeholders, extensive training and implementation of systems. The GOJ should not rush the implementation or this could have far-reaching negative impact on businesses,” he stated.

Wehby commented that GK supports “the PSOJ’s position that there should be no retroactivity in the legislation”. As to the impact on 2016 results, the group CEO stated, “There is going to be increased administrative costs because of the level of detailed information and different transfer pricing methodologies required by the legislation. Our transactions within the group are done at arm’s length and, therefore, we do not believe that transfer pricing would significantly impact our operations.”

Detailed documentation

According to KPMG, documentation required of classified companies includes an overview of the company’s business operations and organisational chart, with details of business units, departments and the organisational structure. Also required is a description of the corporate organisational structure of the group to which the company belongs and the group organisational structure, with details of the roles of each company in the group that relate to connected party transactions; and details of all connected party transactions carried out, along with an analysis of the factors used in identifying comparable independent transactions.

The tax authorities will also require from classified companies an explanation of why the particular transfer pricing method used was chosen; a description of the tests done and the process used to identify the comparable independent transactions relied on; “a description of the comparable independent transactions used; an explanation of why certain comparables were rejected; and a comparative analysis of the relevant connected party transactions and the selected comparables; and details of any comparability adjustments that were required”, KPMG noted.

Further, the authorities require “details of any industry and economic analysis done by the company to arrive at the transfer price, as well as any budgets and projections relied on; details of any advance transfer pricing agreements or other arrangements in other countries that apply to the connected party transactions; and a conclusion about whether the conditions of the connected party transactions were consistent with an arms’ length consideration, along with details of any adjustments that were required to guarantee compliance”, the tax analysts note.

The KPMG analysts commented: “This is a very detailed list of documents, which, upon request, must be provided within 30 working days.”

Penalties

With effect from year of assessment 2016, if any person fails to certify that the accounts and information which are used to prepare the income tax return include the particulars of all connected party transactions, such will be liable to prosecution. KPMG notes that the year of assessment 2016 is the first year for full compliance with the transfer pricing provisions, and is also the first year for complete policing and enforcement by TAJ.

“This means that, along with the requirement to report all connected party transactions for that year on the annual income tax return, companies with gross annual revenue of $500 million or more in the previous year of assessment will be required to keep transfer pricing documentation and to present same upon request by the commissioner general of TAJ.”

2016 is also the year for prosecutions to begin for failure to certify that the accounts and information which are used to prepare the income tax return include the particulars of all connected party transactions.

“Once there is incomplete disclosure on the income tax return, or incomplete certification, or a failure to provide the required certification, the responsible officer of the company could face a maximum penalty of J$2 million, or a maximum of 12 months imprisonment in default of payment of the monetary penalty,” KPMG noted.