Tip 1. Intra-Group Services
BEPS initiatives place major emphasis on pricing issues related to the provision of intra-group services. Under the key BEPS principle, the cost of intra-group services shall commensurate with the level of benefits received by recipient of those services (i.e. the customer).
So, how can you verify that your company applies this principle to intra-group transactions involving the purchase of services? First, you need to address the following questions:
- A mark-up on the cost of services shall be within the arm’s length range.
- Cost structure of the service provider should exclude the costs attributable to shareholder activities.
- Costs incurred by the service provider shall be transparent and easy to calculate.
- Allocation keys must be used on a reasonable and consistent basis for all allocations of overhead costs.
- Services do not duplicate functions and activities performed by in-house departments of the customer.
- Source documents shall be in place and duly completed.
- Apply the benefits test to assure that the customer has the need for services.
Tip 2. Intangible Assets
BEPS initiatives have revised guidelines on issues relating to determination of the arm's length consideration for intangible assets. Generally, where an entity performs high value-adding DEMPE functions in relation to the intangible, it can expect consideration (that may be in the form of royalty payments).
Besides, the BEPS Action Plan covers key points and aspects related to intangibles:
- Legal ownership of intangibles, by itself, does not confer any right to royalty upon the owner.
- Entities performing DEMPE functions are entitled to the arm's length consideration.
- Entities performing DEMPE functions shall monitor risks and have the financial capacity to assume these risks.
- Where the entity provides funding for development of intangibles and does not exercise control over the financial risks associated with the funding, then it is entitled to no more than a risk-free return.
- To precisely determine the market value of complex intangible assets, a thorough analysis is required.
Tip 3. A Lack of Data in a Transfer Pricing Benchmarking Study
A common concern of developing economies in the implementation of transfer pricing regimes relates to the lack of comparable data on transactions between related parties used in the application of the arm’s length principle.
In response to this challenge, the IMF, OECD, UN, and World Bank Group have developed a toolkit to provide practical guidance, which includes different approaches:
- Application of simplified, robust, and streamlined procedures to identify arm's length prices.
- Use of data available to tax administrations for determining the arm’s length range of prices.
- Use of information available on comparable transactions/entities from foreign markets.
- Use of information from the stock exchange and price databases for analysis of transactions involving commodities.
- Taking measures against tax evasion.
Tip 4. Comparable uncontrolled price method
The comparable uncontrolled price (CUP) method may at first seem to be the most natural and intuitive method of transfer pricing. In addition, according to the Law “On Transfer Pricing”, in Kazakhstan it has priority over other methods. However, in practice its application is rather limited. The CUP method is applied in the following cases:
- When analyzing sales transactions with exchange commodities.
- Transactions on financial services provision (loans, guarantees, etc.)
- When transferring rights of use of intangible assets (trademarks, know-how, patents, etc.).
- In case of the taxpayer’s own transactions with independent parties.
Tip 5. Using statistics of the National Bank of Kazakhstan when analyzing loans
The National Bank of Kazakhstan regularly publishes statistics on interest rates on loans provided to legal entities and individuals. Despite the ease of use, the application of these statistics when analyzing transfer pricing loans is limited – the statistics lack important information about the conditions of comparability of transactions used for preparing these statistics. The most important conditions of comparability of transactions are the following:
- Data on credit ratings of the borrowers.
- Availability/absence of security or guarantees for the loans.
- Data on economic sectors where the borrowers operate.
- Data on loan repayment conditions.
Tip 6 – Why transfer pricing documentation should be prepared?
We shall describe the contents of transfer pricing documentation a bit later. And today you will learn how it can help taxpayers:
- Documentation helps to identify risks of adjustments to tax liabilities related to transfer pricing.
- It helps the company to prepare for transfer pricing audits.
- It is among the documents that the supervisory authority will consider during an audit in the first place.
- Documentation automatically transfers the burden of proof to those performing the audit.
- According to the Law of the Republic of Kazakhstan on Transfer Pricing, “transaction parties must maintain records and documents confirming that the transaction price is justified.”
Tip 7 – TP Documentation
Transfer pricing (TP) documentation is the main tool that enables taxpayers to explain their position on TP to a tax authority in case of a tax audit. Documentation properly prepared prior to an audit or receipt of an inquiry from a tax authority shifts the burden of proving a discrepancy between prices in controlled transactions and market level prices to those performing the audit. Key sections of such documentation are listed below:
- Description of activities of the group and the taxpayer.
- Description of the market situation.
- Analysis of the parties’ functions, risks and assets.
- Choice of the most appropriate TP method.
- Economic analysis (benchmarking).
Tip 8 – Three-Tiered TP Reporting
Action No.13 of the BEPS package provides for three-tiered transfer pricing (TP) reporting. The TP Law of Kazakhstan provides for phased implementation of all three files in 2016-2019. A summary of all three tiers of the new TP reporting is presented below:
- The Country-by-Country Report is prepared at the level of the group of companies and includes selected financial and other indicators of the group’s activities with a breakdown into countries.
- The Master File is also prepared at the level of the group and provides an overview of the group’s activities and key revenue drivers.
- The Local File is prepared by each participant of the international group in accordance with the legislation of the country of its registration. This reporting contains a detailed analysis of intragroup transactions of such a participant.
Tip 9 – TP Risk Management
How to understand if your organization has any transfer pricing (TP) risks? We suggest you start by answering a number of following questions:
- Step 1. Does the company perform any significant foreign trade transactions with related parties?
- Step 2. Is there any TP court practice related to similar transactions? What position do courts take in similar situations?
- Step 3. Has a diagnostics of TP risks been performed?
- Step 4. Is the company ready to provide TP documentation in case of an inquiry from an authorized body on TP matters?
- Step 5. Does the company have in-house qualified staff who can prepare substantiated quality TP documentation in case of an audit or an inquiry on the part of an authorized body?
Still have questions?
Please call our Transfer Pricing Hotline
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