1. What is Transfer Pricing? Transfer Pricing is the setting of the price of goods and services sold between related or connected legal entities in an enterprise. E.g. if a subsidiary sells goods to a Parent company, the cost of those goods paid by the parent company to the subsidiary is known as the transfer price.
2. Why are Transfer Pricing regulations important? Jamaican income tax laws are founded on the basic principle that income generated from economic activity conducted in Jamaica should be liable for income taxation in Jamaica. So if the subsidiary is located in Jamaica and the Parent is in the United States, what Jamaica is concerned about is the profitability of the subsidiary company located here. Profit is based on income/revenue earned. Intra-group transactions, if not reported correctly can reduce this profit, as they generally offer opportunities to shift income from one jurisdiction to another. The example below illustrates one example of how profit-shifting may be accomplished through intra-group transactions.
Example 1 Jamaica World Ltd. is an agro processing company. This company grows crops in Jamaica. They harvest and process the crops and sells the finished product in the United States and other countries. Jamaica World Ltd. is a multinational corporation (MNC with three subsidiary companies
Company 1 - Jamaica Inc. (located in Jamaica)
Company 2 - Haven Inc. (located in a very low/zero tax country)
Company 3 - USA Inc. (located in the United States)
Thus, when related companies within a group shift profits, it can pose a significant risk to the integrity of a country’s tax system, and in Jamaica’s case it may reduce already "burdened and limited" tax revenues. So more and more governments have introduced regulations – namely, transfer pricing regulations - to guide how such related-party transactions are reported for the purposes of calculating tax obligations.
3. What does the introduction of transfer pricing regulations achieve? The rules are being put in place to ensure that intra-group transactions among related parties are structured and conducted in a manner that is “fair” by providing for prices that are similar to market rate. In terms of example 1 above, the parent company is really supposed to buy or sell from or to its subsidiary at the same rate/price as it would have bought/sold from or to a third or independent party. This principle is referred to as the 'arm's length principle'. The arms length principle is the most principle underlying transfer pricing regulations, and has been enshrined in Jamaica’s income tax law for a long time. What the new transfer pricing regulations seek to do is to strengthen and clarify the methods for establishing the existence or otherwise of arms-length pricing.
These regulations are meant to achieve the following objectives:
1. Ensure fairness in the market, by reducing potential price distortions which ultimately affect competition.
2. It can assist to safeguard company reputation - as increasingly firms, including Jamaican firms must prove that they are committing to good governance and taxation practices
3. To ensure tax compliance in Jamaica and by ensuring that all parties pay their fair share of taxation.
Although all the reasons are important, enhanced tax compliance assumes even more importance within a in an environment where credible fiscal consolidation is an important pre-condition for, and a continuing complementary factor in, sustained economic growth. Enhanced tax compliance means that Jamaica is able to collect taxes to meet critical economic and social infrastructural needs such as hospitals, roads, schools and national security without necessarily increasing tax rates on existing tax payers.
4. When do the transfer pricing regulations take effect? The regulations are introduced for year of Assessment 2015, beginning 1st January 2015. As noted in the law this represents a "trial period", in which entities will be able to become acquainted with the revised reporting requirements. During this time, no penalties will accrue. Please note Press Release “Transfer Pricing Provisions” from Tax Administration Jamaica (http://bit.ly/1T5YXZg). The full implementation is slated for Year of Assessment 2016, as filed as at March 31st 2017.
5. Is it a back or retroactive tax? It should be noted that the measure is NOT a tax. It is formalizing the concept of the arm's length principle, which ensures that the transfer pricing regime adopted by firms is transparent and fairly derived.
The application of the measure therefore is NOT retroactive, as the arm's length principle has been in the Income Tax Act since its inception. (Please see Press Release “Transfer Pricing Provisions”).
6. When does the penalty take effect? No penalty will take effect now. The penalty will only take effect in 2017, based on reporting requirements for FY 2016.
7. Is this consistent with International Benchmarking? Yes it is. The Organization of Economic Cooperation and Development (OECD) has provided for guidelines, which assist in countries developing these rules. The OECD model provides for standardizing the methods used, so that there is no a lot of differences around the world, so as not to reduce competitiveness of businesses.
Jamaica like much of its regional and international counterparts has been guided by the OECD principles. Some regional countries (Latin America and Caribbean countries) that currently have transfer pricing rules are: Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Mexico, Panama, Peru, Uruguay and Venezuela.
8. Can the public still get involved in this discussion? The Government of Jamaica has always been open to reasonable dialogue and discussion and regularly review policy so that they will remain relevant and effective, in order to meet objectives. Public commentary is welcomed.
Given that the regulations were subject to review by Parliamentary committee, at which point our private sector stakeholders assisted in providing for the adoption of these rules, and their subsequent passage, it should be noted that if any further changes become necessary this will be subject to Parliamentary review and approval.