Page 155 - SAIT Compendium 2016 Volume2

PN 7/1999 Income Tax acT: PracTIce noTes PN 7/1999
appropriate for tax purposes should be determined in accordance with the same prudent business management principles that would govern the process of evaluating a business decision of a similar level of complexity and importance. The Commissioner would expect taxpayers to have created, referred to and retained documentation in accordance with this principle.
10.3.2 An important question is what documentation should taxpayers prepare if they are to demonstrate compliance with the arm’s length principle. Unfortunately, it is not possible to specify a comprehensive pre-de ned set of documentation requirements that meet the requirements of all taxpayers, because appropriate documentation depends on each taxpayer’s speci c facts and circumstances. This Practice Note can, therefore, do no more than set out factors that should be considered by taxpayers in determining an appropriate level of documentation for their speci c circumstances.
10.3.3 In determining an arm’s length price, a taxpayer would generally go through a process which will usually include some form of a functional analysis and information gathering on relevant comparables. This would be expected to point to some appropriate method under which the arm’s length price would be determined. Once the appropriate method has been determined, the process becomes one of applying the relevant data to determine the arm’s length process.
10.3.4 As a general rule the Commissioner considers that taxpayers should contemporaneously document the process they have followed and their analysis in determining transfer prices, in their efforts to comply with the arm’s length principle. This should include some justi cation of why those transfer prices are considered to be consistent with the arm’s length principle.
10.3.5 The arm’s length principle imposes requirements on connected parties that independent parties dealing at arm’s length would not have. For example, independent rms are not required to justify the price of their transactions for tax purposes, but members of multinationals are required to justify the price adopted in their controlled transactions, to evidence compliance with the arm’s length principle. Taxpayers may therefore have to prepare or refer to written materials which they would not otherwise prepare or refer to, such as documents from foreign connected persons.
10.3.6 The Commissioner will rely as much as possible on documentation that should be created in the ordinary course of business and of setting a transfer price. This documentation will generally address the following:
(a) identi cation of transactions in terms of international agreements entered into with connected persons and
the extent of any other commercial or nancial relations with connected persons which fall within the scope
of section 31;
(b) copies of the international agreements entered into with connected persons;
(c) a description of the nature and terms (including prices) of all the relevant transactions (including a series of
transactions and any relevant off-setting transactions);
(d) the method that has been used to arrive at the nature and terms of the relevant transactions (including the
functional analysis undertaken and an appraisal of potential comparables);
(e) the reasons why the choice of method was considered to be the most appropriate to the relevant transactions
and to the particular circumstances;
(f) an explanation of the process used to select and apply the method used to establish the transfer prices and
why it is considered to provide a result that is consistent with the arm’s length principle;
(g) information relied on in arriving at the arm’s length terms such as commercial agreements with third parties,
nancial information, budgets, forecasts etc;
(h) details of any special circumstances that have in uenced the price set by the taxpayer.
10.3.7 At the outset of a transfer pricing review the Commissioner would expect the taxpayer to identify:
(a) which goods or service, if any, are considered most comparable to the goods or services being reviewed; (b) its major competitors;
(c) the competitors the taxpayer considers most comparable; and
(d) the methodologies used and why they should be considered appropriate in the taxpayer’s particular
circumstances.
10.3.8 Taxpayers may be asked to provide the Commissioner with relevant documentation created when the
international agreement was contemplated and at the time when the agreement was entered into. Where there is inadequate contemporaneous documentation of arm’s length international dealings, between connected parties, it will clearly be more dif cult for companies to convince the Commissioner that the dealings took place on an arm’s length basis.
10.3.9 Taxpayers under investigation would be expected to provide relevant documents, explanatory material and other information to which the company has access or could reasonably be expected to have access. The nature of the documentation likely to be sought includes relevant pricing policies, product pro tabilities, relevant market information (such as sales forecasts and market characteristics), the pro t contributions of each party and an analysis of the functions, assets, skills and the degree and nature of the risks involved for the various parties.
10.3.10 In the event that contemporaneous documentation does not exist, companies should review their pricing policies against the guidelines set out in this Practice Note and satisfy themselves that they accord with the arm’s length principle and that dealings with connected persons have been carried out on that basis. It is recommended that documentation be prepared in respect of transactions entered into from July 1995. For future transactions documents should be prepared not later than the date of submission of a tax return affected by these transactions.
11 Practical Considerations
11.1 Introduction
11.1.1 The xing of transfer prices is a complex process. Many factors will have an impact on an arm’s length transfer price. The purpose of this Practice Note is to highlight some of the practical issues that may arise in xing
SAIT CompendIum oF TAx LegISLATIon VoLume 2 147