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HomeOPINIONS AND COLUMNSFULGENCE SSENDAGALA KAJUBI: Potential Triggers for a TP Audit 8

FULGENCE SSENDAGALA KAJUBI: Potential Triggers for a TP Audit 8

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Transfer Pricing and Mystical

By CPA Fulgence Ssendagala Kajubi

Transfer pricing to the pricing of transactions between related entities for goods, services, intangible property, transfers rents and loans. The transfer prices determines the divisions of profits between related entities. It also refers to the practice of pricing transactions between and within enterprises under common ownership and control for example business conglomerates and multinational enterprises

Why transfer pricing is important?

  • Transfer pricing rules help to control the shifting of profits from one tax jurisdiction to another
  • Transfer pricing rules are designed to ensure that appropriate amount of income is subject to tax in each jurisdiction
  • If payments are too high in one-country, profits are shifted from that country to another.
  • If profits are too low, profits are shifted from another country.
  • Where there is absence of transfer pricing rules Multinational Enterprises (MNES) would either intentionally or unintentionally would use transfer pricing to shift large amounts from one country to anther

Impact of Transfer Pricing on the Financial Statements of an MNES

Transfer pricing affects different areas of an MNES financial statements. The below areas show how the intercompany transactions affect each financial statement.

  • Income statements
  • Sale of intangible property, any raw materials, Finished and traded goods
  • Services fees in terms of payroll, legal technical and advisory, tax, insurance, training, marketing, and sales, Research and Development, management services, creativity and innovation, strategic intent and direction among others.
  • Rents, lease of intangible and real property
  • Royalties for the intangible, license of patents, trademarks, and technical know how
  • Dividends and loans
  • Cost of sales
  • Purchases of tangible property, raw materials, work in progress, finished goods
  • Service fees: payments of assembly or manufacturing services
  • Production and machinery installation services
  • Quality control and assurance services
  • Maintenance and repair costs
  • sales, general & Administrative expenses
  • HR, marketing & Sales R&D
  • Rental payments and real property
  • Royalties for intangible property, trade mark
  • Service fee: HQ allocations for example management, accounting, legal, tax insurance etc
  • Interest income and expense on intercompany loans and lending
  • Balance sheet- Current assets & liabilities
    • Intercompany accounts payables & receivables
    • Short term and long terms borrowings and loans or lending
  • Intangible assets
  • Use of brands
  • Patents,
  • trademarks
  • And good will

(f)   Long term borrowing

  • Intercompany borrowings
  • External borrowing using parent company as guarantors

Laws governing Transfer pricing in Uganda. (The Legal framework).

Section 90 of the income tax act and the arms lengths principle.

This section was enacted to ensure that any transaction between related party if done on an arm’s length basis. The same section empowers the commissioner to distribute, apportion, or allocate income, deduction or credits between or among related taxpayers to clearly reflect that very income. The commissioner may adjust the income arising in respect of any transfer or licensee of intangible property between associates so that it is commensurate with the incomes attribute to that property,

Article 9 of the OECD /UN model convention.

The arm’s length as a principle basis of the transfer pricing is found in paragraph 1 of Article 9 of the OECD /UN model convention, which form the basis of the bilateral tax treaties

These rules are intended to make sure that if a taxpayer receives a transfer pricing adjustment in one country and does not obtain a correlative relief in the other country; such taxpayers will suffer a double taxation on the amount of the adjustment.

Uganda has nine tax treaties, which include Denmark, India, Italy, Mauritius, Netherlands, Norway, South Africa, United Kingdom and Zambia. Uganda also negotiated two tax treaties between Belgium and tripartite tax treaty between Kenya and Tanzania

Critical Role of Advance Pricing Arrangement in (APAs) resolving Transfer Pricing Controversy

  • Advance Pricing Arrangement (APAS) is a formal arrangement on transfer prices made between a taxpayer and a tax authority.
  • Helps to resolve Transfer Pricing (TP) disputes by allowing the taxpayer to negotiate with tax authorities
  • Advance Pricing Arrangement (APAs) used to avoid Transfer Pricing (TP) disputes for some of the most complex issues (such as HTVI)
  • Provides certainty for a fixed period
  • Avoid Double Taxation Risk in Future
  • Costs involved and time value of money

Potential Triggers for a Transfer Pricing Audit

  • Consistently loss making or low profit entities
  • Significant advertising and marketing spending by manufacturing / distribution companies
  • Non-maintenance of Transfer Pricing documentation / price setting mechanism not documented
  • Business restructuring
  • Transactions with related parties in low tax jurisdictions
  • Not following the Global Transfer Pricing Policy
  • Having various Specific transactions like Management fees, financial transactions, Royalty payments, Cost sharing agreements among others.

Conclusion

Transfer pricing is only tamed through the Arm’s length Principles. Companies should be aware that the above factors in addition to High interest rates, levels of related party transactions, huge levels of related-party debt,  Insufficient and no appropriate attribution of profit to permanent establishments  and where  most of the Financials of legal entities not aligning with transfer pricing policies will always open transfer-pricing disputes with tax authorities and thus lead to transfer pricing audits  in our organizations and or material transfer pricing provisions.

The Writer Is a Tax Consultant

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