December 15, 2015 5:00 AM
The Arm’s Length Principle (ALP), which is the foundation of internationally accepted transfer pricing rules, was introduced in the Income Tax Act in 1970 as section 17. The effect of the 2015 Income Tax amendments were to provide a degree of clarity and certainty to taxpayers on the acceptable methods of determining the transfer price based on the Arm’s Length Principle, provide greater details on the documentation requirements, and align our transfer pricing rules with international best practice. The 2015 amendments to the Income Tax Act will also remove any subjectivity in the administration of transfer pricing rules.
Taxpayers have always had the obligation to account for connected party transactions on an arm’s length basis. However the initial burden was placed on the Commissioner General to determine whether or not the transactions were in accordance with the Arm’s Length Principle. The 2015 amendments to the Income Tax Act now provides for the taxpayer in declaring his business activities for the year to inform the Commissioner General of the bases used to arrive at the declared transfer prices. This is in keeping with the self-assessment system where the taxpayer would be privy to all the terms and conditions governing their business transactions.
Cabinet had approved the introduction of Transfer Pricing Rules in 2011. The Bill was subsequently tabled by the Honourable Minister of Finance on the 5th of May 2015, and was debated and passed in November, incorporating suggested amendments by external stakeholders.
Effective year of assessment 2015, all taxpayers engaging in connected party transactions will be required to complete a “Related Party Transaction Schedule” (Schedule 8) to be attached to the Income Tax Return and submitted by March 15, 2016. Only large taxpayers whose gross annual revenue equals or exceeds $500,000,000 are required to maintain transfer pricing documentation at the time of their transactions, to determine whether the transfer price used is in accordance with the Arm’s Length Principle. Transfer pricing rules are inherently complex, large taxpayers with turnover of $500,000,000 or more with connected party transactions are therefore encouraged to engage the Technical Specialist Unit and the Large Taxpayer Office in determining the most appropriate methodology to be applied in a given transaction.
No penalties will be applied for year of assessment 2015, for failure to report transactions with related parties, or for the failure to provide a complete return or schedule. However penalties will be imposed for year of assessment 2016 and beyond.
Taxpayers who are engaged in highly complex transactions or specialized industries may approach the Commissioner General of Tax Administration Jamaica (TAJ) with a view to negotiate an Advance Pricing Agreement. The advantage of the Advanced Pricing Agreement is that taxpayers will have certainty as to the acceptable economic terms and conditions applicable to each connected party transaction before the transaction is carried out. The negotiating parties are to determine the commencement of the agreement and which will not be retroactive.
Tax Administration Jamaica and Revenue Appeals Division staff has undergone extensive training in Transfer Pricing Rules, this is expected to continue in January 2016 along with the sensitization of external stakeholders. Technical assistance is being provided by the Organization for Economic Cooperation and Development (OECD).