Transfer Pricing Regulations – Opportunities or Threats!
Transfer Pricing Regulations introduced late last year (via the Income Tax (Transfer Pricing Documentation) Regulations, 2015 and Income Tax (Advance Pricing Agreements) Regulations, 2015) seem to be getting a lot of negative press and some amount of resistance from the businesses that will likely be affected. Justifiably, there is a lot of focus on the increased administrative burdens and resources that will be required to satisfy the new requirements for Advance Pricing Studies, the negotiation and preparation of Advance Pricing Agreements, as well as, the need to complete annual declarations regarding Related Party Transactions. The increased cost of compliance could no doubt be considered a threat to business success. However, I believe that there may be a silver lining in this cloud.
The process of creating an Advance Pricing Study and deliberate decision making in relation to Related Party Transactions will likely lead to increased efficiencies in the allocation of asset valuations and costing throughout the business of a group of companies. Traditionally, the allocation of asset valuations and costing in relation to Intellectual Property and other intangibles used in the business; and management, technical, administrative and other business support services are usually “gray” areas and in many instances are not supported by objective information.
The Transfer Pricing Regulations present an opportunity for businesses to establish a valuation for their Intellectual Property assets. This can prove very valuable in the sale of a business or a part of it, or in the sale or licensing of the Intellectual Property (for example, in establishing a franchise), or in using the Intellectual Property as security for a loan, or in claiming a capital allowance for Intellectual Property under the Income Tax Act. In order for Intellectual Property to be recognized as an asset and be included in the financial statements, the process of establishing its value must meet certain criteria. Having arms-length commercial agreements, including related party agreements, which isolate dealings related to Intellectual Property will provide evidence of the value of the asset and will also provide a basis for the asset to be re-valued at appropriate times. To maximize the benefits of this opportunity, it is important to have appropriate Intellectual Property Licensing Agreements which reflect the usual arms-length provisions, are enforceable in a court of law, and in some cases containing rights which are transferable to third parties. It is also important to ensure that Intellectual Property rights are properly registered, documented and protected.
The Transfer Pricing Regulations also present an opportunity for local businesses to scrutinize their corporate structure and consider whether it is simple, efficient and continue to meet their needs. The regulatory framework for doing business is clearly changing. One theme that is consistent among modern regulations affecting various aspects of the business environment is increased transparency. I believe this means that simplicity is better for business in many instances. How many local group companies are taking advantage of the recently implemented 0% tax on dividends received by one local company from another? The 2013 amendment to the Income Tax Act introduced a nil rate of tax on dividends received by a company resident in Jamaica from another company resident in the island in which the receiving company holds at least 25% voting rights in the paying company. This tax break benefits group and affiliate companies, where the local parent company or investing company receives dividends from its local subsidiary or affiliate, respectively. Up to recently, the most tax efficient corporate structures would usually include an international business company in a CARICOM jurisdiction with an election to pay 1% tax on income in that jurisdiction. There are now obvious tax benefits of establishing a local group structure which is simpler, probably more transparent, cheaper in terms of maintenance cost, and may even lead to less scrutiny by the tax authorities to see whether there are transfer pricing violations.
As group companies are incentivized or compelled (depending on your perspective) to deliberately consider the costs associated with shared management, administrative, technical and business support services, etc. it is inevitable that some businesses will learn more about themselves than they knew before. Armed with new information, management will likely innovate, improve and operate more efficiently.
At MF&G, our cadre of commercial attorneys is equipped to, among other things: assist with negotiating, drafting and reviewing Related Party Agreements, providing services that will assist in building and maintaining an Intellectual Property portfolio, advising on the implications of existing and new corporate structures, and handling documentation for transactions (such as re-organisation of operations) that may arise from management decisions.
Andrea Scarlett-Lozer is a Partner at Myers, Fletcher & Gordon, Attorneys-at-law. She specializes in Commercial Transactions and Advisory, as well as, Intellectual Property law. Andrea is the Head of the firm’s Intellectual Property Department. She may be contacted via firstname.lastname@example.org or www.myersfletcher.com.
This article originally appeared in The Jamaica Observer on April 20, 2016.