For some time now the IRD has been toiling away to bring our transfer pricing legislation in line with the OECD’s Base Erosion and Profit Shifting (BEPs) actions. While just the mere mention of BEPs can put the staunchest tax accountant into a deep sleep, there are nonetheless a couple of points that we need to sit up and take note of.
The first being that the onus of proof is no longer on Inland Revenue, rather it has been firmly shifted to the taxpayer. In other words, the onus of proof is now on the taxpayer for providing evidence (eg, adequate documentation) that their transfer pricing positions have been determined using arm’s length conditions.
Since 1995 the onus of proof for transfer pricing has rested with the Inland Revenue, which is in contrast to our self-assessment tax system. Practically it does make sense for the taxpayer to bear this burden as it is the taxpayer who holds the support for the specific facts and knowledge needed to undertake the comparisons with similar arm’s length transactions to arrive at a correct price.
What this does mean for a business who transacts with offshore related parties is that it is now more important than ever to have adequate transfer pricing documentation in place to support your cross-border related party transactions (transfer prices). Not having adequate documentation in place which can be provided to Inland Revenue when they ask will make it very difficult to rebut an alternative transfer price proposed by Inland Revenue.
The other point to be aware of is that the Inland Revenue is able to extend the current four-year time bar to a seven-year time bar for transfer pricing issues. This means, if Inland Revenue notifies you of an audit or investigation within four-years of the tax return being filed, they can now take up to seven years to finalise their transfer pricing adjustment.