The transfer pricing rules were updated by the Finance Law 2017. Under the law, amounts paid by a resident company to a non-resident company or a group of companies i.e., cross border transactions, are considered as indirect transfers of profits, if the resident company is de facto or de jure controlled by the non-resident company or group of companies and if the tax authorities establish that the payments are unreasonable. The following transactions can be described as unreasonable:
- Overcharges for purchases;
- Payments of excessive royalties;
- Loans that are interest-free or have unjustifiable rates;
- Discounts of debts; and
- Advantages granted out of proportion with the benefit provided by a service provider.
Remunerations for the use of patents, trademarks, drawings and models, interest on moneys lent, or fees for services paid by a resident company to a non-resident company located in a low or no-tax country, are considered indirect transfers of benefits regardless of whether or not the payer and recipient are related, unless the payer proves that the remunerations correspond to genuine operations and are reasonable.
Amounts deemed to be excessive are added back to taxable income and are subject to corporate income tax. Moreover, disallowed amounts are requalified as constructive distributions and are subject to withholding tax.
The transfer pricing rules do not apply to domestic transactions.
The law stipulates that the arm’s length price can be determined by reference to any of the five OECD traditional and transactional methods which are as follows:
- Comparable uncontrolled price (CUP) method;
- Cost-plus method;
- Resale price method;
- Profit split method; and
- Transactional net margin method.
The law does not formally establish a hierarchy of methods, and the taxpayer is theoretically free to elect any method provided he can justify its coherence with the functions performed and risks assumed, and provided the price so determined is at arm’s length.