JAMAICA - Transfer pricing – The Jamaican perspective
The Transfer Pricing (TP) landscape in Jamaica has changed dramatically since 2016 with the advent of TP legislation.
Previously, when considering transactions between connected parties and computing taxable profits, if the Commissioner of Tax Administration Jamaica (TAJ) suspected that the consideration was at an over or undervalue, affecting tax liabilities, he could substitute the consideration for an arm’s-length price, i.e. as would be agreed by independent parties. With this cryptic directive, in the search for an arm’s-length price, the taxpayer and the TAJ were left to agree this between themselves.
The TP legislation
In common with most territories of the former British Empire and members of the Commonwealth, Jamaica specifically incorporated into its laws the TP guidelines set by the Organisation for Economic Co-operation and Development (OECD). Enshrined in the guidelines is the principle that international transactions between connected entities should be at arm’s-length. This means that when signing a tax return, taxpayers will be confirming that their related party transactions are carried out at arm’s-length. If they do not consider this to be the case, appropriate adjustments should be made in the tax return. This means that the burden of proof to demonstrate arm’s length pricing has been effectively shifted from the Commissioner to the taxpayer.
Effects of the changes
As the changes slowly sink in, new record keeping requirements were introduced for certain corporations to include documenting the method(s) used to determine the TP and to produce a study of comparables and functional analyses that were undertaken.
Prior to this, the TAJ had been taking advantage of legislation introduced four years ago to use third-party information, through the tool of audits and inspections, to identify non-compliant taxpayers. Draconian penalties are also imposed if returns filed are not in accordance with arm’s length principles or it can be shown that the return was submitted fraudulently or negligently by the taxpayer, with a resulting loss of tax.
For large taxpayers less emphasis will be placed on time-consuming initial information gathering and lengthy record requests; instead, the Revenue Authorities have been requesting TP documentation and are able to ascertain quickly whether or not a company has complied with the new provisions.
In the meantime, Transfer Pricing Agreement Regulations came into effect in September 2018, shortly after the TAJ and the Institute of Chartered Accountants of Jamaica signed a Memorandum of Understanding (MoU) aimed at strengthening their longstanding collaboration on matters related to the country’s tax system to include TP matters.
The tax reform context
All of these developments are a part of Jamaica’s on-going tax reform program which started in 2013. Tax reform has seen the reduction in corporate tax rates, the replacement of a number of industry-specific incentives with all-industry incentives. These include a tax credit on payroll deductions, excluding certain financial institutions, and accelerated tax depreciation on assets. The biggest benefit for individuals was the increase in the tax-free threshold in 2017/2018 of over 200%.