What is transfer pricing?

Rwanda Revenue Authority head office. On the issue of taxation, it is important for the country to implement a transfer pricing policy as a matter of priority. / Sam Ngendahimana.

On September 25, a Cabinet meeting chaired by President Paul Kagame, approved a ministerial order that among other things establishes general rules on transfer pricing.

The move, experts believe, comes at a time the country continues to attract more foreign direct investments and multinational firms.

 

Like elsewhere in the world, the local economy has seen a wave on new developments and trends in areas like taxation and licensing regime.

 

Specifically on the issue of taxation, various reports indicate that it is important for the country to implement a transfer pricing policy as a matter of priority.

 

In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control.

Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intra group transfer prices that differ from what would have been charged by unrelated enterprises.  

So what is transfer pricing?

In the next paragraphs, The New Times breaks down this development while highlighting its importance.

When goods or services are provided by a multinational organisation to one of its subsidiary firms, the fee levied is the transfer price.

Transfer pricing can also be described as the price paid for the goods transferred from two economic units situated in two different countries but bear the same control or subsidiary of the same parent company.

The issue arises when two or more business entities situated in two different jurisdictional areas which are related to each other in a way and they transfer some goods at a price which is affordably low.

A situation in which the price of such goods would have been more; if the entities were not associated with each other. Such an issue further gives rise to a tax advantage.

Tax authorities come in to ensure that the entities involved operate at an arms’ length basis, or what could be called the market price basis. In this case, a structured tax base is applied by the involved parties.

According to PwC, a professional services network, the Rwandan transfer pricing legislation and the prescribed transfer pricing methods are generally consistent with Organization for Economic Co-operation and Development (OECD) guidelines.

The move according to the report, enables companies to engage in cross-border trade more efficiently.

The law requires that transactions between related parties be carried out under the arm's-length principle.

However, the arm's-length principle requires that transfer prices charged between related parties are equivalent to those that would be charged between independent parties in the same circumstances.

PwC notes that Rwanda operates a self-assessment system. Under this, taxpayers are obligated to self-assess their compliance to the tax legislation, which includes transfer pricing policy.

According to the new income tax law, related persons involved in controlled transactions are required to have documents justifying that their prices are applied according to the arm’s-length principle.

This means that companies are now expected to have transfer pricing policies and documentation.

eashimwe@newtimesrwanda.com

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