By Nour Ali, regional tax consultant at DNV, Dubai
On 16 September, Jordan provided further implementation instructions relating to the transfer pricing rules through executive instructions No. 3 of 2021. The executive instructions shall apply with immediate effect from the date of publishing in the official gazette.
The instructions include further guidance relating to the official transfer pricing rules adopted by Jordan on 7 June through regulation No. 40 of 2021. These new rules, which implement provisions of Article 77/A of the Jordanian Income Tax Law No. 34 of 2014, came into force on 7 July.
The executive instructions comprise additional details with respect to transfer pricing compliance requirements in Jordan, including the transfer pricing disclosure form, local file, master file, and country-by-country report. Also, they provide specific definitions and clarifications related to further miscellaneous issues, such as the concept of ultimate parent entity and constituent entities as well as transfer pricing methods and the transfer pricing policies affidavit.
Transfer pricing disclosure form
According to Article 3 of the executive instructions, taxpayers whose total value of related party transactions within the period of 12 consecutive months exceeds 500,000 Jordanian Dinar (approximately USD 705,000) are required to submit a transfer pricing disclosure form based on the template provided in the executive instructions by the date of submission of the tax return (i.e., four months from year-end).
Pursuant to Article 4 of the executive instructions, the transfer pricing disclosure form shall include information related to related party transactions (including names of related parties and their tax jurisdictions), information related to business restructuring activities undertaken within the multinational enterprise group or by the taxpayer, information related to the ultimate and beneficial owner (including name, country of residence, country of incorporation and ownership percentage) as well as total figures of revenues, expenses and profit/loss as disclosed in the tax return.
In addition to the above, the transfer pricing disclosure form must include information related to the nature of the related party transaction (e.g., purchase or sale of goods, fixed assets, or provision or receipt of services, agency services, lease agreements, financing of research and development, royalty and license agreement and financial transactions). Furthermore, the transfer pricing disclosure form shall also include information related to the transfer pricing method applied, acknowledgment of the taxpayer on whether transactions were conducted free of charge (i.e., non-cash consideration) during the tax period, as well as a declaration on whether the master file and local file are maintained.
Local file
According to Article 7 of the executive instructions, taxpayers are required to maintain and submit a local file within 12 months from financial year-end. The local file shall contain detailed information on the taxpayer, including a description of the management structure, organization chart, a description of the individuals to whom the taxpayer’s management reports, and the countries in which such individuals maintain their principal offices. It must also include a detailed description of the business and business strategy pursued by the taxpayer (including information relating to business restructurings or transfer of Intangibles property).
In addition to the above, the local file shall include detailed information on related party transactions, including a description of the related party transaction, the amount of intra-group payments and receipts for each category of related party transaction involving the taxpayer, the identity of the related party involved in a related party transaction, copies of all intercompany agreements concluded by the taxpayer, detailed comparability and functional analysis of the taxpayer and related parties, an indication of the most appropriate transfer pricing method and the reasons for selecting that method, a list and description of selected comparable uncontrolled transactions (internal or external), a description of any comparability adjustments performed if found and a summary of financial information used in applying the transfer pricing method.
Furthermore, the local file shall comprise a comprehensive industry analysis that includes information relating to major competitors, “strength, weakness, opportunity, and threat” analysis, power of suppliers, power of buyers, availability of substitutes, size and activities of the taxpayer, demand and supply trends, entry requirements, key international target markets, market share, as well as modes of delivery.
Finally, the local file shall have financial information including annual financial statements for the financial year of the taxpayer, information and allocation schedules showing how the financial data used in applying the transfer pricing method, and a summary of schedules of relevant financial data for comparables used in the analysis.
Master file
According to Article 8 of the executive instructions, taxpayers are required to maintain and submit a master file within 12 months from financial year-end. The master file shall contain detailed information on global operations and transfer pricing policies applied by the multinational enterprise group, including organizational structure (including legal and beneficial ownership structure) and geographical location of operating entities.
Furthermore, the master file shall include a description of the group’s business, including important drivers of business profit, a description of the supply chain for the group’s largest products and service offerings by turnover plus any other products and services amounting to more than 5% of group turnover, a list and brief description of important service as well as other arrangements between group members, main geographical markets for the group’s products and services, functional analysis describing the principal contributions to value creation by individual entities within the group as well as a description of important business restructuring transactions, acquisitions, and divestitures occurring during the financial year.
Moreover, the file should contain information on the group’s intangibles, including a list of intangibles and important agreements concluded between related parties, transfer pricing policies as well as the group policies in the management and transfer of such intangibles. Also, it must contain information on the group intercompany financial activities with a general description of how the group is financed, including material financing arrangements with independent lenders, identification of any members of the group that is considered a central financing function together with transfer pricing policies related to financing agreements between related parties.
Finally, the master file shall include information regarding the financial and tax positions like the annual consolidated financial statement for the financial year if prepared for financial reporting, regulatory, internal management, tax, or other purposes, as well as a list of existing advance pricing agreements.
Country-by-country report
Members of multinational enterprise groups whose consolidated revenues exceed the threshold of 600 million Jordanian Dinar (approximately USD 846 million) as per the previous tax period financial statement shall submit a country-by-country report within 12 months from the financial year-end.
The template of the country-by-country report matches the template prescribed by the Organization of Economic Cooperation and Development (OECD) pursuant to the recommendation set forth in Action 13 of the base erosion and profit shifting (BEPS) initiative. Table 1 sets out an overview of the allocation of income, taxes, and business activities by tax jurisdiction, table 2 lists all entities of the multinational enterprise group included in each aggregation per tax jurisdiction and table 3 provides additional information.
According to Article 6 of the executive instructions, Jordan-based members (constituent entities) of a multinational enterprise group headquartered outside of Jordan shall not be required to submit the country-by-country report in Jordan where the jurisdiction of tax residence of the surrogate filing entity requires the filing of the country-by-country report, has a valid and in force competent authority agreement with Jordan that allows for the automatic exchange of country-by-country reports, has not provided a notification to the Jordan tax authority of a systematic failure in the exchange of country-by-country reports, and the constituent entity in Jordan has provided a notification to the Jordan authorities with the identity of the surrogate filing entity (including the name, tax residence, and tax identification number).
Ultimate parent entity
Article 9 of the executive instructions deals with the definition of ultimate parent entity of a multinational enterprise group, defining it as the entity which owns directly or indirectly sufficient interest or shares in one or more entities of the group such that it is required to prepare consolidated financial statements under accounting principles generally applied in its country of tax residence, and there is no other entity of such group that owns directly or indirectly such interest.
Constituent entity
Article 9 of the executive instructions also defines constituent entity of a multinational enterprise group as any independent business unit of a multinational enterprise group that is included in the consolidated financial statements of the group for financial reporting purposes or would be so included if equity interests in such business unit of the multinational enterprise group were traded on a public securities exchange. Constituent entity also includes any such business unit that is excluded from the multinational enterprise group’s consolidated financial statements solely on materiality grounds as well as any permanent establishment of any independent business unit of the multinational enterprise group as previously specified, provided the business unit prepares or should prepare a separate financial statement of such permanent establishment for financial reporting, regulatory reporting, tax reporting, or internal management control purposes.
Transfer pricing methods
Article 10 of the executive instructions requires taxpayers to apply any of the transfer pricing methods according to the international accounting standards, provided that the indicated terms and conditions are adhered to. The applicable transfer pricing methods are comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method, and transactional profit split method.
In addition, Article 10 also provides certain obligations for taxpayers, such as the determination of reasons behind the application of the transfer pricing methods as well as hypotheses followed while applying the transfer pricing methods. Also, upon applying the transfer pricing methods, taxpayers are obliged to follow the same transfer pricing method for succeeding years.
Transfer pricing policies affidavit
Article 10 of the executive instructions requires taxpayers to provide a transfer pricing policies affidavit issued by a chartered accountant confirming the taxpayers’ compliance and adherence with group transfer pricing policies and its impact on the financial statements.
Concluding thoughts
Jordan’s transfer pricing rules and executive instructions have introduced transfer pricing requirements for taxpayers to comply with the arm’s length principle and additional compliance obligations.
Taxpayers in Jordan must carefully consider the applicability of the recent transfer pricing compliance requirement and start preparing for the full suite of transfer pricing compliance obligations (including the transfer pricing disclosure form, transfer pricing policies affidavit, local file, master file as well as country-by-country reporting) to ensure full compliance with the new rules. In addition, taxpayers must undertake remedial arrangements to align with the arm’s length principle for subsequent years.
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