By Nour Ali, regional tax consultant at DNV, Dubai
On 7 June, Jordan adopted official transfer pricing rules for the first time through regulation No. 40 of 2021. The new rules implement provisions of Article 77/A of the Jordanian Income Tax Law No. 34 of 2014, which requires the terms and conditions of any transaction, agreement, or arrangement between related parties to be similar to the terms and conditions that would have been agreed between independent parties.
The rules come into force 30 days after their date of publication in the Official Gazette (i.e., starting from 7 July 2021).
Any person who violates the rules shall be penalized according to the Income Tax Law No. 34 of 2014 (i.e., JOD 1,000 – approximately USD 1,410 – applies for late tax filing by public and private companies).
Scope of the rules
The rules apply to any person (i.e., a natural or a legal person, including a group of persons established by contractual arrangement and permanent establishments) undertaking related party transactions.
For parties to be considered related, they must have a relation either via ownership/shareholding or via effective control.
“Related parties via ownership/shareholding” occurs when a natural person (or any related persons up to the second degree) is related to a legal person either through (in)direct control of 50% or more of voting rights, income, or capital or through participation in the management, control or capital of such legal person. Furthermore, two or more legal persons are related if a legal person (or related person) collectively or separately (in)directly controls 50% or more of the voting rights, income, or capital or is able to participate in the management, control or capital of the legal person. Two or more legal persons are also related if they are under common control.
“Related parties via effective control” occurs when any person (or group of persons) has the ability to exercise effective influence over the decisions and actions of other persons either via funding/financing or business or governance.
“Effective control via funding/financing” occurs when a person (or group of related persons) provides loans that constitute 50% or more of the total amounts of other persons’ loans and capital (except undistributed profits) per their financial statements. Effective control via funding/financing also occurs when a person issues guarantees covering 33% or more of the total value of other persons’ loans per their financial statements. Effective control via funding/financing explicitly does not apply to banks and financial institutions.
“Effective control via business” occurs when 50% or more of a person’s (or a group of related persons’) business activities depend on transactions with the other person, or when one person has the ability to obtain 50% or more of the profits of the other person, or if a person (or group of related persons) are commercial agents or suppliers to the other person.
“Effective control via governance” occurs when any person has the ability to conclude agreements to provide management functions or effectively perform management functions. Effective control via governance also occurs when a person has the ability to control the composition of 50% or more of the board of directors or has the right to appoint/terminate their representation. Furthermore, such control exists if a person (or group of related persons) is related to the person who owns 50% or more of a legal person participating in its management.
Transfer pricing documentation requirements
The rules introduce four-tiered transfer pricing documentation requirements, which include the transfer pricing disclosure form, local file, master file and country-by-country report/notification.
The purpose of the transfer pricing disclosure form is to reveal information surrounding the related party transactions undertaken in a particular year. The deadline to submit the disclosure form is the same submission day of the tax return (i.e., four months from the end of the year).
Specific information is required to prepare the transfer pricing disclosure form. This includes certain information related to transactions, information regarding certain business restructurings, and information about the actual and the beneficial owners. Other required information includes financial figures, the nature of the relation between related parties, details of any free of charge transactions (or transactions with non-cash consideration) and a declaration regarding the maintenance of other transfer pricing documentation (e.g., local file and master file).
The master file provides information at the group level on the business and the applicable transfer pricing policy. Filing of the master file is required by persons whose aggregate arm’s length value of related party transactions exceed the threshold of JOD 500,000 (approximately USD 705,000) during a period of 12 consecutive months. The deadline to submit the master file is within 30 days upon request from the tax authority.
The local file provides information at the local entity level on related party transactions. Filing of the local file is required by persons whose aggregate arm’s length value of related party transactions exceeds the threshold of JOD 500,000 (approximately USD 705,000) during a period of 12 consecutive months. The deadline to submit the local file is within 30 days upon request from the tax authority.
The tax authority may rely on the information included in the local file and the master file in assessing the transfer pricing risks, as well as the tax audit procedures.
The country-by-country report includes information relating to the multinational enterprise global activities by jurisdiction. Persons who are members of a multinational enterprise whose total consolidated revenues exceeds JOD 600 million (approximately USD 846 million) according to their financial statements for the preceding tax period are required to submit a country-by-country report.
All persons who are members of a multinational enterprise (including the parent entity) must provide a country-by-country notification to indicate the identity of the parent entity and the tax jurisdiction in which it submits the country-by-country report.
The deadline to submit the country-by-country report is within 12 months from the end of the reporting year. Meanwhile, the deadline to provide the country-by-country notification is the same submission day as the tax return (i.e., four months from the end of the year).
Under the country-by-country reporting scheme, only Jordan-headquartered groups are required to submit the country-by-country report. However, under the secondary filing requirement, a Jordan-resident entity of a group headquartered outside of Jordan may also be required to submit the country-by-country report in certain cases.
The arm’s length principle
The transfer pricing rules require related party transactions to be conducted in accordance with the arm’s length principle (i.e., under terms and conditions similar to those that could have been agreed upon by independent parties). If terms and conditions of related party transactions are not aligned with the arm’s length principle, then the taxpayer shall adjust the income in the tax return. If the taxpayer fails to do so, the tax authority can direct the taxpayer to adjust income or disregard the related party transactions.
The transfer pricing rules shed light on the arm’s length range and describe it as a set of financial figures and indicators based on the arm’s length principle (including prices, margins and profit shares) resulting from the application of transfer prices and according to the most comparable economic transactions with independent transactions based on the comparability analysis.
Comparability analysis
The transfer pricing rules stipulate that the related party transaction can be compared to transactions between independent parties to determine the arm’s length price if no fundamental differences exist between the transactions or an appropriate adjustment can be made for any differences.
The transfer pricing rules also state that to determine whether two or more transactions are similar and comparable, it is essential to consider the nature of the person’s primary activity and transactions, the contractual terms of transactions, the economic circumstances surrounding the conduct of the transaction, business strategies followed by the persons and functional analysis related to the transactions (i.e., functions performed, assets used and risks assumed).
Taxpayers have the right to conduct a comparability analysis with any comparable transactions as long as the comparable transaction can be accessed and verified by the tax authority. Furthermore, non-local comparable transactions can be acceptable if local comparable transactions are unavailable and the taxpayer is able to consider the impact of differences in economic, geographical or any other factors.
Transfer pricing methods
The transfer pricing rules require that considerations/returns in accordance with the arm’s length principle for a related party transaction shall be determined by applying the method which results in the most accurate and appropriate arm’s length price in light of the facts and circumstances of the transaction.
Hence, the appropriate transfer pricing methods are comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method and the profit split method. None of the methods has any preference in application, and taxpayers may also apply any other method after proving that the methods previously mentioned cannot be applied.
When applying the transfer pricing method, special consideration shall be given to the strength and weakness of the applied methods and the appropriateness of the applied method with the nature of the related party transaction. The appropriateness of the method is determined by analyzing the functional profile of each person involved in the transaction, the availability of reliable information needed to apply the most appropriate transfer pricing method and the extent of similarity between related party and independent parties for comparability purposes.
Aggregation of transactions
The transfer pricing rules allow for the aggregation of transactions (i.e., two or more related party transactions under similar facts and circumstances) for the purpose of the comparability analysis and the application of the transfer pricing method if such transactions are closely interconnected and cannot be analyzed on a separate basis.
Powers of the tax authority
The tax authority has the power to request any additional information about the related parties or any other parties participating in transactions between related parties.
The tax authority has the power to adjust the transfer price if it does not fall within the arm’s length range (i.e., the interquartile range), provided that the transfer price is adjusted in such a way that it reflects the characteristics and circumstances of the case as accurately as possible and so that it falls within the arm’s length range.
The tax authority has the right to review the appropriateness of conducting a corresponding adjustment (in cases where a primary adjustment occurred with respect to income of a non-resident related party situated in a jurisdiction which has a double tax avoidance agreement with Jordan). The process of conducting a corresponding adjustment shall be initiated by the taxpayer through an application (including all relevant necessary supporting documents) to the tax authority.
Concluding thoughts
The tax authority will publish detailed guidelines with further implementing information with respect to the form, content and administrative procedures relating to the maintenance of the four-tiered transfer pricing documentation, the application of the arm’s length range, the application of the transfer pricing methods, and the application of the economic analysis, as well as related transfer pricing concepts.
Taxpayers required to prepare the four-tiered transfer pricing documentation must maintain at all times the relevant transfer pricing documentation.
Taxpayers conducting related party transactions involving Jordan-based entities should assess their business operations and their current transfer pricing policies to identify any potential transfer pricing risks for open and future tax years.
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