Tax Newsletter March 2013

Transfer Pricing regulations take off in Ghana How prepared are you?
Background
In exercise of the powers conferred on him by the Section 114 (1)(d) of the Internal Revenue Act ("the Act"), the Minister responsible for Finance, in September 2012, released to the public, a Gazette on Transfer Pricing Regulations, L.I. 2188, 2012 ('the Regulations'). The Regulations are expected to address the shortcomings of the provisions in the Act on related party transactions. independent/unrelated entities under similar circumstances. The objectives of the Regulations include preventing tax base erosion and shifting of profits, ensuring certainty on the treatment of related party transactions, reducing the risk of economic double taxation and to define prescriptive measures for dealing with related party transactions, amongst others.

The Regulations require taxpayers to demonstrate that all transactions between them and their related entities are carried out at arm's length
Related party transactions are at particular prices, thereby giving rise to the concept of transfer pricing (TP). TP describes the process of setting the prices at which related entities transfer physical goods, intangible property and services among themselves. Although it has been established that there are various rationale for TP and that the concept is right; but it could be subject to abuse which therefore raises major concerns. The Regulations require taxpayers to demonstrate that all transactions between them and their related entities are carried out at arm's length i.e. the profits earned by each enterprise in a transaction among related enterprises are consistent with those which would have been earned by

Highlights of the Transfer Pricing Regulations, L.I. 2188, 2012

Effective date of regulations Scope of regulations - applicable transactions Acceptable transfer pricing methods Documentation requirements Corresponding adjustments Offences, penalties and transfer pricing audit

Effective date of the regulations

The Regulations have an effective date of 27 July 2012 and taxpayers are required to commence compliance with the provisions from this date. Therefore, any transaction entered into by connected persons from 27 July 2012 must be conducted in a manner that is consistent with the arm's length principle as contained in the Regulations. This means that taxpayers must demonstrate compliance with the

Regulations when filing the tax returns due after the effective date.

Scope of the regulations applicable transactions

As stated above, there are a plethora of intra-group transactions which could give rise to TP abuse. Therefore the Regulations cover all forms of transactions between connected taxable persons including: the purchase and sale of goods the purchase, sale and lease or use of tangible assets the purchase, sale and lease or use of intangible assets the provision of management services, technical services and other intra-group services the provision of finance and other financial arrangements rent and hire charges The list above is however not exhaustive as the provisions are flexible to cover other forms of transactions not envisaged provided they affect the profit or loss of the taxpayer.

where it is impossible to obtain third party pricing information on a transaction which is sufficiently similar to the controlled transaction, without differences which have a material effect on the price Resale price method (RPM) - this is based on a price at which a product, which has been purchased from a related party, is resold to an independent party. The resale price is then discounted by an appropriate gross margin to cover the reseller's selling and other operating costs, and to get the arms' length price. Here, the risks/functions/assets analysis is important. It is suitable where there is no material difference affecting the resale price margin in the open market which cannot be adjusted for. However, it is unreliable where there are no functionally comparable transactions Cost plus method (CPM) - this method requires an appropriate profit mark-up to be added to costs incurred by the supplier in arriving at an arms' length price, relative to the risks/functions and assets assumed or employed. It is suitable in comparable transactions and comparable cost bases but unreliable where it offers a strong incentive to inflate an entity's cost base Transactional profit split method (TPSM) - this splits the total profits arising from controlled transactions between related entities in a manner that may be expected between independent third parties, taking their functional analysis into consideration. It is suitable where transactions are too interrelated to be evaluated separately. It is however unreliable where there is the possibility of inconsistency in revenue and /or cost reporting practises by the entities Transactional net margin method (TNMM) - this considers operating profit as a percentage of a predetermined base e.g. sales, costs or assets, in a controlled transaction relative to the same basis achieved in a comparable uncontrolled transaction. This is suitable where there is lack of adequate and / or reliable data for application of other methods. However it does not take into account factors peculiar to each transaction which do not necessarily impact price or profit level, thereby reducing the reliance that
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Acceptable TP methods
The Regulations recommend that parties apply the most appropriate TP method to relevant transactions. Determining the most appropriate TP method in any given case will depend on the facts and circumstances of the case, as well as the extent and reliability of data on which to base a comparability analysis. The Regulations recognise the TP methodologies referenced in the provisions of the OECD guidelines on transfer pricing and consequently, the CommissionerGeneral for the purposes of the Regulations permits the use of one of the following methods in determining and testing the arm's length nature of transactions between related parties: Comparable uncontrolled price (CUP) method - this method compares inter-group prices with prices of similar transactions between unrelated third parties. It is suitable where there are no material differences between transactions being compared. It is however unsuitable and unreliable

can be placed on the results in applying TNMM The Commissioner-General may apply a different method or permit a taxable person in writing to apply a different method other than those listed above where he is of the opinion that the chosen method will give rise to results that are more consistent with comparable uncontrolled transactions in comparable circumstances. Also, where the application of the most appropriate method by a taxable person identifies a range of relevant indicators (i.e. interquartile range) which are of equal reliability, then the terms of the tested controlled transactions will be deemed to be at arm's length if the relevant indicators fall within that range.

Brief description of the tax payer's organizational structure - showing all related entities (including all foreign affiliates) Description of nature of business in which the relevant transaction took place, the property used and the extent of any other commercial or financial relationship Details of all related party transactions entered into - these include any contracts or agreements that specify the terms of the transactions, segmented financial accounts with respect to the transactions Strategies and policies applied and information analysis relied on by the person to determine and ensure that the transaction is at arm's length Identity of entity and its relationship with other entities in the controlled relationship Details of the principal business activities of each entity in the group and the business relationship amongst the associated entities, including services provided, goods sold, intangibles used The consolidated financial statements of the group and financial statements of each of the associated entities Information of each associated entity's line of business, industry dynamics, market, regulatory and economic conditions in which the entity operates Information on the functions and risks of the associated entity and assets employed by the entity Other information that the Commissioner-General considers relevant The abovementioned information and documents are expected to be in place prior to the due date for filling the relevant company's annual income tax returns or on demand from the Commissioner-General. The documents must be made available within the time specified by the Commissioner-General. Also, every company shall submit on request by the Commissioner-General in the course of the tax year, contemporaneous documentation, regarding transactions engaged in by the company in that tax year.

Documentation requirements
Entities who have engaged in related party transactions are required to demonstrate compliance with the arm's length principle by maintaining detailed contemporaneous documentation of the transactions engaged in by the entities for each tax year. The Regulations and the draft Practice Note on Transfer Pricing recently released by Ghana Revenue Authority (GRA) in January 2013 provide general guidelines on documentation requirement. The draft Practice Note is expected to be released, by GRA, in its final form to the general public before 30th April 2013. The Regulations impose, on relevant companies the filing of income tax returns in accordance with section 72 of the Act. The Commissioner-General shall prescribe the form for the purposes of such income tax returns. The form shall include a requirement for all relevant companies to provide the following information: The method(s) used to establish the transfer prices adopted - this includes any adjustments made, assumptions made, justification for application, comparables chosen and screening criteria for choosing comparables and comparability analysis of the controlled transactions and comparables Calculations made and price adjustment factors considered necessary for the purpose of achieving comparability Any arm's length range determined and any reasons in support of that determination and the use of that range

Corresponding adjustments
Though, the Regulations do not have specific provisions for corresponding adjustments, the draft Practice Note on Transfer Pricing contains guidance on claim of Double Tax Relief for tax payers who, due to an adjustment carried out by the revenue authority of another country with which Ghana has a Double Tax Treaty, suffer foreign income tax on income or profit which is ordinarily taxable in Ghana. GRA is allowed to make a corresponding adjustment on that profit or income to avoid double taxation or to eliminate double taxation provided the adjusted profits correctly reflect what the profits would have been on an arm's length basis.

Conclusion
The Regulations impose additional compliance obligations on companies and it is therefore expedient for them to proactively consider taking measures that will address the likely impact on their activities. Such measures may include: Reviewing their business processes to determine and identify TP transactions Developing an appropriate TP policy which shall take into consideration: the company's structure with respect to allocation of risks, functions and income amongst the relevant parties comparable TP transactions that may serve as industry benchmarks provisions of the applicable local laws and double tax agreements (such as requirements for documentation etc.)

Offences, penalties & transfer pricing audit

A taxable person who contravenes any of the provisions of the Regulations with respect to fraud, failure to file returns, under-payment and other offences will be liable to the existing penalties, as set out in the Act.

Restructuring the identified TP transactions to ensure compliance with the TP policy, reflecting Arms Length Principle Implementing the appropriate TP policies and setting up monitoring procedures to ensure full compliance

The Deloitte Transfer Pricing team brings a huge depth of experience in helping companies deal with the complexities of transfer pricing
The Regulations seek to empower the Commissioner-General to examine the amounts charged or credited to accounts with respect to controlled transactions to determine whether the amounts are at arm's length. The Commissioner-General may adjust the taxable profit of a taxable person by using appropriate TP method where he is of the opinion that the amount charged or credited to the accounts in respect of a controlled transaction is not within the arm's length range. A taxable person that receives a notice of adjustments to its related party transactions is required to pay tax on such adjustments. The Commissioner-General is also empowered to conduct an audit of a taxable person even when the person has not filed tax returns for the relevant tax year.

The Deloitte difference

The Deloitte Transfer Pricing team brings a huge depth of experience in helping companies deal with the complexities of transfer pricing. We are recognized as one of the global leading transfer pricing services organizations, integrating both the international tax and economic aspects of transfer pricing. The ability to team with financial services specialists (and other specialists) within the Deloitte network is one of our strong points. In serving our clients, we draw upon: A global transfer pricing practice serving more than half of the Fortune 100 and Fortune Global 100 companies. We have access to transfer pricing specialists, including lawyers, economists and other tax professionals, in DTTL member firms and their affiliates in various countries The DTTL member firms, collectively, have been ranked Number One in Euromoney's list of "World's Leading Transfer Pricing Advisers" in 2002, 2004, 2006, 2008 and 2011. In fact, the 2011 Guide recognized the DTTL member firms, for the sixth consecutive time, as having the greatest number of
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leading transfer pricing advisers, with 96 featured advisers across 40 jurisdictions. Highly experienced transfer pricing specialists. Our professionals

understand both stated documentation requirements and the types of issues that authorities are likely to focus on in their examinations

Contact us:

Andrew Opuni-Ampong Managing Partner +233 (0) 302 775 355 aampong@deloitte.com

Evans Tomety Tax Leader, Deloitte West & Central Africa +234 (1) 271 7838 etomety@deloitte.com

Michael Asiedu Buabeng Manager, Tax & Regulatory Services +233 (0) 302 775 355 mbuabeng@deloitte.com

Yomi Olugbenro Partner, Tax & Regulatory Services +233 (0) 548 528 059 yolugbenro@deloitte.com

Deloitte provides audit, tax, consulting and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte has in the region of 200,000 professionals committed to becoming the standard of excellence. Deloitte's professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloitte's professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. 2013 Deloitte & Touche. Member of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company Limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.