Profit tax compliance and transfer pricing

May 17, 2023

As of January 1, 2020, there have been significant changes in the profit tax legislation due to (amongst others) the abolishment of the world profit principle and the introduction of the territoriality principle. In short, it entails that, under certain conditions, the foreign profit arising from material business activities can be excluded from the levy of profit tax. Also, passive income is in principle considered to be profit derived from domestic business activities.

In order to exclude the abovementioned extraterritorial profits (and losses) from the profit tax basis, the company must make a cost allocation in its administration. We do give in consideration to preparing a provisional profit tax calculation in advance so that the possible tax expense can be included in the financial statements and/or can be considered.

Following the above, we do also suggest taking a further look at the territorial tax basis to see if there is a possibility of an alternative approach for the allocation of income, but also the expenses, that can be beneficial for the Company.

Related to the above suggestion regarding the territorial tax basis there is also the transfer pricing item. Besides that, a transfer pricing analysis can be beneficial for the company and its subsidiaries and affiliates, there are also requirements and regulations regarding (documentation of) intercompany transactions. See for example article 43, paragraph 11 of the General National Taxes Ordinance.

To start we suggest taking a further look at the intercompany agreements available to determine a transfer pricing documentation compliance strategy in the best way possible. At first glance, the intercompany agreements appear to be a mere formality. However, these agreements are of great importance as the intercompany agreements are necessary to implement the transfer pricing policy and formalize it in a legal contract but also when a tax authority wants to assess the validity of the underlying transactions, an intercompany agreement is crucial, and the starting point of a transfer pricing analysis. Once we have reviewed the intercompany agreements, the next step would be a transfer pricing benchmark analysis which is used to set and test the transfer pricing policy. Following this, the arm’s length range for intercompany services can be determined.

Please let us know if we can be of service in the preparation of the above-mentioned calculations and/or transfer pricing analysis.