Transfer pricing to take centre stage in Middle East taxation

02 September 2020 5 min. read
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As the global transfer pricing landscape becomes more sure-footed, businesses headquartered in the Middle East are still grappling with new legislation at domestic and multilateral levels. This is according to new PwC analysis.

Transfer pricing (TP) is a common accounting technique where different parts of the same company charge each other for the exchange of goods and services. Transfer pricing is often adjusted based on the tax rates of each division’s home country, with the aim of easing the tax burden on the umbrella company.

As tax reforms and regulation take centre stage in the Middle East, a number of countries in the region have introduced transfer pricing legislation in the last year, which has significantly increased the complexity of tax compliance for businesses headquartered in the region. As they struggle to comply with these changes, the surrounding outlook is only growing more complicated.

Certainty in the tax and TP landscape in the last year

“The combination of extensive new compliance requirements, a refresh of business models becoming a necessity in the era of Covid-19 and the beginning of transfer pricing controversies means that today in the Middle East, transfer pricing no longer is a tax related afterthought, but instead, a fundamental pillar of tax and business strategy for most groups,” explained Mohamed Serokh, a Tax Partner and Middle East at PwC and Head of the firm’s award-winning Transfer Pricing practice.

The rapid rate of change in the Middle East is at odds with the global transfer pricing landscape, where related legislation has been in place for a number of years, giving businesses time to settle in to the regulatory framework. PwC surveyed more than 120 finance and tax professionals across the region, and found that nearly 80% felt that there is a degree of certainty in the international tax and transfer pricing environment.

Domestically meanwhile, businesses are a lot less certain of how things stand, despite some markets drastically simplifying their taxations systems. Grappling with new legislation and all its implications, businesses face a spectrum of challenges that span implementing policies, sharing information with tax authorities and the risk of tax adjustments under audit.Significant challenges to TP policyFor a fifth of PwC’s respondents, understanding transfer pricing requirements in itself is a challenge, which makes it ever more difficult to meet compliance deadlines. More specifically, intangible transactions are the area of most uncertainty when it comes to compliance.

“This is in line with our expectations for groups operating in the region. Intangible and financial transactions have historically been ignored from a transfer pricing perspective due to the lack of specific regulations in the region. As such, groups have focused on transactions that are typically considered to be easier to price, i.e. services and goods transactions,” said Serokh.

Enter the stage: BEPS

Now, businesses in the Middle East face particular pressure to manage transfer pricing with intangible transactions, not only from their individual country governments, but also from an increasingly stringent international regulatory framework – specifically the Base Erosion Profit Shifting (BEPS) initiative.

Launched by the Organisation for Economic Cooperation and Development (OECD) in 2013, the BEPS has been designed specifically to control tax evasion strategies that make use of international transfer pricing. OECD has identified 15 ‘Action Items’ that cover most types of malpractice, including the migration of intangible financial transactions using internal company transactions.

BEPS-driven changes in TP policy and company structure

This gives Middle East businesses that operate internationally yet another thing to worry about. PwC’s survey revealed that “Most multinational enterprises have either changed, will change or at least assessed changing TP policies and structures due to BEPS.”

The BEPS landscape in the Middle East is still maturing, with most organisations reporting that they remain in the analysis and implementation phase of BEPS-driven transfer pricing policy changes, while less than a fifth report that the changes have actually been made. Businesses in the region also appear more receptive to changing their policies than to changing their overall legal structure, ownership or funding positions in line with BEPS.

According to the report, BEPS will play an increasingly central role in the Middle East landscape from here on. “Middle East headquartered groups have historically seen BEPS measures as overseas compliance obligations rather than anything fundamental to their business. With the recent regional transfer pricing regulatory changes, we expect groups to go through BEPS risk assessments to reassess their tax issues and how to deal with them most effectively.”