The transfer pricing manual covers topics ranging from transfer pricing basics to more detailed explanations of certain financial transactions, thin capitalization, and transfer pricing methodologies.
Tax professionals in Qatar have observed that the QFC tax authorities are more closely reviewing inter-group transactions and making significantly more enquiries about inter-group transactions. Thus, every QFC entity will want to be able to demonstrate that its transfer prices can successfully withstand a challenge by the tax authorities.
Thin capitalization and safe harbor rules
The new transfer pricing manual includes extensive discussions and guidance on thin capitalization related to the analysis of capital structures and borrowing capacity—the goal is to establish arm’s length lending and corresponding arm’s length deductible interest expense. The manual specifically addresses thin capitalization for banks, financial institutions, and insurance companies.
Safe harbor rules are set out for financial and non-financial entities, and ratios are defined that would be acceptable to the tax authorities. These rules are non-statutory and are non-binding on either taxpayers or the QFC tax authorities.
The transfer pricing manual also highlights the need to review various aspects, such as business activity and regulatory requirements, before determining the capital and debt structure.
Transfer pricing documentation
The manual specifies four classes of records or evidence that need to be considered for transfer pricing purposes:
- Primary accounting records
- Tax adjustment records
- Records of transactions with associated businesses
- Evidence to demonstrate an arm’s length result
The scope and extent of the documentation can be determined based on the nature, size, and complexity of the transaction or series of transactions. The manual offers reasonable relief by stating that a comprehensive transfer pricing study, supported by an appropriate benchmarking analysis, will be a significant factor in deciding on the necessity of further enquiry on such transactions.
If a QFC entity fails to maintain records and documentation that are sufficient to establish compliance with arm’s length standards, the entity could be subject to penalties for failure to maintain adequate records (under Article 96) or for making an incorrect return (under Article 107(4)).
Transfer pricing methodologies and comparability analyses
For the purpose of meeting the arm’s length standard, the QFC tax department relies on the transfer pricing methodologies set out in the OECD transfer pricing guidelines.
In conducting comparability analyses, the Qatar transfer pricing manual stresses a preference for the use of internal comparables within the group over external ones. For selecting external comparables, regional comparables are preferred. In their absence, however, comparables from other countries/regions could be considered, subject to a review of whether the territorial differences lead to market differences.
A QFC entity can apply for advance rulings and/or advance pricing agreements (APAs) pursuant to Article 93 and obtain a higher level of certainty on the proposed transfer prices.
In certain cases the QFC tax department may grant an advanced ruling covering up to two or three years.
Read a January 2014 report prepared by the KPMG member firm in Qatar: Qatar – New manual sets out detailed transfer pricing guidance
Contact a tax professional with KPMG's Global Transfer Pricing Services.