KPMG in Qatar has observed that the QFC Tax Department is closely reviewing inter-group transactions and making significantly more enquiries about inter-group transactions. Thus, it is imperative for every QFC entity to ensure that its transfer prices can successfully withstand a QFC Tax Department challenge.
The new manual includes extensive discussion and guidance on thin capitalization related to the analysis of capital structures and borrowing capacity in order to establish arm’s length lending and corresponding arm’s length deductible interest expense. The manual specifically addresses thin capitalization for banks and financial institutions and insurance companies.
Safe harbor rules (capital gearing ratio) are set out for financial and non-financial entities that define ratios that would be acceptable to the QFC. These rules are non-statutory and are non-binding on either the taxpayer or the QFC Tax Department.
The manual also highlights the need to review various aspects, such as business activity and regulatory requirements, before determining the capital and debt structure.
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)).
For the purpose of meeting the arm’s length standard, the QFC Tax Department relies on the transfer pricing methodologies set out in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the Organisation for Economic Co-operation and Development.
In conducting comparability analyses, the QFC’s 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 (per 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.