Pillar One – Amount B Submission
In the first instance, we would like to express our admiration towards the ongoing technical work undertaken by the OECD and the Inclusive Framework on the BEPS initiatives to address the difficulties which arise regarding the taxation of the digital economy. The tax challenges of the digital economy are extensive and difficult to address.
Our firm is incorporated in KSA and UAE, with a representation in Brussels. We have a strong focus on tax policy matters in the Gulf Cooperation Council (“GCC”).
Although it is an oversimplification, in a general sense, the GCC has been slow in the adoption of the principles of international taxation which has perhaps led it to being an under-represented region relative to its growing economic influence. Historically therefore, GCC countries have not participated much in international forums in the same way as other countries may have.
Much of the GCC has also only known only strong economic development towards the second half of the 20th century, and therefore have only started to assert themselves more recently on an international level.
This submission aims to contribute constructively to the discourse, drawing from our experience and insights in the GCC region, and to collectively shape a future where international tax frameworks harmonize with the evolving dynamics of the global economy. In the subsequent sections, we provide our observations and recommendations in relation to the proposed scoping and pricing mechanism for Pillar One – Amount B. At the outset, we would like to express our endorsement for any initiative which seeks to improve legal certainty for tax payers and tax authority alike.
1. GCC Perspective
The GCC region is composed of six sovereign nations, each of which have their own individual tax legislation. However, the commonality in the GCC is that each of the countries remain in a relatively early stage in the development of their domestic tax systems and policies. This is certainly the case for transfer pricing. In this regard, the Kingdom of Saudi Arabia (“KSA”) was the first to introduce formal transfer pricing rules in February 2019 and currently only KSA, Qatar and the UAE have introduced full transfer pricing rules.
As such, the concept of transfer pricing remains relatively novel amongst the majority of taxpayers in the region. Indeed, the tax authorities in the region also have relatively limited experience with transfer pricing compared to other parts of the world.
Although perhaps not in an economic sense it appears clear that the GCC region would be considered a low-capacity jurisdiction in terms of experience and capacity. While the region continues to evolve and modernize rapidly, it will take several years to build up capacity, knowledge, knowhow, and expertise.
On this basis, the introduction of a simplified regime to promote tax certainty in the future would be most welcomed in the region. In this context, we have provided our comments on the current proposal below.
In the GCC, the distribution of goods (i.e. commercial agencies) is often only a privilege of companies held by GCC nationals. As such, distributors for products manufactured outside of the GCC are often unrelated parties and on that basis the pricing is generally inherently arm’s length.
Notwithstanding the above, there remains sufficient intergroup distribution activities to warrant the introduction of Amount B in the region. In relation to the transactions in scope, we broadly agree with the current proposal.
The exclusion of the distribution of services and commodities is in our view appropriate given the difference in functional and risk profile associated with these transactions. The UAE may have benefited from including distribution of services given it has a higher concentration of businesses performing these activities. Notwithstanding this, we agree in principle with these exclusions. The allowance of a de minimis threshold for retail sales is also helpful for some distributors in the region which are often part of large conglomerates undertaking a very wide range of activities.
However, given the difference in functional profile and remuneration structures of sales agent and commissionaire models as compared to buy-sell distribution activities, it may also be worth considering the exclusion of such transactions from the scope of Amount B. Alternatively, allowing for more flexibility in the pricing mechanism for such transactions may be sufficient.
In terms of the introduction of scoping criteria for “non-baseline” contributions, it is our opinion that the tax authorities in the GCC will benefit from the additional qualitative scoping criterion to assist in the effective implementation of Amount B. As alluded to in the public consultation, the accurate delineation of a transaction for transfer pricing purposes requires a qualitative assessment of the controlled transaction meaning that there should not be significant incremental effort associated with this approach.
Given the current lack of expertise in the region, the inclusion of guidance in how to navigate the qualitative components of the analysis for application of Amount B would be beneficial.
3. Transfer Pricing Methodology
We agree that the transactional net margin method is the most appropriate methodology for buy-sell distribution transactions in scope of Amount B. Similarly, the flexibility to elect to use the internal CUP method is seen as welcome and aligns with the existing OECD Guidelines.
We note there is currently a “cap and collar” corroborative mechanism embedded in the pricing matrix. The inclusion of a corroborative mechanism does not appear aligned with the objective of adopting a simplified approach and in our view may create unnecessary additional compliance for taxpayers. It appears that the intention behind such a mechanism is to safeguard against potential distortions in functional profiles between certain types of entities in scope namely sales agents/commissionaires versus buy-sell distributors.
As mentioned previously, it may be preferred to simply remove sales agents or commissionaires from the scope of Amount B. Alternatively, given the fundamental differences between these entities it may be preferable to allow for the Berry Ratio to be used as the primary method for sales agent and commissionaire type arrangements rather than as corroborative. Although this would involve developing a separate pricing matrices, the use of the Berry Ratio as the appropriate method may better align with the functional and remuneration profiles of such entities.
4. Pricing Matrix
In general, there is a lack of comparable data of companies in the GCC. This information is often close guarded, and there is currently no project to make such data publicly available. The traditional transfer pricing databases have some data, albeit limited.
As such, tax authorities in the region tend to allow for a wider geographic scope to be applied when searching for comparables, beyond just the GCC or MENA region. As such, the data availability mechanism will likely be applicable for GCC countries to the extent that they fall within the scope of “qualifying jurisdictions”.
We note that there is an option for a local data set to be produced by the local tax authority where there is a potentially material data availability gap in the global dataset owing to lack of country coverage. In this regard, we would have reservations about this option as it would impose an additional burden for the local tax administrations in the GCC as well as reduce the taxpayer’s input in what the appropriate range would be for their own circumstances. This may defeat the purpose of the exercise.
As outlined previously, the tax administrations in the GCC are at the early stages of their understanding of transfer pricing and will take some time to build up the relevant expertise. In our experience, the approach taken by tax administrations in developing their own ranges during disputes usually has the sole objective to increase profit levels in the GCC.
Furthermore, in the context of the GCC a lot of businesses are either directly controlled or receive support from sovereign wealth funds which may potentially distort the results of a local data if not appropriately accounted for. Additionally, a lack of transparency in available company data would also limit the taxpayers’ ability to contest or dispute the ranges produced.
As such, we would suggest that a high-level of transparency is available to taxpayers in relation to the selection criteria applied for such internally developed comparables. Alternatively, further guidance on what constitutes a “qualifying” local data set or the level of involvement from the OECD in supporting the local tax administration to develop these sets would be appreciated to allay any taxpayer fears of the tax administrations developing an unrealistic range of results.
5. Tax Certainty
Currently, the majority of transfer pricing disputes in the region are largely concentrated in KSA. In this regard, the tax authority in KSA has recently introduced an Advance Pricing Agreement (“APA”) regime in an effort to reduce such disputes. The UAE has also included an APA regime as part of its new corporate income tax regime.
We note that the current consultation acknowledges that existing bi-lateral or multi-lateral APAs should be respected following the introduction of the simplified and streamlined approach. We support this approach and would also recommend that the option remains for tax authorities to agree APAs on a go-forward basis in relation to transactions in-scope.
Unfortunately, the tax treaty network of the GCC countries is not always as extensive as other developed nations (except for UAE and Qatar). As such, reliance on mutual agreement procedure under the terms of the OECD model tax convention may not be available for transactions with certain counter-party jurisdictions. As such, we would recommend mandatory binding arbitration to Amount B in order to ensure that disputes are resolved in a timely manner.
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