The Transfer Pricing Directives, 2081 (2024) document outlines guidelines for managing and regulating transfer pricing between associated entities, particularly cross-border transactions involving related parties. Key highlights include:
Transfer Pricing (TP) refers to the value of transactions between related parties, often influenced by a group's interests rather than market forces. Companies may manipulate prices to shift profits to lower-tax jurisdictions, reducing taxes in higher-tax countries. To address this, a TP directive has been issued to ensure that transactions between related multinational companies are conducted at arm’s length price.
Applicability: The directive applies to controlled cross-border transactions between associated entities, where at least one is chargeable to tax in Nepal. It ensures such transactions occur at an arm's length price.
Associated Persons: Defined as individuals or entities with control or benefits from 50% or more of an entity's rights, capital, or voting power, directly or indirectly.
Comparability Analysis: Aimed at identifying comparable uncontrolled transactions, considering factors like business characteristics, economic environment, and contract terms.
Methods for Determining Arm's Length Price (ALP):
Comparable Uncontrolled Price (CUP) Method: Compares controlled and uncontrolled transactions' prices.
Resale Price Method: Focuses on the price charged by a related party to an independent buyer.
Cost-Plus Method: Identifies costs incurred and adds an appropriate markup.
Transactional Net Margin Method: Assesses net profit relative to an appropriate base.
Profit Split Method: Considers total profit earned by associated enterprises and splits it proportionally.
Selection of Method: Depends on transaction nature, data availability, and comparability between transactions.
TP Assessment Steps: Includes identifying associate relationships, conducting FAR analysis (functions, assets, and risks), selecting comparable transactions, choosing the method, and making adjustments to determine ALP.
Documentation Requirements: Taxpayers must maintain records of cross-border transactions exceeding NPR 100 million and keep them for five years as per the Income Tax Act.
Penalties and Dispute Resolution: Outlines fines for non-compliance, options for advance pricing agreements, and remedies for disputes through administrative review or the Revenue Tribunal.
This directive aims to prevent tax avoidance by ensuring transactions are fairly taxed and properly documented.
