Income tax return in terms of transactions between related enterprises

16 March 2020

For six years, companies have reported all related-party transactions in the tax return. The Income Tax Act also requires companies to increases their tax base if they cannot sufficiently substantiate the difference between the negotiated price of such a transaction and the price that would be negotiated between unrelated parties under the same or similar terms.

The burden of proof in this case rests with the company, which must be able to argue that it is a normal price under the given conditions. It is therefore not surprising that these transactions are still subject to controls, which are subject to frequent additional tax assessments. In addition, due to incorrectly set prices, companies also misrepresent the accounting information in the published financial statements.

In May 2019, the Financial Administration issued an updated guideline for the taxation of transactions between related enterprises. The purpose of the guideline is to define the principles of transfer pricing for tax purposes. The guideline recommends testing the economic substance of each transaction, its benefit to the entity and the amount of the agreed price, e.g. based on the arm's length principle.

By processing the comparative and benchmark analysis, you get a market price range within which prices for comparable products or services typically fluctuate. The core of the analysis is to find external comparable entities, including their profitability indicators. And the guideline recommends an annual check to see if there have been significant shifts in profitability and to prepare a new benchmark analysis at least every three years.

Due to the frequency of controls by tax offices that review transactions between related parties, we recommend negotiating prices with related parties at current or usual prices and obtaining evidence, such as a comparative analysis, processed transfer pricing documentation, expert opinions, market analyses or competitive offers indicating that these are indeed current (i.e. market) prices.