Internal Transfer Pricing Documentation Requirement on Curaçao

As of January 1, 2017, the conditions agreed between affiliated parties with respect to intercompany transactions must be documented and properly accounted for. This includes the transfer prices charged, the transfer pricing method and the substantiation thereof.

TEXT BY REJAUNA I.S. ROJER MSC, TAX CONSULTANT AT MEIJBURG & CO, CARIBBEAN

Until recently, Curaçao did not have a statutory documentation requirement for transfer prices. This situation changed with effect from January 1, 2017. The documentation requirement concerns both affiliated transactions effected as of January 1, 2017 and contracts concluded before January 1, 2017. For transactions entered into as of January 1, 2017, the documentation must be available at the time of the transaction.

Affiliated parties
In principle, affiliated parties are involved when the entities belong to the same group. Nevertheless, an affiliated transaction also concerns transactions between entities that do not belong to the same group, but in which the same person directly or indirectly participates in the management or supervision of, or in the capital of, both entities.

Global trends
Most countries base their rules on internal transfer pricing on the transfer pricing guidelines prepared by the OECD. These guidelines and rules on transfer pricing are being steadily tightened to counter tax evasion and profit shifting in international transactions. The tightening has led to changes in the actual application and assessment of existing tax rules and the implementation of new tax rules worldwide.

“One of the aims of this documentation requirement is to provide the tax authorities with sufficient information to enable them to properly assess the arm’s length nature of the agreed conditions.”

Transfer pricing
Intra-group transactions, such as the supply of goods and services, take place on a large scale between affiliated entities. Such transactions should take place on the basis of the arm’s length principle. When determining a transfer price, for example the following aspects should be taken into account:
1) The functions performed (duties and responsibilities);
2) The assets used; and
3) The risks actually run by the affiliated entities in respect of the affiliated transactions. The remuneration received by independent third parties for the exercise of similar functions, the use of corresponding assets and the running of comparable risks under identical circumstances and conditions as the affiliated parties will subsequently be examined. These components are used as a benchmark to determine and substantiate the arm´s length price. The documentation requirement may also have benefits. For example, the functional analysis that precedes the documentation of the at arm’s length nature of the transfer prices provides the group’s management with insight into the functioning of the group and thus the information required to make any necessary changes. Moreover, the use of appropriate and well-considered transfer prices can even lead to tax savings in some cases. Failure to comply with the documentation requirement will lead to incomplete accounts and may ultimately also lead to a reversal of the burden of proof. If the tax inspector takes a different position and adjusts a taxpayer’s tax base, the burden of proof lies in principle with the inspector. The taxpayer’s ability to mount a successful defense will usually deteriorate significantly if the taxpayer – and not the inspector – must substantiate the arm’s length nature. In the context of the growing global tightening of rules and legislation and the introduction of the requirement to document transfer prices in Curaçao tax legislation, it is advisable to obtain timely insight into the current state of your accounts to ensure they are organized in the best way possible. Commissioning a baseline measurement, for example, may provide good insights. From there, it should be determined to what extent further measures are required as a solid foundation for meeting the documentation requirement and applying a proper transfer pricing policy.