On 16 May 2002 the Director-General of Revenue issued Departmental Instruction No Paw 113/2545 which provides guidelines to the Revenue Department tax audit officers for when they have to consider "market prices".
The Paw 113 Guideline
The Paw 113 guideline applies to:
Income transactions conducted at lower than market price compensation or with no compensation without justifiable ground; and
Expense transactions conducted at higher than market price compensation without justifiable ground.
Definition of Market Price
"Market price" is defined for the Revenue tax audit officers to mean the price that independent contracting parties determine commercially and faithfully for sales of goods, provision of services or lending of money.
Acceptable Pricing Methods
The guideline instructs the Revenue officers to accept the following four methods for determining "market price":
Comparable Uncontrolled Price (“CUP”) method;
Resale Price (“RP”) method;
Cost Plus (“CP”) method; or
Other method (when the CUP, RP or CP methods cannot be applied, and the other method is an internationally-accepted method).
Documentation Requirements for Tax Audit Investigations
For Revenue officers conducting tax audit investigations of market prices for the purposes of computing corporate tax by companies in a group, the guideline lists a set of 10 company-prepared and kept documents, which the Director-General instructs his Revenue officers to take into account. The list of 10 documents is as follows:
Documents relating to the structure and nature of the company and the international group to which it belongs;
Documents relating to budgets, business plans and financial projections;
Documents setting out the company's business strategies and the reasons for their adoption;
Documents setting out the company's sales and operating results and the nature of its dealings with related parties;
Documents setting out the reasons for entering into international dealings with related parties;
Documents setting out the company's pricing policies, product profitability, relevant market information, profit contributions, functions performed, assets used and risks assumed;
Documents setting out the reasons for the company's selection of a particular pricing method or methods;
Documents setting out, when other methods have been considered and rejected, the details of those other methods and the reasons for their rejection;
Documents setting out the negotiation process taken by the company in relation to its international dealings with related parties and the basis of the negotiations; and
Other documents that may be relevant to the determination of market value (if any).
Advance Pricing Agreements
Finally, the guideline instructs Revenue officers to permit companies to enter into advanced pricing agreements with the Revenue Department, and companies that wish to do this are permitted to file an application to the Revenue officers with the relevant documents concerning the issue.
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