Transfer pricing (TP) relates to pricing arrangements between associated enterprises/related parties.
TP refers to multinationals establishing prices for goods and services that are exchanged between affiliates or commonly controlled companies. In many countries, TP extends to both cross border and domestic transactions.
The concept of transfer pricing is based on arm’s length principle. Arm’s length principle is based on how independent companies interact between each other and determine prices for goods & services. The dealings between independent parties are used as a benchmark/yardstick to determine the fair value pricing of transactions undertaken between related parties.
Why are regulations around transfer pricing gaining momentum across the world? With the rapid pace of globalization, many companies are expanding their business operations across various countries. The different tax rates helps companies to manage the overall tax liability of the group through intra group pricing arrangements. From a tax authority’s point of view, there is an expected base erosion of profit and consequently loss of tax revenue in favour of countries having lower tax rate. On the other hand, multinationals face the risk of double taxation. In order to address the concerns , tax authorities in various jurisdictions are implementing transfer pricing regulatory framework in their income tax legislation.
Qatar started its journey towards aligning itself with the global shared international tax rules when it joined the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on base erosion and profit shifting (BEPS) in 2017. The thought behind the BEPS framework was to bring together various jurisdictions/countries to facilitate development of standards on BEPS-related issues.
With respect to transfer pricing framework in Qatar, it started with introducing the country-by-country reporting (CbCR) rules in 2018. This was followed by introducing Law no.24 of 2018 which declared a new income tax law effective from 14 December 2018 and replaced Law no.21 of 2009.
Qatar announced new Executive regulations (ER) on 11 December 2019 which brought in the detailed TP regulations. This included comprehensive three-tiered TP documentation requirements that required entities in Qatar to comply with several new TP compliances.
The requirements for the companies in Qatar to comply with the new documentation requirements for TP were kept in abeyance for FY 2019. In 2021, the General Tax Authority (GTA) in Qatar issued guidance through a FAQ which provided further clarifications with respect to the Transfer Pricing Disclosure Form (TP DF), Local file (LF) and Master file (MF) submissions.
The resident entities in the state of Qatar and permanent establishments in the state of Qatar are obligated to comply and submit TP DF, LF & MF for taxable years beginning on or after 1 January 2020. The summary of the three level transfer pricing documentation requirement has been provided below :
1. TP Disclosure form :
a) Resident entities including permanent establishments in the State of Qatar will need to submit a TP DF if they have undertaken domestic or international related party transactions and the total turnover OR total assets of the entity based in Qatar in the financial year equals to or exceeds QR 10,000,000.
b) The date of filing the TP DF is the same as the day specified for filing the annual corporate income tax return.
c) While preparing the TP DF, the following information will need to be populated in the form :
Ø Overview of the activities performed by the group.
Ø List of major intangible assets owned or used by the resident entity and country of related parties that own these intangibles. This will be determined primarily with regard to the importance of the intangible’s contribution to the group’s activity.
Ø Information about the associated enterprise including country, amount of transaction, and TP method used.
Ø Description of the Group’s TP policy.
Ø Details of the nature of the transactions, the amount of the transactions and the country of the related parties if the aggregate value of transactions with related entities exceeds QR 200,000.
d) Entities which do not carry out any transactions with related entities resident abroad may submit a “nil” declaration.
2. Master file (MF) :
a) The requirement for submitting a MF and a LF by entities in Qatar will be applicable under the following conditions :
Ø the annual tax-free turnover of these entities or the gross assets appearing on their balance sheet is greater than or equal to QAR50,000,000; and
Ø these entities are associated to other entities established abroad i.e. during the year the resident entities in Qatar engaged in cross border transactions with its related parties abroad.
b) The MF is intended to provide a high-level overview in order to place the MNE group’s TP practices in a global economic, legal, financial and tax context.
c) The contents of the MF is aligned with the OECD recommendations. The information required in the MF can be categorized into the following five categories :
Ø the multinational entity's (MNE) group organizational structure;
Ø a description of the MNE’s business or businesses;
Ø the MNE’s intangibles;
Ø the MNE’s intercompany financial activities; and
Ø the MNE’s financial and tax positions.
3. Local File (LF) :
a) The requirement to submit the LF is similar to the fulfillment of conditions as mentioned for the MF above.
b) The contents of LF is aligned with the OECD recommendations. The information required in LF are as follows:
Ø A description of the management structure of the local entity, a organization chart of the local entity, business strategy, information about the main competitors;
Ø A functional analysis, details of inter company agreements, and TP methods applied for benchmarking related party transactions;
Ø Description of the material controlled transactions (e.g. purchase of goods, provision of services, loans, financial guarantees, licenses of intangibles, etc.);
Ø Information about advanced pricing agreements (APAs) and tax rulings; and
Ø Financial statement of the local entity, financial data for comparable used in TP analysis and the sources of the comparable data.
c) The FAQ’s and the circular released by GTA states that any of the six TP methods can be considered for benchmarking. However, the Executive regulations states that, arm’s length principle will be applied in accordance with the Unrelated Comparable Price method, which is the price of the service or goods, if the transaction is between unrelated parties. In cases where the data in relation to Unrelated Comparable Price method is not available, the entity shall submit to the GTA an application to apply any other pricing method approved by the OECD. Further clarity on the approval process is awaited from the GTA.
d) The FAQ’s have restated that for entities having 31 December financial year end (FYE), the deadline for submitting the MF and LF is 30 June of the following financial year. However the timeline of submission of LF/MF for entities having a different FYE still lacks clarity.
e) The FAQ’s provides clarity on maintenance of contemporaneous TP documentation. ( documentation based on arm’s length principle to be maintained at the time of the related party transaction).
Apart from the above three tiered documentation requirements, GTA had issued a circular in 2019 providing guidance on country by country reporting (CbCR) obligations in Qatar. The requirements for CbCR filings is summarized below :
Ø CbCR filing requirements are effective for the financial years beginning on or after 1 January 2018. The CbCR should be submitted within 12 months as of the last day of the reporting financial period.
Ø Entities that are required to file the CbCR - Resident in Qatar, Ultimate Parent entity of a MNE group and the total revenue of the MNE group is at least QAR 3 billion (approx. EUR 700 million) in the preceding financial year based on consolidated financial statements of the preceding year.
Ø Entities that are not required to file the CbCR - Any constituent entity resident in Qatar for tax purposes where the Ultimate Parent Entity is resident outside Qatar will not be required to file the CbCR and neither it will be required to submit a notification of the identity of the reporting entity or its place of residence.
Ø The CbCR information is aligned with the OECD Action 13 report and should be submitted using an XML schema format.
Ø GTA will monitor cases of non compliance with respect to CbCR filing requirements and impose financial penalties provided for under Article 24 (8) of the Income Tax Law (which may extend to QR 500,000).
The Executive regulations also introduced thin capitalization provisions whereby the entity will be required to substantiate that the loan provided by related party was necessary for entity’s business. Further the interest paid on loans, to related parties are restricted to the extent of amount loans that do not exceed three times the ownership rights.
The regulations also introduced Advance Pricing Agreements (APA’s), however detailed guidance on the procedure for application of APA’s is yet to be notified by the GTA.
Based on the above, entities in Qatar including permanent establishments having related party transactions will need to comply with the new TP requirements in line with the law and the clarifications (FAQ’s) provided by the GTA and meet the statutory timelines. The entities in Qatar should undertake robust TP analysis and maintain contemporaneous documentation to support the arm’s length pricing of related party transactions. The entities should review existing TP policies and inter company pricing agreements and consider formulating a group TP policy (companies headquartered in Qatar) in light of the regulations. Failure to comply with the TP regulations may result in penalty implications under the Income Tax law (general section).