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Tax
Transfer pricing considerations
cross-border intercompany transactions between connected persons that are not arm’s length, but which are fully allowable under safe harbour rules, could be reportable under DAC6.
The examples highlight, to some extent, the importance of ensuring that the pricing of transactions between connected persons is carefully considered from a Gibraltar domestic tax perspective in order to ensure that pricing is in line with domestic legislation. Any transfer pricing rules or similar requirements in other relevant jurisdictions would also need to be considered carefully.
Arm’s length profits
In addition, the recent Double Tax Agreement (DTA) entered into between the UK and Gibraltar could mean that more groups need to consider the profits attributable to any non-resident trading in Gibraltar. Prior to the DTA coming into force, a UK company would only be chargeable to Gibraltar taxation on profits deemed to accrue and derive in Gibraltar (i.e. on a territorial basis). Under Article 7 of the DTA, a UK resident company will be chargeable to taxation in Gibraltar if it carries on its business in Gibraltar through a permanent establishment (PE) (such as a branch, or a dependent agent). Accordingly, going forward where a UK entity has a PE in Gibraltar, a profit attribution exercise to determine arm’s length profits of the Gibraltar PE would be required, normally on the back of a transfer pricing exercise.
Finally, Article 9 of the DTA also allows for taxable profits to be calculated, for treaty purposes, based on transactions between UK-resident and Gibraltar-resident ‘associated enterprises’ (broadly, connected persons) being arm’s length.
As Gibraltar enters into more double tax treaties to aid international trade and prevent international tax avoidance, the tax implications of these treaties will need to be considered and understood by potentially affected businesses.
By Vickram Khatwani, Associate Director (Tax) and Gavin Gafan, Senior Manager (Tax), Deloitte
As multinational enterprise (MNE) groups expand their presence into additional countries, they need to
consider the associated international tax implications. A
major example of this is determining how profits should be allocated between those countries for tax purposes. The Gibraltar tax authorities, among many others, require transactions between the entities within an MNE group to be comparable to those which would reasonably be expected to take place between unrelated (third party) companies. This is what is commonly referred to as the “arm’s length standard”. The Organisation for Economic Cooperation and Development (OECD) have specific and widely-adopted Transfer Pricing Guidelines for assisting both MNEs and tax authorities in this respect.
Anti-avoidance provisions
Whilst Gibraltar’s Income Tax Act 2010 (ITA2010) does not itself include detailed transfer pricing rules, it does include a number of anti-avoidance provisions aimed at transactions between connected persons related by virtue of common control.
Section 40 ITA2010 states that where the Gibraltar Commissioner of Income Tax (the Commissioner) believes that a person has entered into an arrangement which eliminates, reduces or would eliminate or reduce the amount of taxation in Gibraltar and the arrangement is artificial or fictitious, the arrangement or those parts of it which eliminate or reduce the taxation payable may be disregarded and the taxpayer can be assessed on the amount of taxation due in the absence of said arrangements. ITA2010 defines ‘artificial and fictitious’ as (a) not real and not genuine; and/or (b) not consistent with the international standard of the arm’s length principle as defined by the OECD.
In addition, Schedule 4 of ITA2010 includes provisions in respect of ‘transactions
with connected persons.’ These provisions state that where a person carries on business with another connected person, and it appears to the Commissioner that the course of business between those persons is so arranged to enable a person to either generate no profits, less than the ordinary profits, losses, or increases in the loss in Gibraltar which might otherwise be expected to arise from that business, then the profits or losses of that person may be adjusted for Gibraltar tax purposes.
These provisions apply to, amongst other things, interest payments on intra-group financing between connected persons. If the interest terms cannot be demonstrated as being on an arm’s length basis, the Commissioner can treat the interest as a dividend for the payer (which is non- deductible for tax purposes).
Likewise, the provisions of Schedule 4 may also apply to other deductions claimed by taxpayers in respect of expenses payable to a connected party or parties. If Schedule 4 does apply, the aggregate amount of the deductions allowed for tax purpose in computing the profits of the taxpayer would be restricted to the lower of: 1. The amount of the expenses; 2. 5% of the gross turnover of the taxpayer in the relevant accounting period; and 3. 75% of the net profit excluding the connected party expenses of the taxpayer in the relevant accounting period.
DAC6
This means that any non-arm’s length transactions between connected parties could still be fully allowable (subject to the provisions of Section 40 of ITA2010 not being invoked by the Commissioner) if, under the above “safe harbour” rule, the lower of the three categories is the cost itself. It should be noted that reliance on the “safe harbour” may result in a transaction being a reportable arrangement under the EU’s Directive on Administrative Cooperation (DAC6), the provisions of which have been transcribed into ITA2010. Hallmark E1 of DAC6 identifies cross-border arrangements that involve the use of unilateral safe harbour rules as reportable. Accordingly,
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