transfer pricing
{tax&legal}
Transfer
pricing
in Cyprus
R
eanda International is a leading international network of
independent accounting and
consulting firms based in Asia
The network’s 2nd Quarter
2013 issue of Prism provides a general overview of information and development of transfer pricing in various countries where Reanda
has a presence. HTT Audit Ltd is the Cyprus
member firm of Reanda International. The
following information relates to Cyprus.
Legal framework
The legal framework governing transfer pricing
is Section 33 of the Income Tax Law which
defines in detail which parties and persons are
deemed to be related and/or connected based
on the principal of direct and indirect control.
When associated enterprises or connected
persons transact with each other, the conditions applied between their commercial and
financial relations must not differ from the
conditions that would exist, if the enterprises
or persons were independent. If there is a difference in those conditions that results in lower
tax profits, the taxpayer must adjust its tax
computation accordingly to eliminate the effect
of abusive transfer pricing.
Non-resident tax payers and foreign tax
authorities that wish for a corresponding
adjustment in a Cyprus company’s/person’s
taxable profits as a result of a primary adjustment made abroad due to transfer pricing need
to apply to the Inland Revenue Department
(IRD) for a Mutual Agreement Procedure
(MAP). The MAP will follow the European
Union’s Arbitration
Convention route or Double Taxation
Treaty (DTT) provisions to resolve the case
depending on the origin of the claim. If the
MAP is successful, the IRD will opt to give a
tax credit to the taxpayer.
Cyprus tax legislation does not provide for
the application of secondary adjustments. A
secondary adjustment is an adjustment made
in addition to
the primary adjustment to deal with excess
cash in the hands of an enterprise after a primary adjustment takes place. For example,
if the purchase price of a specific invoice is
adjusted downwardly to make the transaction
as if its terms were at arm’s length, then the
adjustment value (invoice price vs. arm’s length
price) is treated as a constructive dividend or a
constructive loan or a constructive equity contribution and taxed accordingly.
Application of transfer pricing
Cyprus follows the Organisation for Economic
Cooperation and Development (OECD)
Transfer Pricing Guidelines. Any method described in the Guidelines can be used, provided
it is considered the most reliable method for
the particular case. Per Transfer Pricing guidelines, where traditional transaction methods are
equally reliable as transactional profit methods,
then they must be preferred.
Traditional transaction methods:
(a) The Comparable Uncontrolled Price
(CUP) method: comparison of selling price/
fee of the seller under question with similar
transactions between unrelated parties.
(b) The resale price method: comparison of
the gross margins of party purchasing goods/
services from related parties with similar
businesses where the supplier/provider is
unrelated.
(c) The cost plus method: comparison of the
mark up over costs of a supplier of goods/services to related parties with similar businesses
selling to unrelated parties.
Transactional Profit methods:
(a) Profit split method: split of the combined
profits of the related parties on the basis of an
arm’s length agreement.
(b) Transactional net margin method: comparison of net profit indicators.
76 Gold the international investment, finance & professional services magazine of cyprus
Selection of tax payers for
investigation
Tax payers to be reviewed are selected on
the basis of risk. Indication of high risk
cases as specified above expect to involve
transactions with:
(a) tax havens
(b) related entities that have high tax losses
(c) companies that have tax losses for
utilisation in a Group Structure (between
domestic cases only)
Per Cyprus tax legislation, the burden of
proof is on the taxpayer, who needs to provide evidential documentation to satisfy the
assessor that prices used are at arm’s length
and that these prices have been decided in
accordance with OECD Transfer Pricing
Guidelines.
Penalties/Interest
Transfer pricing adjustments are considered
to fall within the scope of tax avoidance,
unless the IRD proves there has been fraud
or willful default (tax evasion). Therefore,
the provisions of the law relating to tax
avoidance will be applied (interest since the
tax year in which the avoidance took place
and penalties not exceeding 10% of the
additional tax imposed).
In cases of fraud or willful default, additional pena