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Introduction to transfer pricing in Channel Islands
Transfer pricing rules
- Neither Jersey nor Guernsey has specific transfer pricing legislation. Both islands use the wholly and exclusively principle together with anti-avoidance legislation to control artificial profit shifting.
- General guidance dictates that payments between related parties for tax deduction / assessment purposes should follow OECD general guidance on calculating the open market value of related transactions.
- These rules apply to all taxpayers, including branches of foreign companies and there is a self-assessment regime, i.e. the burden of proof is on the taxpayer to confirm its tax computations meet the requirements of the respective laws.
- There is no requirement to file specific TP returns but in certain circumstances transactions between related parties have to be separately disclosed on the corporate tax return (for example, interest, group management fees).
- Certain tax treaties do contain specific rules that dictate that associated enterprises should recognize income / cots as if the transaction had been between two independent enterprises.
- The OECD concept of Master File and Local File is not an obligation for taxpayers in the islands.
- Jersey and Guernsey have both implemented Country by Country Reporting (CbCR).
- Jersey and Guernsey would look at published OCED guidance as a means of interpretation.
Transfer pricing methods
- There is no specified order in which accepted OECD principles should be applied and it is up to the taxpayer to determine the correct method being used whether this is Comparable Uncontrolled Price Method (CUPM), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Residual Profit Split Method (RPSM) or the Transactional Operating Profit Margin Method (TOPMM).
- The burden of proof is on the taxpayer to ensure that basic TP principles are adhered to.
Transfer pricing documentation
Preparation of transfer pricing documentation
- Within Jersey and Guernsey legislation, there are no requirements to produce specific documentation for TP. The taxpayer must however, if asked, be able to justify that any transactions have been carried out at arm’s length.
Master and local file
- There are no Local File and Master File obligations.
Some risk factors for challenge
- Persistent losses in any entity.
- Transactions with low tax jurisdictions resident related parties.
- Business restructurings, or changes in the calculation of related party transactions can trigger a challenge.
- Global marketing / group expenses payments or substantial inter group interest charges.
- Both Tax Authorities may calculate the taxpayers’ gross income and authorized deductions by determining the price or consideration amount of transactions entered into between related parties, on the basis of the prices and consideration amounts that would have been used by independent parties in comparable transactions, whether such parties are legal entities,
- Failure to complete a full and correct tax return within the specified time limits will incur fines for incorrect submissions and interest charges on any additional taxation due.
Economic analysis and how to demonstrate an arm’s length result
- If an enquiry is entered into, the Tax Authorities will expect to see that research has been undertaken, and evidenced by appropriate documentation, to ensure the open market arm’s length value of any transaction.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advanced Pricing Agreements (APAs) are written agreements between a taxpayer and the Tax Authorities to govern the appropriate transfer pricing method for a forward-looking period. APAs are uncommon in the islands but will be agreed in exceptional circumstances.
- There are no exemptions to not using the arm’s length principle.