Transfer pricing is the pricing of transactions between associated parties, such as sale or purchase of goods, provision of services, use or transfer of intangibles, etc. Transfer pricing rules aim to ensure that businesses price their associated party transactions in line with arm’s length principle. MIRA endorses the arm's length principle, an internationally endorsed standard, to guide the pricing of controlled transactions between associated parties.
Section 67 of the Income Tax Act (ITA) specifies circumstances under which taxpayers are required to compute their taxable income in accordance with the arm’s length terms, regardless of the actual arrangement or transactions.
"Arms length terms", means the terms on which a transaction or an agrrangement would have been made, or reasonably be expected to have been made, if it had been made between persons that are not assoviates and in comparable circumstances.
The application of the arm's length principle is based on a comparison of the conditions in a controlled transaction with the conditions that would have been made had the parties been independent and undertaking a comparable transaction under comparable circumstances (comparability analysis). There are two key aspects in such an analysis:
1. to identify the commercial or financial relations between the associated parties and the conditions and economically relevant circumstances attaching to those relations, in order for the controlled transaction to be accurately delineated; and
2. to compare the conditions and the economically relevant circumstances of the controlled transaction as accurately delineated with the conditions and the economically relevant circumstances of comparable transactions between independent parties.
For practical guidance on application of the arm’s length principle, taxpayers may refer to transfer pricing guideline.
The Maldives adopts the three-tiered approach to transfer pricing documentation, consisting of:
1. The Master file; which provides an overview of the group’s business that is relevant to the business operations in Maldives.
2. The Local file; which contains detailed information on taxpayer’s business and transactions with its associated parties.
3. The Country-by-Country Report; which contains aggregate tax jurisdiction-wide information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group.
The Transfer Pricing Regulation governs and implements the requirement imposed under Section 68 of the ITA which entails taxpayers to prepare and maintain Transfer Pricing Documentation (i.e. Master File and Local File) in relation to controlled transactions entered between associated parties.
Transfer pricing documentation enables taxpayers to describe their compliance with the arm’s length principle for their controlled transactions; and provide MIRA with relevant and reliable information to perform an efficient and robust transfer pricing risk assessment.
Further guidance on requirements of documentation is detailed in transfer pricing documentation guideline.