Transfer pricing in a nut shell

The term “transfer pricing” features more and more regularly in discussions and publications on the Namibian economy and tax landscape lately.

What is transfer pricing?

Very briefly, it can be described as an accounting and taxation practice between related parties (like subsidiary and holding companies) in setting prices for cross-border transactions involving goods and services.

The price charged by, for example, a subsidiary to a holding company is known as the transfer price and is the actual price charged between related parties in an international transaction.

Why transfer pricing?

Transfer pricing is used to attach a value to goods, services and technology transferred between holding companies and subsidiaries and entities controlled by the same parent company. The transaction is not controlled by open market principles or in an otherwise commercial environment.

It is also used to control exchange rate fluctuations.

Traditionally, transfer pricing was applied also to shift profits between various tax jurisdictions and to minimise the tax burden of entities operating in countries with high tax rates.

It must be stressed however, that transfer pricing is not per se used to evade taxes.

Arm’s length principle

Most countries following the Organisation for Economic Co-operation and Development (OECD) model apply the arm’s length principle in scrutinising transfer pricing of taxpayers involved in cross border transactions with related parties.

The very fact that transfer pricing is applied by related parties means that it cannot be automatically at arm’s length. Where the price charged or payable by a related party differs from a price that would have been charged to an unrelated party, the difference could result in a tax advantage.

In such a case the tax authorities would apply the arm’s length price, disregarding the value attached by the entities in a cross-border transaction.

Namibian transfer pricing legislation

Namibia introduced legislation on transfer pricing by inserting section 95A on 14 May 2005, but apart from a few cases, Inland Revenue did not vigorously pursue the transactions of cross-border related entities.

This, however, changed recently with a transfer pricing unit being established and trained by international tax specialists. We can therefore expect that the tax returns of more taxpayers falling in the transfer pricing category will be scrutinised and assessed accordingly.

Transfer pricing policy

The wise maxim “prevention is better than cure” is very applicable when it comes to unexpected tax assessment.

The solution is to obtain professional services in ensuring that the transfer pricing policy for Namibian entities linked to entities from abroad is updated and tested for arm’s length scrutiny by the tax authorities.

Bianca Cooper is the manager: indirect tax and transfer pricing at PwC Namibia. Contact her at [email protected]