As one can observe and agree, for Revenue authorities it is imperative that there is correct allocation of profits, which further adds to the jurisdiction-wise challenge of ensuring a fair share of taxes.
The issue gets more challenging when you have more than one tax and particularly when the objectives of the two tax regimes are inherently conflicting. For eg. TP regulations under direct tax regime and Customs law under indirect tax regime.
Both Regulations are based on two key pillars – Allocation and Valuation. The allocation of correct profits, itself is based on business value drivers. Therefore, the two authorities, albeit part of the Revenue Department, work to ensure that related party transactions take place on an arm’s length basis. However, in this regard, the authorities do not follow the same rules of valuation.
The inherent conflict between the two Regulations leaves MNEs at crossroads. To illustrate, customs authorities would examine any lower transaction price declaration; whereas the TP authorities would test the same transaction for any higher price (influenced by the relationship). A similar challenge also surfaces when Countries impose anti-dumping laws.
Similarly, as per the VAT regulations in the UAE, the Value of the Supply of goods or services shall be determined based on the value of supply rules provided in chapter 4 of VAT Decree Law No. 8 of 2017. The valuation rules as per this regulation shall assert different taxable value than the actual value or book value of the Goods or Services that were rendered.
For instance, in case of a supply to a related party, the value of supply may be considered as the market value provided such market value is more than the actual value of the supply or in cases of a deemed supply, the total cost incurred for making the supply might be considered as its supply value.
There are different challenges when Countries have Exchange Control Regulations. In such situations, there may exist prohibitions, caps, etc. on payment to foreign entities.
The above conflict will continue till such time Countries agree to converge; at least with respect to valuation methods under different regulations/ regimes. This subject is being debated at the highest levels, including by large countries like Canada, the UK, Australia, France, the US, etc. Further, there is increased interaction between the two authorities. The OECD has also been active in the matter. In the May 2007 meeting of World Customs
Organization/OECD Conference on TP and Customs Valuation were held in Brussels followed by a meeting of the Focus Group on TP on 26 October 2007 and the efforts to solve the conflict continues thereafter as well.
Despite the efforts, there is no internationally agreed approach. TP policies may be a useful information source, and the related mandatory disclosure requirements (e.g., country-by-country (CbC) reports, documents attached to tax return filings, etc.) provide increased access to information by various governmental administrations (including customs authorities).
