The Tax Authority now has a power to adjust revenue or expense derived of the transaction between two related companies.

The Tax Authority now has a power to adjust revenue or expense derived of the transaction between two related companies.

Notification of the Director-General of the Revenue Department No. 400 on Income Tax issued in January 2021 is empowering tax authorities to adjust revenue or expenses arising out of transaction between two commercially related companies. The respective power will be triggered if they believe that the transaction is made for the purpose of profit/cost shifting or transfer pricing and not in line with the benchmark of transaction of independent or non-controlled companies.

The method to be used by tax authority to determine the proper revenue should the transaction be carried on by the independent parties are as follows:

1. Comparable Uncontrolled Price Method
2. Resale Price Method
3. Cost Plus Method
4. Transaction Net Margin Method
5. Transactional Profit Split Method

Other method can be used if can be proven in writing to Director General that the above methods cannot be used to justify the proper price and more proper method is available.

Please note that the order of the tax authority is still subject to appeal and court petition in case the company does not agree with how their revenue or expense is adjusted.

This notification will be applicable to accounting period on January 1, 2021 onwards.

Please feel free to contact us should you need further support. This article is not a legal advice and it shall be solely treated for general guideline purpose.