Importance of a benchmarking database for effective implementation of transfer pricing regulations

IN an increasingly globalised economy, transfer pricing has become a critical aspect of international taxation.

- By Charmaine Tillekeratne

Transfer pricing refers to the price at which related parties undertake a transaction. Transfer pricing regulations mandate that such transaction should be carried out at arm's length. There are rules and methods to determine the arm's length price at which such transactions between enterprises under common ownership or control should be carried out. At its core lies the arm's length principle, which stipulates that the terms of transactions between related parties should mirror those that would be agreed upon by independent entities under similar circumstances. This principle ensures fair taxation, tax avoidance and prevents profit shifting to low-tax jurisdictions. The Organisation for Economic Cooperation and Development (OECD) formulated the primary global transfer pricing principles formalising the arm's length principle in their published guidelines. The tax authorities of various jurisdictions have utilised these concepts and introduced them as part of each jurisdiction's legislation.In Sri Lanka, transfer pricing regulations were introduced in 2006 under the Inland Revenue Act No. 10 of 2006 and have evolved significantly with the introduction of new provisions in 2018 under the Inland Revenue Act No. 24 of 2017 aligning with OECD guidelines. As per regulations there are different methods used to determine ALP. One of the commonly used methods for example is the Transaction Net Margin Method (TNMM).

According to this method the profitability of the transacting related party company is tested with independent comparable companies having similar operations in the market.

The comparable companies should be selected based on qualitative and quantitative data such as revenue, WIP, inventory, fixed assets, intangible assets etc. This type of data of companies operating in Sri Lanka should be ideally available and accessible to the public. A key challenge is the lack of a dedicated local database which carries such data.