Introduction
Malawi enacted new legislation on transfer pricing with effect from 1 July 2017. These latest provisions replace existing transfer pricing regulations which were in place since 2009. As per the new requirements, taxpayers will have to prepare a contemporaneous transfer pricing documentation. The new legislation applies to domestic and cross-border transactions between related persons.
The updated regulations are effective from 1 July 2017[1] and are contained in two Government notices:
- Transfer pricing documentation regulations (Government Notice No. 36), and
- Transfer pricing regulations (Government Notice No. 37).
Overview of the transfer pricing documentation regulations
Taxpayers engaging in transactions with related persons must have in place contemporaneous transfer pricing documentation that confirms that taxpayer’s controlled transactions[2] are consistent with the arm’s length principle. Documentation will be considered to be contemporaneous where it is in place on the statutory tax return’s filing date.[3]
As per the new regulations, the Commissioner sets out specific information that should be included in the taxpayer’s transfer pricing documentation for the relevant year. The information ranges from the overview of the taxpayer’s business operations to comparability analysis.[4]
Although there is no requirement to file the transfer pricing documentation, the documentation must be submitted within 45 days of a written request issued by the Commissioner General of the MRA.
Any taxpayer which fails to comply with a request to submit its transfer pricing documentation, will be subject to a penalty including:
- An initial penalty not exceeding the Malawi Kwacha equivalent of USD 1,400 at the prevailing exchange rate;
- Further penalties not exceeding the Malawi Kwacha equivalent of USD 2,100 at the prevailing exchange rate for each additional month where the failure continues; and
- Further penalties of an unlimited amount to be determined by the Commissioner General where the failure to comply continues after being subject to initial and subsequent penalties.
Overview of new transfer pricing regulations
The new transfer pricing regulations apply to both domestic and international transactions, and impose the rules that taxpayers need to take into consideration when determining if a controlled transaction is consistent with the arm’s length principle. The regulations are based on the Organisation’s for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
The new legislation accepts the five OECD-recognised methods as a basis of determining the comparable arm’s length price for a transaction. These methods are the comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method and the transactional profit split method. Any other method will be accepted by the Commissioner General under circumstances where the approved methods (listed above) were regarded as less appropriate and the alternative method does provide a better arm’s length price.
The regulations establish the concept of the arm’s length range, an acceptable range of prices, margins or profit shares that have been reached after the application of one of the approved transfer pricing methods. In principle, no adjustment shall be made by the Commissioner General if the relevant financial indicator derived from the controlled transaction(s) falls within the arm’s length range and if the appropriate transfer pricing method is selected. If the relevant financial indicator falls outside the arm’s length range, the Commissioner General may adjust it and any such adjustment will be to the median of the arm’s length range.
The new regulations include a number of paragraphs that specifically concern intra-group services. As per these paragraphs, which are generally in line with the OECD guidance on intra-group services, an intra-group service charge shall be considered consistent with the arm’s length principle where:
- It is charged for a service that is actually rendered;
- The service provides, or was expected to provide, the recipient with economic or commercial value to enhance its commercial position;
- It is charged for a service that an independent party in comparable circumstances would have been willing to pay for or would have performed in-house; and
- Its amount corresponds to that which would have been agreed upon between independent parties in comparable circumstances.
Furthermore, the new regulations contain specific provisions for transactions involving the exploitation of intangible property. Specifically, the regulations require the taxpayer to take into account the contractual arrangements as well as various factors with regard to the development, enhancement, maintenance, protection and exploitation of the intangible property when determining the arm’s length conditions for controlled transactions involving intangible property.
Finally, the Commissioner General is allowed to recharacterise or disregard a controlled transaction, if it is determined that the arrangement would not have occurred in an arm’s length environment.
Alternatively, the new legislation enables the Commissioner General of the MRA to adjust transactions which are concluded on terms inconsistent with the arm’s length principle.
Where an adjustment is made, the regulations facilitate corresponding adjustments for both domestic and international transactions where necessary.
Next steps to be taken
Taxpayers that have transactions with related persons or which are planning on entering into an arrangement with related persons should ensure that they comply with the new regulations, which are applicable starting from 1 July 2017.
In addition, taxpayers should consider whether they need to:
- Review their existing transfer pricing policies affected by the new legislation to determine whether their controlled transactions are consistent with the arm’s length principle;
- Developing transfer pricing policies compliant with the new transfer pricing regulations;
- Implement existing or new policies;
- Ensure supporting documentation, including intercompany agreements, are aligned with the taxpayer’s policies;
For more information, please contact:
- Michael Hewson, Director: e-mail: mHewson@grapheneeconomics.com, cell: +27 82 345 1212
- Muzi Shabangu, Junior Economist: e-mail: mShabangu@grapheneeconomics.com, cell: +27 61 462 0785
[1] Transfer pricing documentation requirements are applicable for taxable period starting from 1 July 2017. The taxable period for income tax is a 12-month period ending on 30 June of each year. For businesses whose year-end is 31 July and 31 August, the applicable tax year-end is the preceding 30 June, while all the years ending in the subsequent months have the following 30 June as a year-end.
[2] Any transaction between related persons.
[3] An annual tax return must be filed within 180 days of the company’s financial year-end.
[4] Please refer to the following link to the new transfer pricing legislation: http://www.mra.mw/assets/upload/downloads/Gazette_Notice_No__36_of_2017.pdf
