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The scoping provision within the Transfer Pricing Rules, Subsidiary Legislation 123.207, the ‘Transfer Pricing Rules’, applies to financial years commencing on or after 1 January 2024, specifically targeting arrangements between associated enterprises that were entered into or materially altered on or after 1 January 2024. The provision goes on to clarify that, with respect to transactions entered into prior to 1 January 2024 that were not materially altered, the transfer pricing provisions apply from basis years commencing on or after 1 January 2027.
Whilst determining the date on which an arrangement is deemed to be entered into may be straightforward, challenges may arise when assessing whether an arrangement may be deemed to have been “materially altered”.
The Rules do not provide direction on this. However, the Guidelines clarify that a case-by-case analysis, considering whether an alteration to an existing transaction or agreement between parties to an arrangement materially alters the substance of the arrangement by reference to the functions performed, assets used, and risks assumed by each of the parties to the arrangement, is required.
In line with OECD principles, the Guidelines highlight that looking only at the arrangement or form thereof itself does not suffice, but going beyond and looking at the conduct of the parties in practice is necessary.
A list of examples of what would be regarded as material alterations includes:
Whilst determining the date on which an arrangement is deemed to be entered into may be straightforward, challenges may arise when assessing whether an arrangement may be deemed to have been “materially altered”.
The Rules do not provide direction on this. However, the Guidelines clarify that a case-by-case analysis, considering whether an alteration to an existing transaction or agreement between parties to an arrangement materially alters the substance of the arrangement by reference to the functions performed, assets used, and risks assumed by each of the parties to the arrangement, is required.
In line with OECD principles, the Guidelines highlight that looking only at the arrangement or form thereof itself does not suffice, but going beyond and looking at the conduct of the parties in practice is necessary.
A list of examples of what would be regarded as material alterations includes:
- a change in the consideration for the performance of the arrangement;
- a change in the rights and/or obligations undertaken by the parties to the arrangement, which change affects the risks undertaken by the respective parties, and in turn may change the remuneration under such arrangement; and
- a change in the duration of the agreement.
Lastly, a change that is driven by external factors, such as a change in the geopolitical or economic environment, should not be considered an alteration to the arrangement captured by the Transfer Pricing Rules, so long as the parties are contractually bound by the pricing agreed before the change.
The interpretation of whether an arrangement is considered “materially altered” has a direct impact on assessing whether the Transfer Pricing Rules apply to a particular year.
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