Transfer Pricing in Nepal : Need to have comprehensive guidelines and Practice
Transfer pricing is a mechanism adopted in relation to transactions between two related entities, so as to minimize the overall tax liability of the group of companies of which the two entities are members. The existing provisions of the Inland Revenue Act are inadequate to apply the arm length principle that neutralizes the adverse effect of transfer pricing. It is therefore, proposed to incorporate in our tax statute a legal basis to enforce the arms length principle. It is expecting additional revenue of Rs. 300 millions by removing this loophole in our tax laws.
In 2004,Nepal has become the member of world trade organization which has brought major significance and changes in business in the country in global market. Although the concept of Transfer Pricing has been introduced in/with Income tax reforms and act 2002. But the drasting changes with inflow Foreign Direct Investment and foreign company in Nepal and some Nepalese companies also made an investment outside Nepal only after 2004 .Nowadays over 60 countries have adopted transfer pricing rules and over 60% of the international trade is carried out within Multinational entity.
There are about 400 to 500 foreign companies having associated with Nepali Business environment out of which about 282 to 285 are Indian company. Since there are huge business transactions and foreign companies in Nepal, Transfer Pricing concept is very necessary to have fair taxation practice in Nepal.
Earlier Seminar on “International Taxation & Transfer Pricing was also conducted by SAFA International for implementation of Transfer Pricing in Nepal. However there is still some confusion and unawareness regarding importance of implementation of Transfer Pricing in Nepal.
Importance of TP
Globalization and economic growth have driven the level of inter-company transactions to new heights. It is estimated that more than 2/3 of all business In particular, developing countries are observing immense growth in intra-group transactions due to the fact that their economies are still in the process of opening up and attract large amounts of FDI. transactions worldwide take place within groups. Therefore, TP is not only of importance to business but also for tax administrations, which have to implement or adapt their national TP legislation and practices accordingly. International consistency in TP is beneficial to creating a basic structure of taxable persons and events, which ensures proper application of the arm’s length principle. Further Transfer pricing helps to identify practical issues in business restructurings and manage risk of double taxation.
Provision of Transfer Pricing in Income Tax
As per section 33, In any arrangement between persons who are associates person, the department may, by notice in writing, distribute, apportion, or allocate amounts to be included or deducted in calculating income between the persons as is necessary to reflect the taxable income or tax payable that would have arisen for them if the arrangement had been conduction at arm’s length price.
In making any adjustment under subsection the department may re-characterize the source and type of any income, loss, amount, or payment; or Allocate costs, including head office expenses, incurred by one person in conduction a business that benefit an associate or associates in conducting a business to the associates based on the comparative uncovers of the businesses.
Associated persons means two or more persons or group of such persons where one may reasonably be expected to act in accordance with the intentions of the other Associated persons may act on as permanent Establishment and Subsidiary.
Provision on Tax Treaty
Contraction States may conduct the transfer pricing audit and the State in which profit was shifted has to recalculate the taxable income
Need To Have Comprehensive Manual/Guidelines
Seeing the business transaction with cross boarders transactions among associates enterprise by foreign company in Nepal, the tax authority has very limited tax provision and practice to identify the issue of transfer pricing cases in the country. Absence of catch in transfer pricing shall increase the Possibility of transfer pricing to shift profits in the contracting states where tax rates are lower.
To implement Transfer Pricing concept, the Tax Authority has to take appropriate step for coming up with comprehensive manual or guidelines and have to work on war stage without any delay. A compressive manual is required for implementation of Transfer Pricing specially containing:-
- Proper study of Nepali Business Market.
- Proper study regarding need of Transfer Pricing concept.
- Study of foreign investors in Nepal.
- Study on top 10 foreign companies for case studies with available data.
- Study of top 10 trading partners of the country.
- How to integrate transfer pricing into business and tax strategies
- How to perform the required transfer pricing analyses
- Selection and implement appropriate transfer pricing policies
- Study to know which evidence needs to be gathered
- Study to identify and manage transfer pricing risk
- Brief study of international market implementing Transfer Pricing.
- Proper Guidelines and policy regarding Transfer Pricing required
- Study regarding difficulties and challenges emerging from implementation Transfer Pricing.
Challenges of Transfer Pricing Practice through Authority.
Not Sufficient number of qualified officers and auditors who lacs accounting techniques or expertise; lack knowledge within the private sectors, lack of provision of advance price agreement, limited number of tax treaties between trading countries, lack of available sufficient data and information to calculate arms length price.
To mitigate these challenges, the department may have to come up with comprehensive guidelines on transfer pricing with capacity building program of the tax officers and tax professionals, establishment of data bank in existing transfer pricing materials and potential transfer pricing materials depending on the trading partners and investing countries and finally rasing an awareness among stakeholders.
I recall my days in 2048 B.S. i.e. 1991 AD when failed in class 10th exam in Nepal. There are 56.08 percent (2, 21,478 out of 3, 94,933) students who have failed in regular exam of class 10th standard and 89.13 percent (1,19,107 out of 1,33,626) students failed in exempted exam of class 10th. Exempted students are those who have failed either more than compartment of two times earlier attempts.
Those students who have failed must be facing a very embarrassing situation or state of mind that they have failed!! Everybody surrounding them with the attitude that the child have not done well! You cannot do any thing! all the child or students/ your friend who have passed are all studious and good students, obedient, disciplined, civilized, and all the good words shall be used for all those passed children but for those who have failed are not eligible to get even small word of appreciation/affection? You cannot do anything, you just not good in your study, you have studied well, and you cannot do anything in life.
The matter of concern that everybody greeting and congratulating passed students but no one of in governing authority of education in government/country taking/raising any doubt or concern that why 56 percent children have failed ?why there pass percentage is of only 43 percent in Nepal whereas just neighboring country India is of 98 percent most often?
Is it the students/child whose level of intelligence is not at par with neighboring country? Is there such a difference between level of intelligence and study difference between the two countries? What is the root cause? Whether it is parents, Society, Education system in the country, education standards in private and government school?
The time has come for the people/system/educational institutions who think that they are responsible citizen or body of the family/society/country to take call on this situation.
Those children who have failed in exam must be thinking that they not capable of passing even class 10th and this results into depression and negation thinking to both parents and child which leads them to negative attitudes towards further education. They don’t see any future in study further brought them away from study to Gulf country for employment in just tender age of 17-20.
The parents below poverty line the percentage are still 25 percent to 29 percent in Nepal or middle class people starts thinking alternative to study to send them abroad/gulf country for employment opportunities, the results are before us that averages 1500 youth leaves Nepal everyday which results into unskilled remittances and country without youth.
It is a wake up call to all stakeholders and governance authorities in Nepal for such alarming situation for the country. The development shall be obstructed not possible without youth and education in the country.
The monitoring of the examination system and worst results are not much relevant or important than the good education system in high requirement. The question must be asked with the authority for the reason of failure in the examination which is 56 percent rather than the child of having age of 15-17 years who must not be in a position to analyse and find the reason of failure.
It is not the students or children who failed rather an entire education system and governance authority. The time has come for them to take the conscious call and lead the education system towards development before it is too late which may results into youth revolution.
Those who failed in the examination must not feel hurt and depressed. To fail is not a matter and time of sadness but knowing and introspecting the reasons and come out with flying colour of success with making it ladder of success is the only way in life.
No Infrastructure, no power energy, no stability of the government are needed. The very first need is to reach to the original self attitude from where every citizen whether they are professionals, general citizen, bureaucrats or political leader whosoever they are should start understanding their responsibility towards self, towards family, society, nations/states, universe and then nature.
The very senses of responsibilities starts withdrawing attention from unwanted things and objectives of everyone who are involved and intended to involves in nation building.
We are witnessing since initial days in history of Nepal always, most of the political leader and whosoever were in the governance of Nepal have been fighting to resumes power except some of the exceptional people who were little aware towards responsibility of themselves and nation.
We must have experienced that the integration and disintegration of states/nation since the origin of the country Nepal. Previous to integration/unification in one Nepal by the then king Prithvi Narayan sah and we are witnessing these events since beginning? We shall be surprised with sorrow and pain with knowing that how many people had lost their lives with unnatural death just for sake of power. The losses of civilian were not recoverable in any way in the human history/civilisation.
Post of Prithvi Narayan Sah ruling 1768–1775, again the play of resuming the power of state has not been stopped even when we are now in 21st century and consequently the loss of human being and their suffering to live even normal life have been in stake always. The quantification and estimation of loss of human being rights and living cannot be estimated and not even bring it into measurable terms which are immeasurable all the way.
Now we can see the evidence of the play and situation of the country since death of King Birendra how every one potential influencing people/leader is trying to resume power through their unaware/insane state of mind.
We are fighting to get our full constitution for the last 6-7 years since passing of interim constitution in 2007. Yes, the constitution is important and valued documents/principles to drive the country but is it the last one which shall not be amended or not amendable at all further? Our leaders are seeing what are they going to get in present time and whether it shall be beneficial for them in terms of money and power? Are they looking forward to get satisfaction and blessings from the people from all over the country? Must be not and doubtable?
Innocent people must be thinking that if we get constitution, the miracle happens and life of the normal people shall get on track, 14 hours load shedding shall be converted into 24 hours electricity and the situation of the country shall be improved immediately.
Currently we are not getting one constitution drafted/passed and the major obstacle is the favour and disfavour of state federalism and basis of state federalism. What we sees that the current situation of the country is not in a position to recoup/gain its normal pace of development where we should have worry to consolidate our energy and resources to get on development track with one single state with full democracy. But unfortunately, we are fighting for the number of state not for the future prosperous Nepal rather for becoming the state chief and sharing of the power and status which are difficult to get by everyone which is not possible in case of one single state. The struggle are there for mere getting the power in the hands of various leaders where most have no experience and having vision to drive the nation towards development.
State federalism shall be required energy/resource like nation building capacity and determination like India where the then prime minister Jawaharlal Lal Nehru had to build the nation from scratch when it became independent in 1947 after long period of British rule who had left the economy in unpredictable stage of sufferings.
The country is facing the tremendous transition phase to development track with stable government with stable governance for the last various years.
We cannot deny the need of infrastructures, constitution, stable government but what all stakeholders and nation builders are needed first to put their time and energy not in state federalism but one consolidated republic country towards which we should have the right attitude/commitment towards self, family, society, nation to get the prosperous country through all needed development stage.
Everyone says everywhere written whether it is self help books, whether it is quotation by someone that life is full of risks, one has to take a risk, without risk, there is no gain, there is no success at all. Where there is high risk, there is high gain.
I totally disagree with these statement/sayings. The so called risk is nothing but steps/ladder to success. Where there are low risks/ low steps i.e. low speed of action leads to low success or late success. High risks/high steps/faster steps leads to high success.
You have to understand that the moment you dare to take risk/step/action towards success and start thinking that you have taken risk or high risk in life to get success in life. The very thinking of risk taking attitude/thought start massaging to your subconscious mind that there is always risks in your life, you are taking risks and the repetitive remembering and sending massage to sub-conscious mind leads/put you risk zone to fail in life.
Your conscious mind never sending massage in terms of thinking of good steps/action towards success rather Risks……Risks……Risks…and the mind occupied with risks attract risks opportunities and event in life which push you into risks zone from where one has to face the disastrous situation to come out.
The moment you start massaging your sub-conscious mind through your conscious mind though action or thinking that you are taking high risk, the very moment, fear of knowing that you have taken high risks start cultivating of fear of failure. Once massage start functioning in your subconscious mind, it is not god, not luck but your own sub-conscious mind start attracting risks to push to in failure zone in your endeavour.
Hence one has to attain a state of mind, one has to have an attitude towards success through thinking of and interpreting their steps/ladder towards success but not thinking/understanding that they are taking high risk and without high risk, there is no success. Risks are nothing but steps/action towards success…..