Governed by the Transfer pricing legislation Sect 98A and 98B of the Income Tax Act was introduced on the 1st of January 2014. The law was meant to forestall transactions that do not satisfy the arm’s length principle between associates.
What are Arms Length Transactions.
These are transactions in which two or more unrelated and unaffiliated parties agree to do business, acting independently and in their self-interest. An international standard which states that where conditions are made or imposed between two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
The rules complement the old rules of Section 23 and 24 of the Act. These new transfer pricing rules are both domestically and externally focused. The concept of
transfer pricing is among the suite of measures that have been legislated in order to reduce instances of tax avoidance by tax payers.
To fully understand Transfer Pricing, we need to understand the definition of an Associated Persons.Two persons are associated persons with respect to each other if they meet the conditions set out in section 2A of the Income Tax Act which reads as below.
2A When persons deemed to be associates
(1) Where a person, other than an employee, acts in accordance with the directions, requests, suggestions or wishes of another person, whether or not the persons are in a business relationship and whether or not those directions, requests, suggestions or wishes are communicated to the first-mentioned person, both persons shall be treat- ed as associates of each other for the purposes of this Act.
(2) Without limiting the generality of subsection (1), the following shall be treated as a person’s associate—
(a) a near relative of the person, unless the Commissioner is satisfied that neither person acts in accordance with the directions, requests, suggestions or wishes of the other;(b) a partner of the person, unless the Commissioner is satisfied that neither person acts in accordance with the directions, requests, suggestions or wishes of the other;
(c) a partnership in which the person is a partner, if the person, either alone or together with one or more associates,controls fifty per centum or more of the rights to the partnership’s income or capital;(d) the trustee of a trust under which the person, or an associate of the person, benefits or may benefit; (e) a company which is controlled by the person, either alone or together with one or more associates;
(f) where the person is in a partnership, a partner in the partnership who, either alone or together with one or more associates, controls fifty per centum or more of the rights to the partnership’s income or capital;
(g) where the person is the trustee of a trust, any other person who benefits or may benefit under the trust;
(h) where the person is a company—
(i) a person who, either alone or together with one or more associates, controls the company; or
(ii) another company which is controlled by a person referred to in subparagraph (i), either alone or together with one or more associates.
2B When person deemed to control company
For the purposes of this Act, a person shall be deemed to control a company if the person, either alone or together with one or more associates or nominees—
(a) controls the majority of the voting rights attaching to all classes of shares in the company, whether di- rectly or through one or more interposed companies, partnerships or trusts; or
(b) has any direct or indirect influence that, if exercised, results in him or her or his or her associates or nominees factually controlling the company.
