TAX NEWSLETTER: REMODELING OF THE APPLICABLE TRANSFER PRICING REGIME
Context
As per recent regulatory publications, the Algerian transfer pricing regime has encountered numerous amendments and remodelings following the enactment of the Rectifying Finance Law for fiscal year 2023 (hereinafter referred to as “RFL 23”), which has been supplemented by the recent issuance of a new order relating to transfer pricing documentation, thus underlying the administration’s aim to provide for a comprehensive framework designed to mitigate tax base erosions.
We recall that since fiscal year 2020, local entities carrying intercompany transactions were obligated to file a transfer pricing documentation annually to the tax authorities allowing its agents to assess whether or not the adopted pricing policy is compliant with the arm's length principle as defined by OCED, meaning that the latter aligns with the prices negotiated between independent companies.
For this purpose, the authorities proceeded with the publication of the interministerial order of November 17th, 2020 in order to specify the content to be covered by the said documentation, as well as its complementary version if requested by tax auditing agents.
Starting from fiscal year 2023, affiliated entities shall comply with the evolution of the applicable regime as the newly introduced measures may have a direct impact on local business operations for such groups, namely through the redefinition of the annual transfer pricing remote declaration scope, clarifying the notion of capitalistic control triggering the right of reintegrating indirectly transferred profits, and the increase of the applicable non-compliance penalties.
Considering the above, Fares Legal is glad to provide you with a comprehensive summary of the key provisions introduced by RFL 23, as well as the up-to-date documentation format:
Transfer pricing documentation issuance
As per RFL 23, entities meeting the conditions established by Article 151 ter of the Direct Tax Code that are subject to an onsite accounting audit by the tax administration are required to provide a transfer pricing documentation describing the applied intercompany pricing policy, on the initiation date of the audit.
Failure to comply with this obligation will result in the issuing of a formal notice by auditing agents, prompting companies to provide the said documentation within 15 days, followed by the application of penalties if the request remains unfulfilled.
Indeed, while the previous obligation was carried systematically on an annual basis, the newly introduced regime only foresees the providing of a transfer pricing documentation within the framework of a tax audit.
However, given that current regulations provide for a limited response time (starting on tax audit initiation day / 15 days following receipt of a formal notice), we advise to maintain an annual production of this documentation internally in order to avoid the application of penalties for non-compliance for audited companies.
Content
From a general perspective, the main sections constituting the transfer pricing documentation remain relatively similar to the previous model established by the tax authorities, with the addition of various specifics to be covered by each section respectively.
In accordance with the newly published order, taxpayers shall report information concerning the group of companies on the one hand, as well as the reporting company on the other, which are summarized as per the below:
1) For the Group:
Description of Business Segments
Details on the group's business structure, revenue sources, supply chain, market segmentation, service agreements, functional analysis, and significant corporate restructuring.
Intangible Assets
Overview of the group's strategy regarding intangible assets, including R&D, ownership details, intercompany agreements involving intangible assets, pricing policy governing intangible asset transactions within the group, and transfers of intangible asset ownership.
Intercompany Financing Operations
Overview of the group's financing structure, entities carrying the financing function within the group, and pricing policies governing significant financing agreements with independent lenders.
2) For the Audited Company:
Organizational Business Structure
Description of the company's management and organizational structure, detailed operational strategy involving corporate reorganization or intangible asset transfers, along with key competitors.
Transactions with Affiliated Entities
Details of intragroup transactions, expenses, income, related party entities, intercompany agreements, comparability and functional analyses, transfer pricing methods, financial information, and existing in-advance pricing agreements.
Financial Information
Submission of the company's annual financial statements and breakdown tables illustrating financial data used for transfer pricing analysis.
Each section provides comprehensive information to enable authorities to assess compliance with the arm's length principle and ensure transparency in intra-group transactions.
Description
In comparison to previous transfer pricing documentation requirements, the newly published order aligns with the tax authority's aim to efficiently monitor profit transfers and mitigate tax base erosion.
With the introduction of the revised transfer pricing regime in Algeria through RFL 23, the measures signaled the growing interest of tax authorities in regulating this transaction category.
Now, by combining the remote declaration obligation with the enhancement of transfer pricing documentation content during tax audits, as well as increasing penalties for non-compliance, intragroup transactions shall consequently be properly structured by entities in order to avoid the incurring of substantial tax expenses which will directly affect the profitability derived from local operations.
This strategic approach underscores the government's commitment to combating profit shifting and promoting tax fairness. It reinforces the importance of adherence to regulations, fostering transparency and integrity in Algeria's business landscape.
In that respect, we advise our clients to inquire about the evolving measures as provided for by the administration, and align with the foreseen declarative process for fiscal year 2023.