Executive Instructions of the new Transfer Pricing regulations for MNE groups have been released

On 7 June 2021, the Hashemite Kingdom of Jordan published its official Transfer Pricing (TP) Regulations in the Official Gazette under regulations No. (40) for the Financial Year 2021. The Regulations cover multinational entity groups (MNE groups) headquartered and/or operating in Jordan.

Following these Regulations, on 16 September 2021, the Hashemite Kingdom of Jordan published Executive Instructions No. (3) of 2021 which will give some clarification regarding the TP requirements in Jordan.

Disclosure Form

It has been highlighted in the TP Regulations that enterprises whose transaction value with related persons (based on the arm’s length principle) exceed 500,000 Jordanian dinars during a period of 12 consecutive months, should submit a Disclosure Form along with the tax return. 

Article 4 of the Executive Instructions is aligned with Article 9 of the TP Regulations that gives the details of information that need to be included in the Disclosure Form.

The new requirement in the Instructions relates to the template that is available for the Disclosure Form. The template is presented in two tables (section 1 and section 2).

Section 1 of the table will contain information regarding the related parties and Section 2 of the table contains information regarding the related party transactions.

A new requirement that has been added in the Executive Instructions is to include whether the taxpayer concluded non-monetary related party transactions during the tax period. In this case, taxpayers should provide details of these transactions.
 

Local File

The TP Regulations provided the requirement of the submission of the Local File without mentioning the deadline or the detailed content.

The Executive Instructions clarify the deadline to submit the Local File which is within 12 months following the tax period.  

Article 7 of the Executive Instructions provides the content of the Local File as
follows:

1. Taxpayer information, including the following:
   1. A description of the administrative organization of the taxpayer and its organizational structure and the countries in which the main business decisions are being undertaken.
   2. A detailed description of the business, activities, and strategy of the taxpayer, including a statement on any business restructuring or asset transfers.
2. The most important information about the transactions of the concerned parties including the following:
   1. A description of the transactions between Related Persons.
   2. The value of expenses and revenues within the group for each category of transactions between related persons.
   3. The identity of the related persons participating in each category of transactions.
   4. A copy of all agreements concluded by the taxpayers for transactions within the group.
   5. A detailed comparison and job analysis of the taxpayer and the related persons.
   6. The TP method adopted, the applicable assumptions for the method and the reasons for choosing this method.
   7. A list, description, and analysis of independent comparable internal or external transactions.
   8. Settlements that have been made, if any.
   9. The financial information on which the TP method is based.
3. A comprehensive analysis of the sector in which the taxpayer conducts their activities, including:
   1. Biggest competitors.
   2. Analysis of strengths, weaknesses, opportunities, and threats (SWOT).
   3. Capabilities of suppliers.
   4. Capabilities of buyers.
   5. The size and activity of the taxpayer.
   6. Trends of supply and demand.
   7. Entry requirements for the sector.
   8. The most important target international markets.
   9. Market currency.
   10. Delivery methods. 
4. Financial statements, including the following:
   1. Consolidated annual financial statements of the taxpayer for the relevant tax period.
   2. A table of information that shows the relationship between the financial statements used in applying the TP method.
   3. A summary of the relevant financial data tables used in the comparability analysis and the source of the data.

The above information that should be included in a Local File is aligned with the Organization for Economic Co-operation and Development (OECD) TP Guidelines except the industry analysis which includes specific requirements. These new requirements are in line with other Gulf Cooperation Council (GCC) TP legislation.
 

Master File

As for the Local File, the TP Regulations provide the requirements in relation to the submission of the Master File.

The Executive Instructions provide that the deadline of the submission of the Master File should be within 12 months following the tax period.

Article 8 of the Executive Instructions provide the content of the Master File as follows:

1. The organizational structure that shows the ownership of the entities belonging to the multinational group and the geographical location of each of them.
2. The description of the business of the multinational group, including:
   1. Factors affecting business profits.
   2. A description of the supply chain for the most important products and services provided by the group in terms of sales volume, including other products and services that represent more than five percent (5%) of the group's sales.
   3. A list of the agreements for the provision of services concluded between the members of the multinational group or any similar arrangements.
   4. The main markets for the group's products and services.
   5. A functional analysis showing the value added by the group's subsidiaries.
   6. A description of the most important transactions related to business restructuring, acquisitions, and liquidation during the tax period.
3. Information about the intangible assets of the multinational group, including a list of these assets, agreements between related persons, TP policies and the group's strategy in managing these assets and transferring the ownership of these assets.
4. Information about financing activities between the enterprises of the multinational group, including:
   • The members of the group who perform major financing activities for the group, their countries of incorporation and their headquarters.
   • The special TP policies of the multinational group regarding financing activities between related parties.
5. Information on the financial and tax conditions of the multinational group, which include:
   • The consolidated financial statements of the multinational group for the tax period subject of the tax declaration prepared for financial reporting purposes or for legal, administrative, tax or other purposes.
   • A list of the TP agreements concluded between the multinational group and tax administrations, if any.

The above information that should be included in a Master File is aligned with the OECD TP Guidelines.   
 

Country by Country Reporting

In the TP Regulations there is a requirement to submit a Country by Country report (CbCR) to the tax authority for the financial year preceding the reporting year concerned for groups with a turnover exceeding 600 million Jordanian
dinars.

Jordan resident Ultimate Parent Entities of the Group will be required to submit a CbCR. Additionally, under a secondary filing requirement, Jordan resident entities of Groups headquartered outside of Jordan may also be required to submit a CbCR under certain circumstances.

The Executive Instructions provide a template for CbCR table 1, table 2 and table 3 which are in line with the OECD format.

Moreover, the Executive Instructions provide more details regarding the concept of a Surrogate filing entity. Taxpayers will not be required to file the CbCR in Jordan where filing has been made through a surrogate filing entity such that its jurisdiction: Requires a CbCR to be filed; has an agreement with Jordan that allows for automatic exchange of CbCR data; has not notified the Jordanian Tax Authority of any systemic failure in exchange of CbCR data; has been notified of the identity of the ‘Surrogate filing entity’; and a notification has been provided to the Jordan Tax Authority providing the name and jurisdiction of tax residence of the ‘Surrogate filing entity’ and its tax identification number. 
 

Transfer Pricing methods

As previously mentioned in the TP Regulations, the choice of TP method is in line with OECD guidance and prescribed methods (comparable uncontrolled price, resale price, cost plus, transactional net margin and transactional profit split).

As newly clarified in the Executive Instructions, taxpayers must specify the reasons that were relied upon in choosing the TP method and the assumptions that have been adopted.

Additionally, a new requirement mentioned in article 10 of the Executive Instructions is the submission of an Affidavit from a certified accountant confirming the consistent application of the TP policy of the group.

However, we are expecting clarification from the tax authority regarding the deadline and the format of the Affidavit. 

Based on Article 10 of the Executive Instructions, if the taxpayer adopted any of the TP methods for a related party transaction, the taxpayer should continue to adopt the same method for subsequent tax periods.
  

Conclusion

The Executive Instructions have been published only a very short time since the publication of the TP Regulations and it is clear that the Jordanian Tax Authority remains committed to quickly and effectively finalizing its TP legislative framework. 

Some new important details have emerged from the Executive Instructions. These include the requirement for a TP Affidavit, the requirement for a consistent use of a selected TP method and the requirement for mandatory filing of a Local file and Master file within 12 months of the prior reporting period.

Given these new important requirements, taxpayers in Jordan should immediately assess their related party transactions and associated TP policies to manage their TP risks.