Updated: 3 days ago
Recent changes were made to Form C by the Inland Revenue Board in preparation for the YA 2022. One of the most important changes is for those businesses participating in transfer pricing arrangements. As a result, the disclosure items have been significantly expanded to cover new areas.
These new areas include, among other things, stating the characterisation of your company by reference to its functional profile, the business restructuring undertaken by the group during the year, whether or not your company engages in cash pooling activities, performs any research and development activities or owns any intellectual properties.
Form C Requires Additional Disclosures
The taxpayer is NOW obligated to provide an entity characterisation concerning its business activities, specifically its manufacturing, distribution, and service activities; for instance:
Whether manufacturing activities are carried out as a toll manufacturer, contract manufacturer, full-fledged manufacturer, or any other form of manufacturing;
Whether distribution activities are carried out as a full-fledged distributor, commissionaire distributor, agent distributor, limited risk distributor, licenced distributor or any other form of distribution;
Whether service activities are carried out as a management-service provider, IT service provider, treasury or any other form of service.
The accurate definition of the entity is critical, and it must be decided based on an analysis of the transfer pricing functions, assets, and risks (FAR).
After the preliminary transfer pricing interviews (also known as functional analysis interviews) have been carried out and the required data has been collected, it is time to move on to the next step, explaining the manufacturer's business model.
For transfer pricing, the following commonly used phrases are often used to characterise the operational manufacturing structures of a manufacturer. These terms are organised according to the risk profiles and economic characterisation of the structures:
Entrepreneur (or a Full-Fledged Manufacturer);
Contract Manufacturer; and
The IRBM does not define any of the terms listed above. It is strongly advised that a comprehensive explanation be provided for each of the respective terms of the characteristics mentioned in Form C concerning the activities of manufacturing, distribution, and service.
Entrepreneur (or a Full-Fledged Manufacturer)
Full-fledged manufacturers may be responsible for various tasks, including production planning, input procurement, supply chain management, quality control, long-term capacity utilisation planning, and possibly even selling to third-party clients.
Product responsibility, warranty, capacity utilisation, market demand, and pricing risks are some of the risks associated with the operations of a full-fledged manufacturer who holds (non) routine intangibles.
A manufacturer who is also an entrepreneur may also be involved in significant research and development activities. In this case, the manufacturer assumes the risks associated with creating, maintaining, and protecting valuable intangible property that may result from research and development activities.
For instance, in a simplified model with one entrepreneurial entity and many non-entrepreneurial businesses that make up the value chain of an MNE group.
Non-entrepreneurial entities, such as limited-risk entities, generate returns on regular functions. The full-fledged manufacturer/entrepreneur receives all residual profits or losses from the value chain.
If there are group losses, the manufacturer entrepreneur will incur all group losses,
The principal keeps ownership of the raw materials, work-in-process, and finished products at all times during the manufacturing process when working with a toll manufacturer.
The raw materials are owned by the related-party manufacturer, who then makes them available to the toll manufacturer so that they can be processed (that is, the toll manufacturer does not take title to raw materials).
The toll manufacturer performs the processing services, and the manufacturing principal rewards the toll manufacturer through a toll manufacturing fee.
This fee is commonly determined as a markup on the processing costs.
The manufacturer is responsible for all risks, including those related to the final demand and price and those involved with storing raw materials and completed goods inventories.
Compared to a normal licenced manufacturer, a contract manufacturer is typically regarded as carrying a lower level of risk.
A manufacturing principal that directly bears the risk of demand and final consumer pricing is the "manufacturing principal" for whom the contract manufacturer manufactures items.
The principal may guarantee the acquisition of the goods if the product manufactured by the contract manufacturer meets the product and quality requirements set out by the principal. Therefore, compared to a licenced manufacturer, a contract manufacturer may be subject to relatively limited risks connected with retaining finished goods and selling them.
Because the contract manufacturer often owns the plant and equipment and procures and owns the raw materials, they are still responsible for bearing the risks involved with retaining inventories of fixed assets and raw materials. However, in many cases, a manufacturer may do some "contract manufacturing" activities in addition to its licenced or full-fledged manufacturing activities.
A licenced manufacturer manufactures items under the terms of a licence agreement.
This manufacturer uses the intangible manufacturing assets the licensor owns, such as patents, product designs, manufacturing processes, and know-how.
The licenced manufacturer is responsible for paying royalties for the use of licenced intangibles, often purchasing raw materials and semi-finished goods on its behalf, and maintaining inventories of completed goods and raw materials.
As a result, it is responsible for the risks of storing inventory and selling items, including the risk connected with demand and pricing.
The licenced manufacturer will typically own the facility and equipment required for manufacturing activities and invest in the workforce's training and development.
These terms, which summarise manufacturer risk and functional profiles, are often helpful in describing typical transfer pricing issues associated with the manufacturing sector.
Even though the boundaries between these terms are not always clear, and they may oversimplify complex manufacturing profiles, they help summarise manufacturer risk and functional profiles.
If controlled transactions are involved, you need to be able to classify them properly because they will need to be filled for the income tax return of 2022.
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