Federal Experts Consultancy

Q1. What is the scope of the reporting obligation under Article 57 of the Executive Regulations of the Income Tax Law?

In accordance with the provisions of Article 57 of the Executive Regulations (ERs) of the Income Tax Law (ITL) and Articles 6 and 7 of the Decision of the President of the General Tax Authority (GTA) No. 4 of the year 2020 of July 16, 2020 relating to the transfer pricing (TP) declaration and the master file and local file, entities resident in Qatar must submit a master file and a local file when they meet the following conditions:

  • the annual tax-free turnover of these entities or the gross assets appearing on their balance sheet is greater than or equal to QAR50,000,000; and
  • these entities are associated to other entities established

Important:

  1. For the purposes of applying the aforementioned provisions, an entity is deemed to be associated to another entity, resident abroad, in the following cases:
  • the reporting entity holds, at the end of the financial year (FY), directly or indirectly, more than half of the capital or voting rights of the other entity; or
  • more than half of the reporting entity’s capital or of its voting rights is held, at the end of the FY, directly or indirectly, by the other entity.
  1. Entities which do not carry out any transactions with related entities resident abroad may submit a “nil”
  2. The reporting obligation described above also applies to foreign entities having a permanent establishment (PE) in Qatar, being specified in this case that the conditions mentioned above will be considered as satisfied if they are fulfilled at the level of the PE in

Enterprises other than those described above are not required to produce the master file and local file.

However, those enterprises are obliged to provide information and documents about their material cross-border transactions upon a specific request of the GTA in the course of a tax examination or for transfer pricing risk assessment purposes.

Q2. What is the master file?

Article 57 of the Executive Regulations (ERs) of the Income Tax Law (ITL) and Articles 6, 7, 8, 9, 10 and 11 of the Decision of the President of the General Tax Authority (GTA) No. 4 of the year 2020 on the Transfer Pricing (TP) Declaration, the Master File and the Local File, require multinational enterprises (MNEs) to provide the General Tax Authority (GTA) with high-level information regarding their global business operations and

transfer pricing (TP) policies in a “master file”.

Q3. What is the local file?

Article 57 of the ITL’s ERs and Articles 6, 7, 8, 9, 10 and 11 of the Decision of the GTA’s President of No. 4 of the year 2020 require that detailed transactional TP documentation be provided in a “local file”, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the TP determinations they have made with regard to those transactions.

Q4. Why are those documents useful for the General Tax Authority?

Taken together, these two documents (master file and local file) will require taxpayers to articulate consistent TP positions and will provide the GTA with useful information to assess TP risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.

Q5. What are the objectives of master file and local file requirements?

The objectives of master file and local file requirements are:

  1. to ensure that taxpayers give appropriate consideration to transfer pricing (TP) requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns (cf. Article 52 of the Executive Regulations (ERs) of the Income Tax Law (ITL));
  2. to provide the General Tax Authority (GTA) with the information necessary to conduct an informed TP risk assessment (cf. Article 58 of the ITL’s ERs); and
  3. to provide the GTA with useful information to employ in conducting an appropriately thorough audit of the TP practices (cf. Article 58 of the ITL’s ERs), although it may be necessary to supplement the documentation with additional information as the audit progresses (cf. Articles 56, 59 and 60 of the ITL’s ERs).

Taxpayers are required to carefully evaluate, at or before the time of filing a tax return, their own compliance with the applicable TP rules (cf. Article 53 of the ITL’s ERs).

Q6. Are taxpayers required to assess their compliance with the arm’s length principle? 

By requiring taxpayers to articulate convincing, consistent and cogent transfer pricing (TP) positions, TP documentation will help to ensure that a culture of compliance is created.

Well-prepared documentation will give the General Tax Authority (GTA) some assurance that the taxpayer has analyzed the positions it reports on tax returns, has considered the available comparable data, and has reached consistent TP positions.

Moreover, contemporaneous documentation requirements will help to ensure the integrity of the taxpayers’ positions and restrain taxpayers from developing justifications for their positions after the fact.

The Executive Regulations of the Income Tax Law require that TP documentation requirements be satisfied on a contemporaneous basis.

This means that the documentation would be prepared at the time of the transaction, or in any event, no later than the time of completing and filing the tax return for the fiscal year in which the transaction takes place (cf. Article 53 of the ETL’s ERs).

Q7. How does transfer pricing documentation ensure high quality transfer pricing risk assessment?

Effective risk identification and assessment constitute an essential early stage in the process of selecting appropriate cases for transfer pricing (TP) audits or enquiries and in focusing such audits on the most important issues (cf. Article 58 of the Executive Regulations (ERs) of the Income Tax Law (ITL)).

Because the General Tax Authority (GTA) operate with limited resources, it is important for it to accurately evaluate, at the very outset of a possible audit, whether a taxpayer’s TP arrangements warrant in-depth review and a commitment of significant tax enforcement resources.

Particularly with regard to TP issues (which generally are complex and fact-intensive), effective risk assessment becomes an essential prerequisite for a focused and resource-efficient audit.

Proper assessment of TP risk by the GTA requires access to sufficient, relevant and reliable information at an early stage.

While there are many sources of relevant information, TP documentation (TP declaration, master file and local) is one critical source of such information (Cf. Articles 56 and 57 of the ITL’s ERs).

The GTA will use a variety of tools and sources of information for identifying and evaluating TP risks of taxpayers and transactions, including TP declaration (to be filed with the annual tax return), TP questionnaires focusing on particular areas of risk (cf. Article 56 of the ITL’s ERs), general TP documentation requirements identifying the supporting evidence necessary to demonstrate the taxpayer’s compliance with the arm’s length principle (cf. Articles 59 and 60 of the ITL’s ERs), and cooperative discussions between the GTA and taxpayers.

Each of the tools and sources of information appears to respond to the same fundamental observation: there is a need for the GTA to have ready access to relevant information at an early stage to enable an accurate and informed TP risk assessment.

Q8. What information must be provided in the master file?

 The master file should provide an overview of the multinational enterprise group (MNE) business, including the nature of its global business operations, its overall transfer pricing (TP) policies, and its global allocation of income and economic activity in order to assist the General Tax Authority (GTA) in evaluating the presence of significant TP risk.

In general, the master file is intended to provide a high-level overview in order to place the MNE group’s TP practices in their global economic, legal, financial and tax context.

It is not intended to require exhaustive listings of minutiae (e.g., a listing of every patent owned by members of the MNE group) as this would be both unnecessarily burdensome and inconsistent with the objectives of the master file.

In producing the master file, including lists of important agreements, intangibles and transactions, taxpayers should use prudent business judgment in determining the appropriate level of detail for the information supplied, keeping in mind the objective of the master file to provide the GTA a high-level overview of the MNE’s global operations and policies.

When the requirements of the master file can be fully satisfied by specific cross-references to other existing documents, such cross- references, together with copies of the relevant documents, should be deemed to satisfy the relevant requirement.

For purposes of producing the master file, information is considered important if its omission would affect the reliability of the TP outcomes.

The information required in the master file provides a “blueprint” of the MNE group and contains relevant information that can be grouped in 5 categories:

  1. the MNE group’s organizational structure;
  2. a description of the MNE’s business or businesses;
  3. the MNE’s intangibles;
  4. the MNE’s intercompany financial activities; and
  5. the MNE’s financial and tax

Taxpayers should present the information in the master file for the MNE as a whole.

However, organization of the information presented by line of business is permitted where well justified by the facts, e.g., where the structure of the MNE group is such that some significant business lines operate largely independently or are recently acquired.

Where line of business presentation is used, care should be taken to assure that centralized group functions and transactions between business lines are properly described in the master file.

Even where line of business presentation is selected, the entire master file consisting of all business lines be made available to the GTA in order to assure that an appropriate overview of the MNE group’s global business is provided.

The Decision of the President of the General Tax Authority No. 4 of the year 2020 on the Transfer Pricing Declaration, the Master

File and the Local File sets out the items of information to be included in the master file.

Q9. What information must be provided in the local file?

 In contrast to the master file, which provides a high-level overview as described in Q8, the local file provides more detailed information relating to specific intercompany transactions.

The information required in the local file supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm’s length principle in its material transfer pricing (TP) positions affecting a specific jurisdiction.

The local file focuses on information relevant to the TP analysis related to transactions taking place between a Qatari affiliate and associated enterprises in different countries and which are material in the context of the Qatari’s tax system.

Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate TP method.

Where a requirement of the local file can be fully satisfied by a specific cross-reference to information contained in the master file, such a cross-reference should suffice.

The Decision of the President of the General Tax Authority No. 4 of the year 2020 on the Transfer Pricing Declaration, the Master File and the Local file sets out the items of information to be included in the local file.

Q10. What does “contemporaneous documentation” mean?

 Each taxpayer should endeavor to determine transfer prices (TP) for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction.

Thus, a taxpayer ordinarily should give consideration to whether its TP is appropriate for tax purposes before the pricing is established and should confirm the arm’s length nature of its financial results at the time of filing its income tax return (ITR).

Where a taxpayer reasonably demonstrates that either no comparable data exists or that the cost of locating the comparable data would be disproportionately high relative to the amounts at issue, the taxpayer should not be required to incur costs in searching for such data.

Q11. What is the timing for preparing the transfer pricing documentation and for filing the master file and local file?

 The Executive Regulations (ERs) of the Income Tax Law (ITL) require information to be finalized by the time the tax return is filed (Cf. Article 53 of the ITL’s ERs).

A 30-day period is given to taxpayers to respond to specific General Tax Authority (GTA)’s requests for documentation and other audit related information requests (cf. Article 56 of the ITL’s ERs).

Taxpayers must submit their master files and local files no later than June 30 of the year following the fiscal year in question (cf. Article 57 of the ITL’s ERs and Article 8 of the Decision of the President of the General Tax Authority No. 4 of the Year 2020 on the Transfer Pricing Declaration, Master File and Local File).

Q12. What does “Materiality” mean?

 Not all transactions that occur between associated enterprises are sufficiently material to require full documentation in the local file.

The General Tax Authority (GTA) has an interest in seeing the most important information while at the same time it also has an interest in seeing that multinational enterprises (MNEs) are not so overwhelmed with compliance demands that they fail to consider and document the most important items.

The section “Controlled transactions” in the local file form includes a description of significant transactions with associated enterprises, amounts of intra-group payments and receipts, identification of associated enterprises involved in controlled transactions, significant inter-enterprise agreements, a comparability analysis and a functional analysis, an indication of the transfer pricing (TP) method used.

The transactions concerned are those between the enterprise that establishes the documentation and one or more associated enterprises and the amount of which, aggregated by category, exceeds QAR200,000 for the year.

Transactions carried out between a head office and its branch must, subject to meeting the aforementioned threshold of QAR200,000, also be described.

Important (1):

In all cases, the amounts are those taken from the enterprise’s accounts without compensation between income and expenses, or between acquisitions and disposals of assets.

The categories of transactions to be considered are:

Revenues: sales of goods, provision of services, commissions, royalties, performance guarantees, financial guarantees, financial products, other products.

Charges: purchases of goods or services, commissions, fees, performance guarantees, financial guarantees, financial charges, other charges.

Important (2):

In the case of mixed transactions, such as the sale of goods accompanied by the provision of maintenance services, the local file must reflect the accounting method adopted by the enterprise for these transactions.

The enterprise may therefore be required to indicate these elements in two different categories (sales and provision of services) or in only one.

Acquisitions and disposals of assets relate to tangible and intangible assets.

Important (3):

The amounts indicated must correspond to the gross amount of the purchase prices and the selling prices of the assets concerned, and not to the capital gains or losses.

The gross amount must be declared when it is greater than QAR200,000.

See Subparagraph (b) of Paragraph 2 of Article 9 of the Decision of the President of the General Tax Authority No. 4 of the Year 2020 on the Transfer Pricing Declaration, Master File and Local for the materiality standard applicable in completing the master file.



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