What are Secondary adjustments in Transfer Pricing?

Multinational Enterprises (MNEs) with subsidiaries or divisions in multiple countries need to comply with transfer pricing requirements. Transfer pricing involves determining the prices at which goods, services, or intellectual property are exchanged between MNEs located in different tax jurisdictions.

This transfer price should be based on the principle of arm’s length, which implies that the price should be similar to what unrelated parties would charge in a similar transaction. However, multinational corporations, due to authority and control over division’s management, can manipulate these transfer prices to minimize their global tax liability. Secondary adjustments act as a safeguard to mitigate such manipulation.

Taxpayers facing transfer pricing adjustments need to be aware of secondary adjustments. Transfer pricing advisers in Dubai can advise you on secondary adjustments. Read ahead to learn more secondary adjustments in Transfer Pricing:

The Purpose of Secondary Adjustments

The purpose of secondary adjustments is to resolve discrepancies stemming from primary and corresponding adjustments. A primary adjustment happens when a tax authority or a taxpayer adjusts taxable profits by way of applying the arm’s-length principle to transactions between associated enterprises. On the other hand, a corresponding adjustment is the offsetting income reduction in the counterparty jurisdiction.

What are secondary adjustments in transfer pricing?

Secondary adjustments and adjustments in the books of account of the taxpayer and its associated enterprise so that the actual allocation of profits between the taxpayer and its associated enterprise is consistent with the transfer price determined as a result of the primary adjustment. It removes the inconsistency between the cash account and the actual profit of the taxpayer. Transfer pricing consultants in Dubai can help you with secondary adjustments.

How does Secondary Adjustment Work?

Some jurisdictions have asserted a constructive transaction (secondary transaction) in the local legislation to make the actual allocation of profits consistent with the primary transfer pricing adjustment. In this way, the excess profits resulting from a primary adjustment will be treated as having been transferred in some other form and taxed accordingly.

The secondary transactions often take the form of constructive dividends, constructive equity contributions, or constructive loans.  Secondary adjustments attempt to account for the difference between the re-determined taxable profits and the originally booked profits. The subjecting to tax of a secondary transaction gives rise to a secondary transfer pricing adjustment (a secondary adjustment). Thus, secondary adjustments may serve to prevent tax avoidance.

The Dividend Approach in Secondary Adjustments

A jurisdiction making a primary adjustment to the income of a subsidiary of a foreign parent company may treat the excess profits in the hands of the foreign parent as having been transferred as a dividend, in which case withholding tax may apply.

Constructive Loan Approach in Secondary Adjustments

In another example, the tax administration making a primary adjustment may treat the excess profits as being a constructive loan from one associated enterprise to another associated enterprise. In this case, an obligation to repay the loan would be deemed to arise.

Concern of Double Taxation in Secondary Adjustments

A secondary adjustment may lead to double taxation unless a corresponding credit or some other form of relief is provided by the other country for the additional tax liability that may result from a secondary adjustment. Transfer pricing experts in Dubai can further advise you in this regard.

Why do some jurisdictions reject secondary adjustments?

Secondary adjustments are rejected by some jurisdictions because of the practical difficulties they present. For example, if a primary adjustment is made between brother-sister companies, the secondary adjustment may involve a hypothetical dividend from one of those companies up a chain to a common parent, followed by constructive equity contributions down another chain of ownership to reach the other company involved in the transaction. Many hypothetical transactions might be created, raising questions about whether tax consequences should be triggered in other jurisdictions besides those involved.

Hire the Best Transfer Pricing Consultants in Dubai, UAE

Transfer pricing compliance in the UAE can be complex for MNEs but it can be made simple by consulting with transfer pricing experts. When it comes to availing transfer pricing advisers in Dubai, MNEs need to be cautious. Hiring the best transfer pricing consultants in Dubai such as Tax Gian can make transfer pricing compliance seamless.

Tax Gian is the flagship brand of Jitendra Tax Consultants (JTC), consisting of a team of highly experienced tax experts. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. We can help you navigate the complex provisions of transfer pricing. Call us today to avail yourself of comprehensive corporate tax advisory services in Dubai, UAE.

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