Rule 20: Application of this chapter
This chapter applies for the purposes of section 108 mainly, which provide the Commissioner with the power to distribute, apportion or allocate income, expenditures or tax credits between associates in respect of transactions not made in accordance with the arm's length principle.
Rule 21: Interpretation
(1) In this chapter,-
(a) "comparable uncontrolled transaction", in relation to a controlled transaction, means an uncontrolled transaction that satisfies one of the following conditions, namely:-
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the differences (if any) between the two transactions or between persons undertaking the transactions do not materially affect the price in the open market, the resale price margin or the cost plus mark up, as the case may be;or
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if the differences referred to in sub-clause (i) do materially affect the price in the open market, the resale price margin or the cost plus mark up, as the case may be, then reasonably accurate adjustments can be made to eliminate the material effects of suchdifferences;
(b) "controlled transaction" means a transaction between associates;
(c) "transaction" means any sale, assignment, lease, license, loan, contribution, right to use property or performance ofservices;
(d) "uncontrolled persons" means persons who are not associates;and
(e) "uncontrolled transaction" means a transaction between uncontrolledpersons.
Rule 22: No title (Subject to the other rules in this)
Chapter, the Commissioner, in applying this Chapter shall also be guided by international standards, case law and guidelines issued by the various tax-related internationally recognized organizations.
Rule 23: Arm's length standard
(1) In determining the income of a person from a transaction with an associate, the standard to be applied by the Commissioner shall be that of a person dealing at arm's length with a person who is not an associate (referred to as the "arm's lengthstandard").
(2) A controlled transactions shall meet the arm's length standard if the result of the transaction is consistent with the result (referred to as the "arm's length result") that would have been realized if uncontrolled persons had engaged in the same transaction under the sameconditions.
(3) Subject to sub-rule (6), the following methods shall apply for the purposes of determining an arm's length result,namely:-
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the comparable uncontrolled-pricemethod;
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the resale pricemethod;
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the cost plus method;or
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the profit splitmethod.
(4) The method in clause (d) shall apply only where the methods in clauses (a), (b) and (c) cannot be reliablyapplied.
(5) As between clauses (a), (b) and (c), the method that, having regard to all the facts and circumstances, provides the most reliable measure of the arm's length result as in the opinion of Commissioner shall beapplied.
(6) Where the arm's length result cannot be reliably determined under one of the methods in sub-rule (3) the Commissioner may use any method provided it is consistent with the arm's length standard.
Rule 24: Comparable uncontrolled price method
The comparable uncontrolled price method determines whether the amount charged in a controlled transaction gives rise to an arm's length result by reference to the amount charged in a comparable uncontrolled transaction.
Rule 25: Resale price method
(1) The resale price method determines whether the amount charged in a controlled transaction gives rise to an arm's length result by reference to the resale gross margin realized in a comparable uncontrolledtransaction.
(2) The following steps shall apply in determining the arm's length result under the resale price method,namely:-
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determine the price that a product purchased from an associate has been sold to a person who is not an associate (referred to as the "resale price");and
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from the resale price is subtracted a gross margin (referred to as the "resale gross margin") representing the amount that covers the person's selling andother operating expenses and, in light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit;
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from that amount is subtracted any other costs associated with the purchase of the product, such as customs duty;and
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the amount remaining is the arm's length result.
(3) The resale price margin of a person in a controlled transaction may be determined by referenceto:-
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the resale price margin that the person earns on products purchased and sold in a comparable uncontrolled transaction;or
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the resale price margin that an independent person earns in comparable uncontrolled transaction.
Rule 26: Cost plus method
(1) The cost plus method determines whether the amount charged in a controlled transaction gives rise to an arm's length result by reference to the cost plus markup realised in a comparable uncontrolled transaction.
(2) The following steps shall apply in determining the arm's length result under the cost plus method,namely:-
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determine the costs incurred by the person in a controlledtransaction;
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to this amount is added a mark up (referred to as the "cost plus mark up" to make an appropriate profit in light of the functions performed and market conditions; and
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the sum of the amounts referred to in clauses (a) and (b) is the arm's length result.
(3) The cost plus mark up of a person in a controlled transaction may be determined by referenceto:-
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the cost plus mark up that the person earns in a comparable uncontrolled transaction;or
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the cost plus mark up that an independent person earns In comparable uncontrolled transaction.
Rule 27: Profit split method
(1) The profit split method may be applied where transactions are so interrelated that the arm's length result cannot be determined on a separate basis.
(2) The profit split method determines the arm's length result on the basis that the associates form a firm and agree to divide profits in the manner that independent persons wouldhave agreed on the basis that they are dealing with each other at arm'slength.
(3) The Commissioner may determine the division of profits on the basis of a contribution analysis, a residual analysis or on any other basis as appropriate having regard to the facts andcircumstances.
(4) Under contribution analysis, the total profits from controlled transactions shall be divided on the basis of the relative value of the functions performed by each person participating in the controlledtransactions.
(5) Under residual analysis, the total profits from controlled transactions shall be divided as follows:-
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each person shall be allocated sufficient profit to provide the person with a basic return appropriate for the type of transactions in which the person is engaged; and
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any residual profit remaining after the allocation in clause (a) shall be allocated on the basis of division between independent persons determined having regard to all the facts and circumstances.
For the purposes of clause (a) of sub-rule (5), the basic return shall be determined by reference to market returns achieved for similar types of transactions by independent persons.
