June 21, 2021
Jordan implements transfer pricing rules
On 7 June 2021, the Hashemite Kingdom of Jordan published Regulations No. (40) of 2021 in the Official Gazette. The Regulations introduce, for the first time in Jordan, transfer pricing (TP) rules that will apply from 7 July 2021. Taxpayers engaged in transactions with related parties (including notional transactions between a branch and its head office) with an annual value exceeding JOD500,000 (approximately US$705,000) will need to prepare and maintain the following:
Members of an MNE group also need to submit a country-by-country (CbC) report within 12 months following the end of the group’s tax period if the total consolidated revenue in the group financial statements exceeds JOD600m (approximately US$846m).
Based on the Regulations, it does not appear that taxpayers will have a filing requirement until 2022. However, the Minister of Finance still needs to issue Instructions to provide details about the new rules and their application. Nevertheless, Jordan-based entities should start reviewing their TP policies and related-party pricing arrangements so they will be able to meet their compliance requirements on a timely basis.
Since the Organisation for Economic Co-operation and Development (OECD) and G20 countries adopted a 15-point Base Erosion and Profit Shifting (BEPS) Action Plan in 2013, BEPS has remained a key priority for governments around the globe. The Final Reports, issued in 2015, represent a package of measures that governments should implement to address features of tax regimes that facilitate BEPS. The package includes a set of minimum standards that Inclusive Framework members need to implement.
On 29 October 2019, Jordan became the 135th country to become an Associate Member of the BEPS Inclusive Framework, committing Jordan to aligning with the shared international consensus to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
One of the minimum standards requires Associate Members to implement CbC reporting rules and recommends also establishing TP documentation requirements. The objective of a CbC report is for MNE groups to set out financial information for each tax jurisdiction where the group has a presence which would allow tax authorities to assess high-level TP- and BEPS-related risks for MNE groups. The new TP rules deliver one element of Jordan’s commitments under the Inclusive Framework.
The Regulations adopt the arm’s-length principle reflected in the Associated Enterprise Article of Jordan’s tax treaties and in the OECD Transfer Pricing Guidelines for Multinational Enterprises. As part of the process of preparing a TP master file and local file documentation, taxpayers are expected to conduct a functional analysis to describe the taxpayer’s relationship and economic role with related parties, the functions performed, the risks assumed, and the tangible and intangible assets used, and to apply one of the five prescribed OECD TP methods (or an alternative approach if it provides a satisfactory outcome) to assess whether the pricing of transactions with related parties is at arm’s length.
The Regulations provide a detailed definition for when parties are related. Two parties will be related if one party holds a controlling interest (50% or greater) in the other; they are under common effective control; and, in some cases, when one party has the ability to influence the decisions of the other.
Taxpayers engaged in transactions with related parties where the aggregate annual value of the related-party transactions exceeds JOD500,000 will be required to prepare a master file on the global business operations and TP policies of the taxpayer’s MNE group and a local file containing analysis and information on all transactions with related parties. For most MNE groups, the master file should already exist to comply with the TP documentation requirements of other countries. These documents will need to be submitted to the Income and Sales Tax Department (ISTD). The submission deadline will be set by Instructions to be issued by the Minister of Finance. In addition, a detailed TP disclosure form will need to be filed with the annual income tax return.
The OECD/G20 BEPS Action 13 report contained model legislation that countries could adopt to implement the following CbC reporting principles:
The Regulations indicate that any member of an MNE group must file a CbC report in Jordan (and not merely a notification) if consolidated group revenues exceed JOD600m. The Instructions to be issued by the Minister of Finance may provide further clarity. For most MNEs, the CbC reporting requirements in Jordan should not create significant additional administrative costs if they are already preparing the report for other jurisdictions.
The introduction of new transfer pricing CbC reporting rules was to be expected following Jordan becoming a member of the BEPS inclusive framework in 2019. The new rules and compliance requirements are also largely in line with those of other BEPS Inclusive Framework countries.
Nevertheless, the introduction of local file and transfer pricing disclosure forms for taxpayers whose annual related-party transactions exceed JOD500,000 do create new compliance requirements. Although these filing requirements are unlikely to affect taxpayers until 2022, Jordan-based entities should start reviewing their TP policies and related-party pricing arrangements so they will be able to meet their eventual requirements on a timely basis.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Jordan, Amman
Ernst & Young LLP (United States), Middle East Tax Desk, New York