What are the Preliminary Stages
The Preliminary Stages involve gathering certain types of ‘proof’ with regards to a Related Party Transaction.
Service transactions
The Preliminary Stages for service transaction […] includes proof that the service:
- Has actually been rendered by the service provider and received by the service recipient;
- Is required by the service recipient;
- Provides economic benefits to service recipients;
- Is not an activity for the benefit of shareholders or shareholder activity;
- Is not an activity that provide benefits to a party solely because the party is part of a business group (passive association);
- Is not a duplication of activities that have been carried out by the Taxpayer themselves;
- Is not a service that provides incidental benefits; and
- In the case of on-call services, it is not a service that can be obtained immediately from an independent party without an on-call contract in advance.
There are also additional requirements for service transactions relating to the cost base used in calculating the service charge.
The use of or right to use intangible assets
The Preliminary Stages for transactions related to the use of or right to use intangible assets […] includes proof regarding:
- The existence of intangible assets;
- Types of intangible assets;
- Value of intangible assets;
- Parties who legally possess the intangible assets;
- Parties who economically posses the intangible assets;
- The use of or right to use intangible property;
- The parties who contribute and carry out development, enhancement, maintenance, protection and exploitation activities of intangible assets; and
- Economic benefits obtained by the parties who use the intangible asset.
PMK 172 contains guidance on the proof required for each type of Related Party Transaction.
When do the Preliminary Stages need to be undertaken?
From TY 2024 onwards, a Taxpayer is required to include in their Transfer Pricing Documentation Local File (“Local File”) an explanation of the Preliminary Stages carried out for each of the Related Party Transactions covered in that Local File.
If there guidance regarding what specific proof needs to be gathered and what is enough proof
Other than the similar guidance for each type of Related Party Transaction to the above guidance for services and intangible property transactions, there is no further guidance in PMK 172 regarding the type of proof or volume or proof that a Taxpayer should gather to comply with the Preliminary Stages.
What are the implications if a Taxpayer does not undertake the Preliminary Stages
PMK 172 states that if a Taxpayer does not comply with the Preliminary Stages for a Related Party Transaction, then that related party transaction will automatically be concluded to not meet the arm’s length principle.
What are the implications of not carrying out the Preliminary Stages before a Local File is prepared
As discussed above, a Taxpayer is required to document in their Local File an explanation of the Preliminary Stages carried out for a Related Party Transaction covered in that Local File. If a Taxpayer documents that it has carried out the Preliminary Stages in its Local File, but it has not actually carried out the Preliminary Stages as documented, then that Taxpayer, among other implications, can be considered to have submitted an incorrect Local File, with consequences following. A Taxpayer in this situation can also be considered to have not complied with the Preliminary Stages such that a Related Party Transaction can automatically be concluded on audit to not meet the arm’s length principle.
Recommended next steps
Taxpayers are strongly recommended to understand and develop a strategy to comply with this new requirement now so that they will be in a position to complete their transfer pricing documentation for TY 2024. It is strongly recommended to not leave compliance with this new requirement to the time of preparing transfer pricing documentation for TY 2024.
