Country-by-Country Reporting and Advance Pricing Arrangements in the Maldives

With the enactment of a modern Income Tax Act in 2019, the Maldives has adapted to several other globally accepted income tax practices, including the OECD's country-by-country reporting (CbCR) requirement and the introduction of advance pricing arrangements marked as noticeable changes to the then existing business profit taxation regime.

Apart from this, a comprehensive transfer pricing documentation requirement was imposed from the financial year 2020 that follows the three-tier approach recommended by the OECD in its BEPS action plans.

This article covers the current practices in terms of the CbCR requirement and the current practice on entering into advance pricing arrangements for related-party transactions.

On 20 January 2021, the Maldives Inland Revenue Authority (MIRA) issued the Country-by-Country Reporting Regulation, requiring annual CbCR for multinational enterprises (MNEs) resident in the Maldives. The regulation broadly follows the rules that are recommended by the OECD as part of its BEPS project. 

CbCR must be prepared and submitted by MNEs resident in the Maldives with a consolidated group revenue of more than EUR750 million in the prior financial year. The format of the report is identical to the standard template set out at Annex 3 of Chapter 5 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and is required to be submitted to the MIRA no later than 12 months from the last day of the reporting fiscal year of the MNE group (for reporting fiscal years commencing from 1 January 2021).

The primary filing obligation falls on the ultimate parent entity (UPE) of the MNE group that is resident in the Maldives for tax purposes. However, where certain conditions are met, the constituent entities resident in the Maldives may also be required to submit CbCR. A constituent entity, in general, includes any separate business unit that is required to consolidate its accounts with its UPE’s accounts for financial reporting purposes (or that would be so required if the equity interest in such a business unit was publicly traded on a securities exchange). This would be considered a separate constituent entity of the MNE group. A constituent entity may include an entity treated as a partnership as well as a permanent establishment that prepares separate financial statements for financial reporting, regulatory, tax reporting or internal management control purposes.

Each country-by-country report that a Maldivian reporting entity files with the MIRA for the MNE group may be shared with foreign tax jurisdictions where that MNE group is doing business if the Maldives has entered into a tax treaty or tax information exchange agreement and a competent authority agreement for the automatic exchange of CbCR with the Maldives. Furthermore, the Maldives is now a signed member of the Multilateral Competent Authority Agreement, which allows the Maldives tax authority to exchange information between all other member countries of the convention.

The MIRA has determined that the confidentiality of the information contained in the CbCR must be preserved at least to the same extent that would apply if such information were provided to it under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. 

The Advance Pricing Arrangement Regulation was issued by the MIRA on 16 March 2021, outlining the process to request an advance pricing agreement (APA) on cross-border controlled transactions between associates. The regulation details the process for requesting a unilateral, bilateral and multilateral APA and the process that needs to be followed and what is considered a breach of contract, and the requirement to submit an annual compliance report in relation to the APA.

An APA facilitates the determination of a transfer price between one or more taxpayers or between one or more tax authorities, with the main aim to avoid any transfer pricing disputes between these parties. Currently, an APA can only be requested in relation to cross-border controlled transactions with associated entities and does not include domestic transactions between associated entities.

The main benefit provided by an APA is the certainty it offers in terms of arm’s-length prices for the cross-border controlled transaction with regard to which it was agreed. 

What Is the Procedure to Be Followed to Request an APA?

Phase 1 – pre-filing consultation

The purposes of the preliminary meeting are determining the scope of the APA, identifying the controlled transaction, determining whether the cross-border controlled transaction is appropriate to be included in an APA and discussing the main points to be included in the APA. 

Taxpayers are required to submit a MIRA 923 form along with all the information required in the form to commence a pre-filing consultation. 

Phase 2 – application for an APA

Where the taxpayer successfully completes the pre-filing consultation, a formal application for an APA should be submitted through a MIRA 924 form along with all the following information.

• An introduction of the business activity and the controlled transaction with regard to which the APA is requested, including a description of why the transaction is within the scope of Section 68(b) of the Income Tax Act. 
• The scope of the APA, and the proposed time to be covered under the APA. 
• Proposed arm's-length terms for the controlled transaction, including: 
1. a comparability analysis of the controlled transaction; 
2. the chosen transfer pricing method and the reason for its selection; 
3. any critical assumption; and
4. the worldwide organisation structure, the history of associated entities, details of production portfolio, financial statements, functions, and tangible and intangible assets. 
• A list of associated entities with which the controlled transaction is carried out and the place of tax residency of such associated entities.
• A list of tax jurisdictions with which the APA is to be entered into. 
• The existing transfer price method used and any information that might affect the controlled transaction. 
• The regulation also clarifies circumstances under which an APA can be revised or revoked.

Taxpayers can propose amendments to any APA request in writing prior to the finalisation of the APA. Likewise, where taxpayers wish to revoke an application, taxpayers are required to inform the MIRA in writing prior to signing the APA. 

Where the taxpayer knowingly includes an error or misrepresentation and excludes any required information in the annual compliance report, or fails to submit the annual compliance report by the deadline without a reasonable cause, or where the taxpayer does not abide by the conditions stipulated in the APA, the MIRA can revoke the APA. 

Where the above errors were made unknowingly and the delay in submission was due to a reasonable cause, then the MIRA can cancel the APA after considering the factors involved.

Furthermore, where there is a change in any facts or conditions based on which the APA was agreed, the taxpayer should inform the MIRA through an official letter when a critical assumption of the APA is changed/breached within five days of such change/breach. Critical assumptions include every fact that would significantly affect the implementation of the APA or the grounds on which it has been concluded.

Where there is any change to a critical assumption based on which the APA was agreed, the parties to the agreement are not obliged to act on the APA from the date that such change/breach was informed to the MIRA.

The taxpayer is obliged to submit an annual compliance report for each tax year covered under the APA along with the final income tax return for that tax year by June 30th of the following tax year.