- 20 Marks
Question
The resort industry at Ada in the Greater Accra region of Ghana is extremely popular with foreign tourists due to the Volta estuary, good weather and the range of leisure activities. These attract investments from multinational companies in the resort business. The multinational enterprises dominate the industry at Ada. The multinational enterprises operate over 90% of the resort industry servicing business clients and other travellers. There are smaller enterprises apart from the multinationals in the resort business. Multinational companies operating in the resort industry make use of central booking companies in low tax jurisdictions. These central booking companies are associated companies of the multinational. The central booking companies advertise the resorts in targeted markets, accept bookings for stay at the resorts and conclude the contracts for stay at the resorts.
A recent study by a Non-Government Organization (NGO) revealed that the multinational enterprises in the resort industry in Ghana reported minimal profits or losses for the last years.
Grape Resort Limited is a Ghanaian registered company whilst CPL Resort Limited is a Cayman Island registered company. Sunrise Pleasure Limited and CPL Resort Limited are 100% owned by the Manna Group S.A, a company resident in Austria.
Grape Resort Limited owns, manages and operates a chain of full service resorts at Ada. CPL Resort Limited advertises the resorts, accepts bookings for stay at the resorts, concludes the contracts and receives payments from clients. Special vouchers are then given to the clients. Clients present the special vouchers to Grape Resort Limited in Ada to access their services. CPL Resort Limited pays fees to Grape Resort Limited from the payment it receives from the clients. Some local and foreign clients book, patronize and pay for the resort services directly at the Grape Resort Limited. Grape Resort Limited is among the multinationals that has reported losses from their operation of resorts in Ghana for the last 5 years.
Required:
Prepare a preliminary Transfer Pricing Report for the management of Grape Resort Limited on how to determine the arm’s length price of their products and services in Ghana based on the information you have at your disposal.
Answer
Transfer Pricing (TP) Report
Address
Introduction should include the period that the TP report covers- 5 years
- Broad base analysis of the tax payer transactions
- GRAPE RESORT LTD is a resident entity in Ghana
- GRAPE RESORT LTD is a member of Multinational resort company
- TP risk that is available
- GRAPE RESORT LTD and other MNE operating in Ada beach reported losses for the past five years
- There are related party transactions which poses risk for TP issues
- CPL RESORT pays fees to GRAPE RESORT LTD, which may not be at ALP
- Analysis the transactions:
- Controlled transactions
- Advertisement by CPL RESORT for GRAPE RESORT LTD
- CPL RESORT accept booking for GRAPE RESORT LTD
- CPL RESORT conclude contract on behalf of GRAPE RESORT LTD
- Payment are receipted for SBL by GRAPE RESORT LTD
- Uncontrolled Transactions
- Advertisement by other independent parties
- Other independent companies accept booking for other companies operating in Ghana
- Other independents companies conclude contract
- Other independent companies also receive payment.
- The tested party:
- The tested party is the GRAPE RESORT LTD because:
- the function performed by SBL is less complex and
- SBL is a resident entity in Ghana that transfer pricing audit processes could will be convenient to conduct
| Factors | Tested party (GRAPE RESORT LTD) | CPL RESORT | Independent Parties |
|---|---|---|---|
| Characteristics of the transactions | Operation of resort business | Performance of marketing and booking activities | Operation of resort business |
| Functional Analysis: | |||
| Function performed | – Owns the resort – Operate the resort – Accommodation services – Bar services – Accept booking – Receive payment | – Market the resort – Accept booking from clients – Receive from clients – Make payment the GRAPE RESORT LTD – Conclude contracts | – Owns the resort – Operate the resort – Accommodation services – Bar services – Accept booking – Receive payment – Advertises resort |
| Risk Assumed | – Reputational risk – Exchange rate risk – Employees lock out | Software downtime | – Reputational risk – Exchange rate risk – Employees lock out |
| Assets Own | Building/ Rooms Human capital Intangible ie Goodwill | Software Human Capital | – Building/ Rooms – Human capital – Intangible ie Goodwill |
| Business Strategies | Online booking | Online booking Special voucher are offered | – Online booking – Special voucher are offered |
| Economic circumstances | Inflation in Ghana currently at 7.6% Exchange rate volatile | ??? | Inflation in Ghana currently at 7.6% Exchange volatile |
| Contractual arrangement | ??? | ??? | ??? |
Comparability Adjustment
There may not be a peculiar need to perform any comparability adjustment. This is because the related parties and the independent parties are operating in similar circumstances, and operate from same localized area.
Possible TP Method
- Cost Plus Method: The cost plus considered the cost that the related party incurred and appropriate AL mark-up that an independent party earns in similar circumstances is used to add to the cost.
a. Reason for choosing CP is that
i. the companies are providing services
ii. It is very easy to find comparable as resort industry has many other players - CUP: Compares the prices charges in the independent resort companies to that the related parties. Where there significant diffs, the appropriate adjustment is done to reflect the ALP.
a. Reason for this choice is that CUP is very easy to use.
After an appropriate TP method is selected, appropriate ALP will be allocated to the GRAPE RESORT LTD.
Transfer Pricing Adjustment
Where it is found that the group pricing is not at ALP, appropriate adjustment will need to be made, to ensure that the group’s TP price is at ALP.
Conclusion
Observations
✓ There should be the need for GRA to conduct regular TP Audit. Not to wait until there is media outcry or NGO report before the TP audit is conducted
✓ It is difficult to ascertain the business strategy of the companies involved in the related parties transactions.
- Topic: Comparability and Transfer Pricing Documentation
- Series: FEB 2020
- Uploader: Samuel Duah