Transfer Pricing in Caribbean Tax Law


Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise.


In principle, a appropriate price is one that should match either what the seller would charge an independent (uncontrolled), arm’s length customer, or what the buyer would pay an independent, arm’s length supplier.

Numerous countries around the world have implemented legislation based on the arm’s length principle, which underpins Article 9 of both the OECD Model Tax Convention on Income and on Capital and the United Nations Model Double Taxation Convention between Developed and Developing Countries. This principle is the foundation of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“the OECD Guidelines”).

Paragraph 3 of the Commentary on Article 9 of the United Nationals Model Convention states that:

With regard to transfer pricing of goods, technology, trademarks and services between associated enterprises and the methodologies which may be applied for determining correct prices where transfers have been on other than arm’s length terms, the Contracting States will follow the OECD principles which are set out in the OECD Transfer Pricing Guidelines. These conclusions represent internationally agreed principles and the Group of Experts recommends that the Guidelines should be followed for the application of the arm’s length principle which underlies the article.


Acceptable Transfer Pricing methods can be placed into one of two categories:

I.  The “Traditional” Methods:

(a)  Comparable Uncontrolled Price Method. The comparable uncontrolled price method consists of comparing the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction.

(b)  Resale Price Method. The resale price method consists of comparing the resale margin that a purchaser of property in a controlled transaction earns from reselling that property in an uncontrolled transaction with the resale margin that is earned in comparable uncontrolled purchase and resale transactions.

(c)  Cost Plus Method. The cost plus method consists of comparing the mark up on those costs directly and indirectly incurred in the supply of property or services in a controlled transaction with the mark up on those costs directly and indirectly incurred in the supply of property or services in a comparable uncontrolled transaction.

II.  The “Profit” methods:

(d)  Transactional Net Margin Method. The transactional net margin method consists of comparing the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that an enterprise achieves in a controlled transaction with the net profit margin relative to the same base achieved in comparable uncontrolled transactions.

(e)  Transactional Profit Split Method. The transactional profit split method consists of allocating to each associated enterprise participating in a controlled transaction the portion of common profit (or loss) derived from such transaction that an independent enterprise would expect to earn from engaging in a comparable uncontrolled transaction. When it is possible to determine an arm’s length remuneration for some of the functions performed by the associated enterprises in connection with the transaction using one of the approved methods described in subparagraphs 2 (a) to (d), the transactional profit split method shall be applied based on the common residual profit that results once such functions are so remunerated.

Priority of methods

On October 5, 2015, the OECD Secretariat published final papers outlining consensus actions under the G20/OECD Base Erosion and Profit Shifting (BEPS) Project. The most appropriate transfer pricing method should be selected, and traditional and profits methods are considered equal.  However, a sufficiently accurate CUP, when it exists, is preferable. The BEPS project encourages that both sides of a transaction be considered when selecting the most appropriate method, even when the method ultimately selected is a one-sided method.


As of the date of this blog, Jamaica is the only country in the Caribbean with Transfer pricing legislation, in the form of the Income Tax Act (Amendment) (No. 2) Act of 2015, which received the Governor General’s assent on December 16th, 2015.

In our view, it is inevitable that other Caricom member states will introduce similar legislation in due course. The Government of Trinidad and Tobago, for example, in the Minister of Finance’s Financial Year 2014 Budget Statement, has already indicated that technical work is ongoing in order to introduce transfer pricing legislation in accordance with the OECD’s guidelines.


Anti-Avoidance Legislation

The income tax acts of the Commonwealth Caribbean countries empower local tax authorities to disregard any transactions that they view as artificial or fictitious. This general power has been utilised by the tax authorities in dealing with related parties and large multinational companies to evaluate whether transactions are at arm’s length.

The Caricom Double Taxation Treaty and Common law Principle

In the absence of specific Transfer Pricing legislation in domestic legislation, it is also noteworthy that the Caricom Double Taxation Treaty has been ratified in the domestic law of its member states, and contains the following Article:

“Article 10



(a) an enterprise of a Member State participates directly or indirectly in the management, control or capital of an enterprise of another Member State; or

(b) the same persons participate, directly or indirectly in the management, control or capital of an enterprise of a Member State and an enterprise of another Member State;

and in either case conditions are made or imposed between the enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise, and taxed accordingly.”

In light of this, it is clear that the “arm’s length principle”, which is at the heart of the OECD guidelines, is incorporated into the local law  of the signatories of the Caricom Tax Treaty. Accordingly, although there may not be specific regulations detailing filing, reporting (such as exist in Jamaica, for example) and other compliance obligations, which exist in countries with specific transfer pricing legislation, there is nonetheless a legislative foundation for Caribbean tax authorities to challenge any arrangement between associated enterprises resident in two or more Caricom member states that do not satisfy the arm’s length principle.

Consequently, multinational enterprises need to be cognisant of the internationally recognized transfer pricing standards, and ensure that related party transactions within Caricom conform to these standards in order for them to withstand the scrutiny of the Caribbean tax authorities. Specifically, in the absence of legislation, the OECD guidelines will be highly persuasive in the development of the case law delineating the scope of arm’s length principle within Caricom, as is consistent with the Caribbean’s common law tradition.


This blog is published by the site administrators of on June 1st, 2016 for discussion purposes only. Should you require legal advice, please contact us and we shall be happy to make a referral to a local tax practitioner.


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