As Barbados prepares to implement transfer pricing legislation to align with global tax standards, it is essential for businesses, particularly multinational enterprises (MNEs), to understand how these new regulations, though not yet in force, can potentially impact them. From compliance costs and operational strategies to new tax liabilities, this understanding is imperative to enable businesses to proactively adapt and position themselves to ensure sustainable growth in an increasingly regulated international market.

A Global Perspective

Over the past 10 years, we have seen a significant shift in the way business is conducted in the global economy.  With rapid business expansion and increases in inter-group and intra-group trade, the Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) countries joined forces and adopted the Global Anti-Base Erosion Rules (GloBE rules) or a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS). Since 2013, there have been ongoing efforts by the OECD to bolster equitable tax practices globally and maintain fair competition, such that we see transfer pricing comprising a significant portion of this expansive plan. The BEPS Actions 8 to 10 outline the standard to align transfer pricing outcomes and value creation, and Action 13 outlines the requirement for MNEs to prepare and submit a country-by-country report of certain indicators of economic activity, their income, and the taxes paid. The ultimate objective of these Actions is to align the place where income is reported for tax purposes, with economic activity and the place where value is created.

Why the proposed rules?

For Barbados, the implementation of transfer pricing regulations represents a strategic next step toward fully aligning with global tax standards, attracting high-quality foreign investment and protecting national revenue from tax avoidance schemes. While these rules may present a fresh set of compliance challenges for businesses aiming to remain competitive, they can be considered essential to safeguard the country’s tax base.

What then can we expect?

Although the exact details of the transfer pricing regulations in Barbados are still in the pipeline, we can expect key elements such as:

  • an increase in the required level of documentation surrounding transfer pricing methods used,
  • required evaluations of combined controlled transactions, and
  • the inclusion of domestic transactions and guidelines surrounding the attribution of profits to permanent establishment arrangements.  

More importantly, we can expect a focus on the “arms’ length” principle in alignment with the OECD Model.

The “Arm’s Length” principle explained

Transfer pricing refers to the pricing of goods or services, and intangible assets transferred between subsidiaries, divisions and associated companies. Specifically, transactions are ‘priced’ as if the parties were independent of each other or ‘at arm’s length’.  

The regulations will determine how much profit should be reported in each jurisdiction, to ensure that each is allocated their fair share of the MNEs profits based on the perceived economic activity and value creation.

For example, without transfer pricing rules, Company A, a subsidiary of an MNC in Jurisdiction A sells product at $500 to Company B, its parent company in Jurisdiction B. In Jurisdiction A, the $500 sale price minus $400 cost of goods equals $100 profit. Company A would report a low profit in Jurisdiction A.  

In Jurisdiction B, the $1,000 sale price at market rates minus $500 cost of goods equals $500 profit. The parent company sells it for $1,000, keeping most of the profit from the sale of goods in Jurisdiction B.  

With transfer pricing rules however, Company A would sell product to Company B at the “arm’s length price” of $850, ensuring that the transaction reflects a fair market price. In Jurisdiction A, the $850 sale price minus $400 cost of goods equals $450 profit. Company A would report a higher profit in Jurisdiction A.

In Jurisdiction B, the $1,000 sale price minus $850 cost of goods equals $150 profit. By enforcing the ‘arm’s length’ principle, Jurisdiction A can collect tax on $450 of profit, instead of $100, ensuring that it benefits fairly from the economic activity within its borders.

Potential Impact

With new compliance requirements on the horizon, businesses will need to provide detailed documentation to show how prices are determined for intra-group transactions. This could mean more time, resources and costs to ensure compliance. Failure to comply could result in potential fines or audits for non-compliance.

Transfer pricing can also impact day-to-day operations by requiring businesses to meticulously track and record intra-group transactions, analyze financial and operational data, and consistently monitor market trends to ensure pricing strategies of intra-group transactions stay within the new guidelines.

One of the elephants in the room is how it will affect the bottom line for businesses. While the initial impact may result in increased compliance costs and increased tax liabilities, the long view projects a level playing field for businesses operating across borders, and positions Barbados as a globally compliant, investment-friendly country.

Steps to get ready

As the legislation is expected to come into force in 2025, businesses will need to:

  • re-examine their tax planning strategies, review current pricing strategies and practices,
  • strengthen related party documentation and agreements,
  • improve budgeting and planning strategies to help mitigate additional costs,
  • stay informed by monitoring updates from the Tax Authority,
  • leverage technology to automate data collection and reporting, and
  • seek expert advice to navigate the changes smoothly.

Existing businesses and potential investors have a unique chance to forge ahead by proactively adapting to the proposed rules. While the new regulations may present new demands, they equally offer businesses a distinctive opportunity to align with global standards, enhance credibility, and play a part in building a fairer international tax landscape.