- 6 Marks
Question
Two vehicles of the same model and brand were sold by SuccessVehicles Ltd to two buyers at different prices. The first buyer bought one of the vehicles at the equivalent of US$84,500 and the second buyer bought the other vehicle at US$91,000. This arrangement, the Tax Authority finds difficult to accept and plans to confront SuccessVehicles Ltd on the matter.
The Commissioner-General has invited you as a final level student of ICAG to advise him on the factors to consider before approaching SuccessVehicles Ltd on the matter, as the Commissioner-General suspects related party issues.
Required:
Write a paper to the Commissioner-General on the issues to consider before approaching SuccessVehicles Ltd on the matter.
Answer
ICAG
Accra
12th December 2020
COMMISSIONER-GENERAL
GHANA REVENUE AUTHORITY
ACCRA
Subject: Comparability Factors for Investigating Related Party Issues in SuccessVehicles Ltd
Introduction:
The sale of two vehicles of the same model and brand at different prices (US$84,500 and US$91,000) to different buyers by SuccessVehicles Ltd raises concerns regarding transfer pricing and related party transactions. Before approaching SuccessVehicles Ltd, the following factors should be considered:
1. Contractual Terms:
The contractual terms between the company and the two buyers should be reviewed. Differences in terms (e.g., delivery conditions, payment terms, warranties) could justify the price differential.
2. Nature of the Vehicles:
There is a need to assess whether the two vehicles are identical in every aspect. Variations in specifications, additional features, or customizations could explain the pricing disparity.
3. FAR Analysis (Function, Asset, Risk):
The FAR analysis looks at the following aspects to determine if the pricing is justified:
- Function: The specific function each vehicle serves in the transaction should be assessed.
- Asset: Differences in the use of assets or resources should be considered, especially if the vehicles were produced or sold under different conditions.
- Risk: The level of risk assumed by the seller in each transaction (e.g., foreign exchange, market conditions) could affect pricing.
4. Economic Conditions:
Economic factors at the time of each sale, such as inflation, foreign exchange rates, and market demand, should be examined. Differences in these conditions could account for the pricing discrepancy.
5. Market Penetration Strategy:
If one of the sales was made as part of a market penetration strategy to introduce the vehicle to a new market or gain market share, this could justify a lower price. New products often carry introductory pricing.
Conclusion:
The factors outlined above will provide a basis for determining whether the price differences between the two vehicles sold by SuccessVehicles Ltd are justified or if there is an issue of related party transactions that require further scrutiny.
Yours faithfully,
Boys Abre3
Final Level Student
- Topic: International taxation
- Series: NOV 2020
- Uploader: Theophilus