The Letters That Arrived on the Same Morning

The group financial controller of a Caribbean conglomerate with operations across four territories arrived at her desk on a Tuesday morning in March to find two letters that would consume the next eighteen months of her professional life. The first was from the revenue authority in the group’s primary jurisdiction, advising that the company had been selected for a transfer pricing audit covering the three most recent fiscal years. The second, arriving by coincidence on the same day, was from the revenue authority in a neighbouring territory where the group operated a distribution subsidiary, requesting documentation to support the intercompany pricing of goods transferred from the parent company.

The group had been transferring manufactured goods from its primary jurisdiction to the distribution subsidiary at prices that had been set informally by the group’s founder fifteen years earlier and never revisited. Management fees were charged from the parent to the subsidiary based on a percentage of revenue that had no documented rationale. A trademark licensing arrangement had been established three years prior on the advice of an international tax consultant, but the royalty rate had been benchmarked against comparable transactions in markets that bore no resemblance to the Caribbean. And a loan from the parent to the subsidiary, extended to fund a warehouse expansion, carried an interest rate that was below the subsidiary’s commercial borrowing rate but above the parent’s deposit rate — a rate chosen for administrative convenience rather than arm’s-length analysis.

The group had no transfer pricing documentation. No local file. No master file. No benchmarking studies. No intercompany agreements that reflected the actual terms of the transactions. The pricing policies that governed millions of dollars in annual intercompany flows existed nowhere except in the collective memory of the finance team and a series of informal emails.

The revenue authority in the primary jurisdiction proposed an adjustment of US$4.2 million to the group’s taxable income, representing the difference between the prices at which goods had been transferred and the prices that the authority determined would have been charged between independent parties. The revenue authority in the neighbouring territory, applying its own transfer pricing rules to the same transactions, proposed a separate adjustment that effectively taxed a portion of the same income a second time. The group faced a combined additional tax assessment of approximately US$1.6 million, plus penalties and interest, plus the cost of professional advisors engaged to defend a position that had no documentation to support it.

The founder’s reaction was disbelief: “We are one group. We are simply moving our own goods between our own companies. How can two governments tax the same profit twice?” The question was understandable. The answer was the reason transfer pricing has become the most consequential tax issue facing Caribbean multi-territory enterprises.

This fictional scenario, while not attributable to any specific Caribbean group, reflects a pattern that Dawgen Global encounters with increasing frequency as Caribbean revenue authorities build transfer pricing audit capability, adopt formal transfer pricing legislation, and participate in the international information exchange frameworks that make intercompany transactions visible across borders.

Why Transfer Pricing Matters Now

Transfer pricing is the pricing of transactions between related parties — companies within the same group, or entities under common control. The fundamental principle, established by the OECD Transfer Pricing Guidelines and adopted by revenue authorities worldwide, is that transactions between related parties should be priced as if they were conducted between independent parties dealing at arm’s length. When intercompany prices deviate from arm’s-length prices, taxable profits can be shifted from higher-tax jurisdictions to lower-tax jurisdictions, eroding the tax base of the countries where economic value is created.

For decades, transfer pricing was perceived as a concern for large multinational enterprises operating between developed economies. Caribbean enterprises largely operated below the radar of transfer pricing scrutiny. That era is over. Three converging forces have made transfer pricing a present and urgent issue for Caribbean businesses of all sizes.

OECD BEPS and Global Tax Transparency: The OECD’s Base Erosion and Profit Shifting project has fundamentally reshaped the global tax landscape. BEPS Action 13 introduced standardised transfer pricing documentation requirements — the master file, local file, and country-by-country report — that are being adopted by jurisdictions worldwide, including in the Caribbean. BEPS Action 8-10 strengthened the arm’s-length principle and introduced guidance on hard-to-value intangibles, low-value-adding services, and cost contribution arrangements that directly affect common Caribbean intercompany transactions. The Inclusive Framework on BEPS, which includes Caribbean jurisdictions, commits member countries to implementing minimum standards that include transfer pricing documentation and dispute resolution mechanisms.

Caribbean Revenue Authority Capacity Building: Caribbean revenue authorities have invested significantly in transfer pricing audit capability over the past decade. Jamaica’s Tax Administration Jamaica has a dedicated transfer pricing unit and has been conducting transfer pricing audits with increasing sophistication. Trinidad and Tobago enacted formal transfer pricing legislation through amendments to the Income Tax Act, establishing documentation requirements and penalty provisions. Barbados has transfer pricing provisions embedded in its tax framework. The Cayman Islands’ economic substance requirements, while not traditional transfer pricing rules, require entities to demonstrate that they conduct genuine economic activity commensurate with their reported income — a functional equivalent that affects how intercompany transactions are structured and documented.

Automatic Exchange of Information: The Common Reporting Standard, country-by-country reporting, and bilateral information exchange agreements have created an environment in which Caribbean revenue authorities can access information about how Caribbean groups structure their intercompany transactions across jurisdictions. A revenue authority that previously had no visibility into how a group priced its intercompany transactions can now request — or receive automatically — information that identifies potential transfer pricing risks. This information asymmetry has shifted decisively in favour of revenue authorities.

Five Transfer Pricing Vulnerabilities in Caribbean Groups

Informal Pricing Set by Founders and Never Revisited: The most common transfer pricing vulnerability in Caribbean enterprises is the simplest: intercompany prices that were set years or decades ago based on the founder’s commercial instinct rather than arm’s-length analysis, and that have never been reviewed, updated, or documented. These prices may or may not approximate arm’s-length prices, but without documentation, the enterprise cannot demonstrate compliance and is vulnerable to whatever adjustment the revenue authority proposes. The burden of proof in transfer pricing disputes typically falls on the taxpayer — the enterprise must demonstrate that its prices are arm’s length, not the other way around.

Management Fees Without Substance: Intercompany management fees are the most frequently challenged transfer pricing transaction globally, and Caribbean groups are particularly exposed. Management fees charged from a parent company to subsidiaries must reflect genuine services rendered, must be priced at arm’s length, and must be documented with sufficient detail to demonstrate both the nature of the services and the basis for the pricing. Caribbean groups that charge management fees calculated as a percentage of revenue with no documented service agreement, no time records, and no benchmarking analysis face near-certain challenge from revenue authorities that view unsubstantiated management fees as profit-shifting mechanisms.

Intellectual Property and Royalty Arrangements: Caribbean groups that have established trademark licensing, brand licensing, or technology licensing arrangements between group entities face transfer pricing scrutiny on the royalty rates charged, the ownership of the intangible property, and the development, enhancement, maintenance, protection, and exploitation functions performed by each entity. BEPS Actions 8-10 introduced stringent requirements for the transfer pricing of intangibles, requiring that returns from intangible property be allocated to the entities that perform the functions, use the assets, and assume the risks associated with the intangible’s value creation — not merely to the entity that legally owns the registration.

Intercompany Financing: Loans, guarantees, cash pooling arrangements, and other intercompany financial transactions between Caribbean group entities create transfer pricing exposure that many groups have not assessed. An intercompany loan must carry an interest rate that reflects the borrower’s creditworthiness, the loan’s terms, and the market conditions that would apply to a comparable transaction between independent parties. A parent company guarantee that enables a subsidiary to borrow at lower rates from a commercial bank creates a benefit that may need to be priced. These financial transactions are increasingly scrutinised by Caribbean revenue authorities that have historically focused on goods and services.

Double Taxation Without Relief: Perhaps the most damaging consequence of inadequate transfer pricing governance is double taxation — the scenario in which two revenue authorities each adjust the same intercompany transaction, resulting in the same income being taxed in both jurisdictions. The Caribbean’s treaty network is limited. Double taxation agreements between Caribbean jurisdictions are few, and those that exist may not contain the mutual agreement procedures needed to resolve transfer pricing disputes. Caribbean groups that face transfer pricing adjustments in multiple jurisdictions may find themselves with no mechanism to eliminate the resulting double taxation — a permanent cost that could have been avoided with proper documentation and planning.

The Documentation Imperative

Transfer pricing documentation is not a bureaucratic exercise. It is the enterprise’s primary defence against revenue authority adjustments, penalties, and double taxation. Properly prepared documentation serves three critical functions.

First, it provides contemporaneous evidence that the enterprise considered the arm’s-length principle when setting its intercompany prices. Revenue authorities are significantly more likely to accept intercompany pricing that is supported by documentation prepared at the time the prices were set than pricing that is justified retrospectively during an audit.

Second, documentation shifts the burden of proof. In many jurisdictions, including those in the Caribbean that have adopted formal transfer pricing rules, the existence of compliant documentation creates a presumption of good faith that protects the enterprise from penalties even if the revenue authority ultimately disagrees with the pricing methodology.

Third, documentation provides the foundation for managing double taxation risk. When two revenue authorities challenge the same transaction, the enterprise’s ability to achieve a resolution depends on its ability to present consistent, well-documented positions in both jurisdictions. Without documentation, each revenue authority will apply its own methodology independently, and the enterprise will bear the cost of any overlap.

Dawgen Global’s Transfer Pricing Advisory Programme

Dawgen Global has developed a Transfer Pricing Advisory Programme specifically designed for Caribbean multi-territory enterprises, combining deep knowledge of Caribbean tax legislation, revenue authority practices, and regional business structures with technical expertise in OECD Transfer Pricing Guidelines and international best practice.

Transfer Pricing Risk Assessment: Dawgen Global conducts comprehensive assessments of the enterprise’s intercompany transactions, identifying the transactions that create transfer pricing risk, evaluating the adequacy of existing documentation and pricing policies, and prioritising the transactions that require immediate attention. The risk assessment considers the perspective of every Caribbean revenue authority with jurisdiction over the group’s transactions, ensuring that the enterprise’s transfer pricing position is defensible in all relevant territories.

Documentation Preparation: Dawgen Global prepares transfer pricing documentation that meets the requirements of Caribbean revenue authorities and aligns with the OECD’s three-tiered documentation framework. This includes master files that describe the group’s global operations, organisational structure, intangible property, intercompany financial transactions, and financial and tax positions; local files that document each entity’s material intercompany transactions with detailed functional and comparability analyses; and benchmarking studies that identify comparable transactions and establish arm’s-length price ranges.

Intercompany Agreement Design: Dawgen Global drafts and reviews intercompany agreements that reflect the actual terms of the group’s intercompany transactions. These agreements are essential for demonstrating that the pricing arrangements were established on a principled basis and that both parties to each transaction understood and agreed to the terms. For Caribbean groups with historical arrangements that lack formal agreements, Dawgen Global assists in regularising these arrangements prospectively.

Transfer Pricing Policy Design: Dawgen Global designs transfer pricing policies that align the group’s intercompany pricing with commercial objectives while maintaining arm’s-length compliance. The policy establishes pricing methodologies for each category of intercompany transaction, defines the process for setting and reviewing prices, and creates the governance framework for ongoing transfer pricing compliance.

Dispute Resolution and Advance Pricing Agreements: Dawgen Global represents Caribbean groups in transfer pricing disputes with revenue authorities, managing the audit process, preparing position papers, and negotiating settlements. For groups seeking certainty, Dawgen Global advises on the availability and suitability of advance pricing agreements and mutual agreement procedures under applicable double taxation treaties.

From Vulnerability to Compliance

The fictional conglomerate that received simultaneous transfer pricing enquiries from two revenue authorities was not engaged in aggressive tax planning. It was simply moving goods between its own companies at prices that seemed reasonable to its founder. But in the absence of documentation, reasonable is not a defence. Arm’s length is the standard, and demonstrating arm’s-length compliance requires analysis, documentation, and governance that the group had never invested in.

Caribbean multi-territory enterprises cannot afford to treat transfer pricing as a future concern. Revenue authorities are auditing now. Information is being exchanged now. Penalties are being assessed now. The cost of retrospective compliance — defending undocumented positions under audit pressure — is invariably higher than the cost of proactive compliance. And the cost of double taxation, where it arises, may be permanent.

The enterprises that will navigate the transfer pricing landscape most effectively are those that treat it not as a compliance burden but as a governance discipline — integrating transfer pricing into their commercial decision-making, maintaining contemporaneous documentation, and building the internal processes that ensure compliance is sustained over time rather than scrambled together when the audit letter arrives.

Commission Your Transfer Pricing Review

Dawgen Global invites Caribbean multi-territory enterprises to take the proactive step toward transfer pricing compliance. Our Transfer Pricing Risk Assessment provides a comprehensive, confidential evaluation of your group’s intercompany transactions, identifies the transactions that create the greatest risk, and delivers a prioritised roadmap for achieving compliant, defensible transfer pricing documentation.

Request a proposal for Dawgen Global’s Transfer Pricing Risk Assessment and Documentation Programme. Email [email protected] or visit www.dawgen.global to begin the conversation.

DAWGEN GLOBAL | Big Firm Capabilities. Caribbean Understanding.

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