The arm’s length standard
Where an arrangement exists between associated persons, the person shall calculate their income tax payable, according to the arm’s length standard.
The arm’s length standard requires associated person to qualify, characterise, apportion and allocate amounts to be included or deducted in calculating income to reflect arrangement that would have been made between independent persons.
The Commissioner-General may by Statutory Instrument, prescribe conditions on the application of and exceptions to this section and international guidelines that must be followed in applying the arm’s length standard.
Where, in the opinion of the Commissioner-General, a person has failed to comply with the aforementioned, the Commissioner-General may make adjustment consistent with calculating their income tax payable according to the arm’s length standard; and in doing so the Commissioner-General may:
- Re-characterise an arrangement made between associated persons, including re-characterising debt financing as equity financing.
- Re-characterise the source and type of any income, loss, amount or payment; and
- Apportion and allocate expenditure based on turnover.R
This shall apply to an arrangement between a permanent establishment in Sierra Leone and its non-resident owner.
Note: “arrangement” means a transaction including a course of conduct, dealing or understanding, whether expressed or implied, whether or not enforceable by legal proceedings and whether unilateral or involving more than one person.
Re-characterisation of income and deductions
For the purposes of determining liability to tax under the ITA 2000 (Income Tax Act), the Commissioner may:
- Re-characterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme or which would result or has resulted in less income tax being paid.
- Disregard a transaction that does not have substantial economic effect, or
- Re-characterise a transaction the form of which does not reflect the substance.
A “tax avoidance scheme” includes any transaction one of the main purposes of which is the avoidance or reduction of liability to tax.
