Secondary Pricing Adjustment

Tax Consequence

Treating the non-repatriated funds as a constructive distribution of earnings triggers withholding tax obligations for the domestic enterprise. The secondary pricing adjustment often results in a withholding tax liability of ten percent on the deemed dividend amount. Since no actual payment is made to the parent, the subsidiary must pay this tax from its own cash reserves.

This consequence adds a substantial layer of expense to the primary tax audit.

Accounting Treatment

Booking the adjustive entries requires specific account configurations to reflect the tax authority’s transfer pricing decision. In a secondary pricing adjustment, the excess profit that was transferred abroad is reclassified as a receivable or a distribution. The resulting balance sheet update changes the financial statements and can impact the entity’s distributable profits.

This step ensures that the corporate books correspond to the final tax assessment.

Repatriation Option

Enterprises can avoid the deemed dividend withholding tax by arranging for the actual cash to be returned to the country. Under the rules governing a secondary pricing adjustment, the taxpayer can choose to repatriate the excess pricing amount from the overseas parent within a specific timeframe. This transaction must be documented and submitted to the tax bureau to cancel the withholding tax liability.

However, this option requires coordination with foreign exchange banks to navigate the national capital controls. This coordination can be complex and requires the approval of local tax officials. If done incorrectly, the repatriated cash could be treated as new income, resulting in double taxation.