Summary — What every GMC group needs to know:
- Section 34D lets the Comptroller adjust income, deductions or losses where conditions between "related parties" differ from "arm's length conditions". Adjustments are made on the actual transaction, looking at substance over form, and can disregard a transaction that independent parties would not have entered into at all.
- A transfer pricing adjustment triggers an automatic surcharge of 5% of the amount adjusted (s. 34E), payable within one month even if the assessment is under objection or appeal.
- A company, firm or trust with gross revenue above $10 million in a basis period must prepare transfer pricing documentation for every related party transaction by the filing deadline, keep it for at least 5 years, and produce it within 30 days of a notice (s. 34F). Non-compliance is an offence with a fine up to $10,000.
- The general anti-avoidance rule in s. 33 allows the Comptroller to disregard or vary any arrangement whose purpose or effect is to alter, relieve or reduce tax, unless it was carried out for bona fide commercial reasons without tax avoidance as a main purpose.
- A s. 33 adjustment carries a surcharge of 50% of the tax or additional tax (s. 33A), also payable within one month.
- Both surcharges can be remitted by the Comptroller for good cause and are refunded if the underlying assessment is reduced on appeal.
Why GMC has these rules
GMC taxes companies at a flat 15% on chargeable income (Income Tax Act 2025, s. 43(1)(a)) and offers concessionary regimes for approved companies. A low, simple rate attracts groups that trade with affiliates in other countries. That is exactly the setting in which tax authorities scrutinise the prices charged between related companies, because moving profit into or out of a jurisdiction is easiest through intra-group pricing.
The Income Tax Act 2025 therefore contains two distinct sets of protective rules. The first is a specific transfer pricing regime (ss. 34D to 34F) built around the arm's length principle. The second is a general anti-avoidance rule (s. 33) with its own surcharge (s. 33A). They overlap but operate differently, and a well-run GMC business needs to understand both.
In this article "$" means United States dollars, as it does throughout the Act (s. 2AA). "Comptroller" means the Comptroller of Income Tax appointed under s. 3.
Who is a related party?
Section 2 defines a "related party" of a person (A) as any person who directly or indirectly controls A, is controlled by A, or is under common control with A. Control is not limited to shareholding; the definition catches subsidiaries, parents and sister companies, and also individuals or trusts that control a company. For partnerships, trusts and registered business trusts, s. 34D(3), (5) and (7) extend the concept as prescribed by rules made under s. 7.
A permanent establishment is treated as a separate person for these purposes: where a person carries on business through a permanent establishment, s. 34D applies "as if the person and the permanent establishment are 2 separate and distinct persons" (s. 34D(2)). A foreign company with a branch in GMC must therefore price its head-office-to-branch dealings on an arm's length basis.
Section 34D does not apply to dealings between parties to a purely private trust where every settlor is an individual and every beneficiary is an individual or a philanthropic body, provided the trust is not a commercial vehicle (s. 34D(9) and (10)).
The arm's length test (s. 34D)
The three conditions
Section 34D(1) applies where:
- two persons are related parties;
- conditions in their "commercial or financial relations" differ from the conditions that "would be made or imposed if they were not related parties and dealing independently with one another in comparable circumstances" (the "arm's length conditions"); and
- had the arm's length conditions applied, the GMC income of one of them would be greater, a deduction would be less, or a loss would be less (s. 34D(1)(c)).
Where those conditions are met, the Comptroller "may" increase the income, reduce the deduction or reduce the loss (s. 34D(1A)). Income increased under this power is treated as accruing in, derived from or received in GMC (s. 34D(1D)), and a reduced loss is treated as never incurred (s. 34D(1E)).
Substance over form and recharacterisation
Two subsections give the rule real teeth. First, the arm's length conditions must be identified on the basis of the actual relations between the parties, "taking into account both the form and substance of those relations, but disregarding the form of those relations to the extent it is inconsistent with their substance" (s. 34D(1B)). A contract that says one thing while the parties do another will be tested on what they do.
Second, s. 34D(1C) permits recharacterisation. If independent parties in comparable circumstances "would in comparable circumstances enter into substantially different commercial or financial relations", the arm's length conditions are identified on the basis of those different relations. If independent parties "would in comparable circumstances not enter into commercial or financial relations" at all, the analysis proceeds "on the basis of the absence of commercial or financial relations". In plain terms: an intra-group arrangement that no third party would ever agree to can be treated as if it did not exist.
Right of appeal
A s. 34D adjustment can be challenged. Section 34D(2A) preserves the taxpayer's right to question both whether the section applies and the Comptroller's decision, in an appeal against the assessment under Part 18.
The 5% transfer pricing surcharge (s. 34E)
Where the Comptroller makes any of the three adjustments under s. 34D(1A), "a surcharge equal to 5% of the amount of the increase or reduction (as the case may be) is recoverable by the Comptroller from the person as a debt due to the GMCA" (s. 34E(1)).
Three features deserve attention:
- The base is the adjustment, not the tax. The surcharge is 5% of the income increased or the deduction or loss reduced. On a $2 million adjustment, the surcharge is $100,000 regardless of how much extra tax results, and it is payable even where the adjustment merely reduces a loss that produces no current tax.
- Payment is not suspended by an objection or appeal. The surcharge must be paid within one month after written notice is served, "despite any objection to or an appeal lodged against" the assessment (s. 34E(2)). The Comptroller may extend time, with interest (s. 34E(3)).
- Relief is available. The Comptroller "may, for any good cause, remit wholly or in part any surcharge" (s. 34E(5)). If the assessment is varied or annulled on objection or appeal, the surcharge is adjusted correspondingly and any overpayment, with interest paid, is refunded (s. 34E(6)).
Collection provisions that apply to tax, including recovery from persons leaving GMC (s. 86), apply to the surcharge (s. 34E(4)).
Transfer pricing documentation (s. 34F)
Who must prepare it
Section 34F applies from the first year of assessment under the Act, which begins on 1 January 2026 (s. 2, "year of assessment"). It applies to a company, firm or trust if either:
- its gross revenue from trade or business for the basis period is more than $10 million (s. 34F(2)(a)); or
- it was required to prepare documentation for a transaction in the immediately preceding basis period (s. 34F(2)(b)).
The second limb means that once a business crosses the threshold, it stays in the regime for the following year even if revenue falls.
What must be prepared, and when
The company, the person making the firm's return, or the trustee "must prepare documentation ... for each transaction undertaken ... with a related party in the basis period concerned", unless exempt by rules made under s. 7 (s. 34F(3)). The documentation must:
- be prepared "no later than the time for the making of the return of the income" for the year of assessment (s. 34F(5)(a));
- contain the prescribed details of the parties' commercial or financial relations, the conditions imposed between them, and "an explanation as to whether those conditions are arm's length conditions" within s. 34D(1)(b) (s. 34F(5)(b)); and
- comply with any other prescribed requirements as to form and content (s. 34F(5)(c)).
The detailed content requirements, and any exemptions for low-value or domestic transactions, are left to rules under s. 7. Until such rules are published, a business in scope should prepare documentation that at minimum records the transaction, the functions, assets and risks of each party, the pricing method used and the comparables relied on, and a reasoned conclusion on arm's length conditions.
Retention and production
Documentation must be kept "in safe custody" for at least 5 years from the end of the basis period in which the transaction took place (s. 34F(6)). The Comptroller may by written notice require a copy, and the person must comply "within 30 days starting from the date the notice is served" (s. 34F(7)). Thirty days is not enough time to build a file from scratch, which is why the Act requires it to exist before the return is filed.
Offences
A person who without reasonable excuse fails to prepare, retain or produce documentation, or who produces documentation known to be false or misleading in a material particular, commits an offence with a fine up to $10,000 (s. 34F(8)). The Comptroller may compound the offence (s. 34F(9)). The more significant cost of poor documentation is not the fine; it is the loss of the ability to defend pricing when a s. 34D adjustment and s. 34E surcharge follow.
The general anti-avoidance rule (s. 33)
When it applies
Section 33 applies where the Comptroller is satisfied that "the purpose or effect of any arrangement is directly or indirectly" to alter the incidence of tax, to relieve a person from liability to pay tax or make a return, or to reduce or avoid a liability under the Act (s. 33(1)). "Arrangement" is defined widely as "any scheme, trust, grant, covenant, agreement, disposition and transaction and includes all steps by which it is carried into effect" (s. 33(5)). It expressly includes inflating a qualifying deduction transferred under group relief (s. 33(3); see our guide to group relief and amalgamations).
The rule reaches arrangements "made or entered into before, on or after the date of commencement of this Act" (s. 33(6)). Legacy structures are not grandfathered.
The commercial purpose defence
The rule "does not apply to any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax" (s. 33(7)). Both limbs must be satisfied: a genuine commercial reason is not enough if tax reduction was nonetheless one of the main purposes. Contemporaneous board papers explaining why a structure was chosen are the best evidence.
What the Comptroller can do
Where the rule applies, the Comptroller "must disregard or vary the arrangement and make any adjustment that the Comptroller considers appropriate", including recomputing gains or profits or imposing tax, "so as to counteract any tax advantage" (s. 33(2)). The arrangement remains valid for all other purposes. The taxpayer may challenge the application of s. 33 in an appeal against the assessment under Part 18 (s. 33(4)).
The 50% anti-avoidance surcharge (s. 33A)
Where a s. 33 adjustment results in tax or additional tax, "a surcharge equal to 50% of the amount of tax or the additional amount of tax is imposed on the person" (s. 33A(2)). Where the adjustment reduces or disregards a group relief transfer and the claimant company is assessed, the 50% surcharge falls on the transferor company (s. 33A(3)).
As with s. 34E, the surcharge is payable within one month of notice despite any objection or appeal (s. 33A(4)), may be remitted for good cause (s. 33A(7)), and is adjusted and refunded if the assessment is varied or annulled (s. 33A(8)). The Comptroller may extend time for payment, with interest (s. 33A(5)).
How the two regimes compare
| Feature | Transfer pricing (ss. 34D–34F) | General anti-avoidance (ss. 33–33A) |
|---|---|---|
| Trigger | Non-arm's length conditions between related parties | Arrangement whose purpose or effect is to avoid or reduce tax |
| Comptroller's power | Increase income, reduce deduction or loss | Disregard or vary the arrangement; any appropriate adjustment |
| Defence | Conditions were arm's length; documentation | Bona fide commercial reasons and no main tax purpose |
| Surcharge | 5% of the amount adjusted | 50% of the tax or additional tax |
| Payment | Within one month, despite appeal | Within one month, despite appeal |
| Remission | For any good cause | For good cause |
| Documentation duty | Yes, above $10 million revenue | No specific duty |
Practical checklist
- Map every related party transaction: management fees, royalties, intra-group loans, guarantees, shared services and head-office-to-branch dealings.
- Check whether gross revenue for the basis period exceeds $10 million. If it does, or did last year, s. 34F applies.
- Prepare transfer pricing documentation for each related party transaction before the return filing deadline, covering the prescribed details and an explicit arm's length conclusion.
- Make sure contracts reflect what actually happens. Section 34D(1B) disregards form that is inconsistent with substance.
- Ask whether an independent party would have entered into the arrangement at all. If not, s. 34D(1C) allows the Comptroller to ignore it.
- Record commercial reasons for any restructuring in board minutes at the time; this is the s. 33(7) defence.
- Retain documentation for at least 5 years and be able to produce it within 30 days.
- Budget for surcharges: they are payable within one month even while an appeal is pending.
Frequently asked questions
Does GMC follow the arm's length principle?
Yes. Section 34D tests related party dealings against the conditions that would apply between independent parties "dealing independently with one another in comparable circumstances". The Comptroller may adjust income, deductions or losses to reflect those conditions and may look through the form of a transaction to its substance.
What is the transfer pricing documentation threshold in GMC?
Section 34F applies where gross revenue from trade or business exceeds $10 million in the basis period, or where documentation was required in the previous basis period. The detailed content is prescribed by rules under s. 7, and exemptions may also be prescribed.
How much is the transfer pricing surcharge?
Five per cent of the amount of the adjustment (s. 34E(1)), not of the tax. It is payable within one month of notice regardless of any objection or appeal, but the Comptroller may remit it for good cause and it is refunded if the assessment is reduced.
Can the Comptroller attack a structure set up before the Income Tax Act 2025 commenced?
Yes. Section 33(6) applies the anti-avoidance rule to arrangements made "before, on or after" commencement. The defence in s. 33(7) requires bona fide commercial reasons and that tax avoidance was not one of the main purposes.
Is the 50% surcharge automatic?
It is imposed whenever a s. 33 adjustment results in tax or additional tax (s. 33A(2)). The Comptroller may remit it wholly or partly for good cause (s. 33A(7)), and it falls away to the extent the assessment is annulled on appeal (s. 33A(8)).
Key takeaways
- Related party pricing in GMC is governed by an arm's length rule with substance-over-form and recharacterisation powers (s. 34D).
- Adjustments carry an automatic 5% surcharge on the amount adjusted, payable within one month (s. 34E).
- Businesses above $10 million in gross revenue must have documentation ready by the filing deadline and keep it for 5 years (s. 34F).
- The general anti-avoidance rule reaches any arrangement, including pre-commencement ones, and carries a 50% surcharge (ss. 33 and 33A).
- Contemporaneous evidence of commercial purpose and arm's length pricing is the only reliable defence.
This article is general information about the law of the Gelephu Mindfulness City Special Administrative Region as at the date above. It is not legal advice and does not create a lawyer–client relationship.
You may contact Basnet Law at basnet@basnetgmc.com or office@basnetgmc.com for any legal queries related to GMC.
References
- Income Tax Act 2025 (Law No. 6 of 2025), ss. 2 ("related party", "year of assessment"), 2AA, 3, 7, 33, 33A, 34D, 34E, 34F, 37B, 43(1)(a), 86, Part 18
