TP&Tax on Financier Worldwide 2023 Transfer Pricing Publication
TP&Tax has been featured in the 2023 publication of Financier Worldwide, where we have provided insights on the current trends in the transfer pricing landscape in Tanzania.
Transfer pricing is increasingly becoming an area of focus for companies and revenue authorities across the world, as a result of increased cross-border transactions. While the cross-border movement of goods and services has benefited Multinational Enterprises through increased efficiency and minimization of the Group’s tax liability, it exposes countries to losing their fair share of tax revenues. Accordingly, countries have introduced transfer pricing policies and strengthened their administration of taxes, to minimize the erosion of the tax base and profit shifting from transactions between Multinational Enterprises.
In this publication, we provide insights on the recent transfer pricing developments in Tanzania, measures taken by the revenue authority to monitor transfer pricing in Tanzania and what is required of a taxpayer that falls within the scope of transfer pricing in Tanzania.
Q. Could you outline some of the significant developments in the transfer pricing arena over the last 12 to 18 months? In what ways have these developments impacted how organisations go about implementing their tax planning strategies?
A. The laws governing transfer pricing (TP) in Tanzania include the Income Tax Act, 2004 and the Tax Administration (Transfer Pricing) Regulations, 2018. Over the last 18 months, there have been several changes to these laws with a focus on minimising the potential loopholes for base erosion and profit shifting (BEPS) outside Tanzania, such as the percentage of shareholding in the definition of associate changing from 50 percent to 25 percent to widen the net for taxpayers falling within the scope of TP. The penalty for non compliance with the arm’s length principle was reduced from 100 percent of the TP adjustments to 100 percent of the tax effect from the TP adjustments. This was a positive measure to enforce voluntary compliance by taxpayers and minimise the number of TP disputes, as the initial penalty was punitive to taxpayers. The thin capitalisation rules were also amended by defining equity to only include paid-up share capital. This change may pose a risk for thinly capitalised companies, where the current trend by the Tanzania Revenue Authority (TRA) is to capitalise the excessive shareholder loans to equity.
Q. To what extent are the tax authorities in Tanzania placing greater importance on the issue of transfer pricing? Have they increased their monitoring and enforcement activities?
A. The TRA has a special unit within the Large Taxpayers Department, called the International Taxation Unit (ITU), which is responsible for conducting TP audits for large taxpayers and providing support to the domestic revenue departments. A few years ago, a greater focus on TP matters was placed on large taxpayers. In recent years, TP audits from the domestic revenue departments and key sectors of the economy such as agribusiness and the mining industry, to name just two, have significantly increased. The queries presented in recent audits also focus more on the group’s value chain and how value is created in Tanzania, and whether the entity in Tanzania is appropriately remunerated.
Q. Could you outline the challenges that companies face as they try to maximise their tax efficiencies while staying within the bounds of transfer pricing regulations? Is it becoming tougher to balance the drive for efficiency with compliance requirements?
A. The main challenge is balancing compliance requirements and the cost of compliance. The TP regulations do not provide any safe harbours and therefore, companies with domestic and cross-border intercompany transactions, irrespective of their magnitude, are required to comply with the regulations. Failure to do so will result in penalties. This may be expensive for companies with lower intragroup activities and local groups of companies, where the risk of profit shifting might not be substantial. Furthermore, the TP regulations allow taxpayers to apply for advance pricing agreements (APAs), but so far, none has been approved by the TRA. The TRA also has a time limit of five years to conduct an audit and adjust a company’s tax return, from the date of filing the return. Due to a shortage of resources, transfer pricing audits would be initiated almost at the expiry of the time limit, which by then, interest and penalties for late payment have accumulated if there are upward TP adjustments. This, coupled with non-approval of APAs, increases uncertainty to taxpayers when undertaking transactions, irrespective of their level of Compliance.
Q. What kinds of challenges arise in calculating appropriate transfer prices, both for tangible and intangible assets? How crucial is it to have consistent supporting documentation?
A. The TP regulations require the selection of the appropriate TP method in hierarchical order, with the comparable uncontrolled price (CUP) being the most preferred method. There are also certain transactions such as commodity, intragroup services and intercompany loan transactions, where the laws have specified the TP methods to be used. This has caused various challenges to taxpayers because not all transactions can be sufficiently analysed by the methods stipulated in the TP regulations. In several instances, the TRA has also challenged taxpayers for applying the methods stipulated in the TP regulations. Another challenge is the lack of African comparables. However, the TRA is cognisant of the limited availability of African comparables in TP databases and therefore, tends to accept other geographical locations that are comparable to Africa. It is very crucial for a taxpayer to have consistent supporting documentation, for its TP policies to be accepted by the TRA. The TP regulations provide a list of information required to produce compliant TP documentation and emphasise that the functional analysis for controlled transactions should be justified by documentary evidence.
Q. Have you seen an increase in transfer pricing disputes between companies and tax authorities in Tanzania?
A. The number of TP audits in Tanzania has increased, which means an increase in TP disputes between companies and the TRA. TP audits are typically lengthy, complex and expensive. For instance, when the TRA issues a tax assessment after completion of an audit, the taxpayer is allowed to file an objection if it is aggrieved by the assessment. The objection is to be reviewed by the technical unit within the TRA, other than the audit team. However, for the objection to be admitted, the taxpayer is required to pay the higher of the tax not in dispute or one-third of the assessed tax. Given the high magnitude of TP adjustments, one-third of the assessed tax is usually higher than the tax not in dispute. This may strain the taxpayers’ cashflow and affect its core operations.
Q. What steps should companies take if they become the subject of a tax audit or investigation?
A. A company with controlled transactions should maintain a robust TP report with supporting documentation on a contemporaneous basis. The TP document should be in place by the time the final tax return is filed. If the total magnitude of intercompany transactions is TZS 10bn, approximately US$4.26m, or more, then the TP document needs to have been submitted to the TRA along with the tax return, six months after the financial year end. This is the first step to take before a company is subject to a TP audit. An audit is initiated by the TRA through issuing an audit notification letter and a request for submission of TP documentation, among other things. The taxpayer is then required to submit contemporaneous TP documents for the years under audit, within 30 days. Failure to do so attracts a penalty of TZS 52.5m per year.
Q. In general, what advice would you give to companies on reviewing and amending their transfer pricing policies and structures?
A. We advise companies to proactively review and monitor their TP policies during the year to ensure that they are within the arm’s length range. The company should also prepare documentary support on a real-time basis, to justify the arm’s length of their transactions as they take place. If this is done proactively, it significantly minimises the risk for additional tax liabilities in the future. Regulation 7 of the TP regulations provides a list of information required to form a compliant TP document from a Tanzanian TP perspective. Therefore, companies should ensure that TP documents are prepared to comply with the requirements of the local regulations as opposed to globally applied guidelines.
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