Transfer Pricing Documentation: How Often Should It Be Updated?
One of the most frequently asked questions in my capacity as a transfer pricing consultant, is how often a tax payer is required to update their transfer pricing documentation. As the deadline for maintenance of transfer pricing documentation is fast approaching, this question becomes even more relevant for tax payers with related party transactions during the year. This article aims at providing clarifications on how often a taxpayer with related party transactions is required to update their transfer pricing documentation per the Tanzanian transfer pricing requirements.
Transfer pricing documentation requirements in Tanzania
The Tax Administration (Transfer Pricing) Regulations,2018 require taxpayers with related party transactions to prepare contemporaneous transfer pricing documentation and have it ready by the time of filing their annual tax return (i.e., six months after the financial year end). When the transfer pricing documentation is requested by the TRA, it needs to be submitted within 30 days upon request. If the total magnitude of the related party transactions during the year is 10 billion TZS and above, then the taxpayer is required to file the transfer pricing documentation with the Tanzania Revenue Authority (TRA) along with their tax return. These requirements are stipulated under Regulation 7 of the Transfer Pricing Regulations.
There is also a penalty clause, which provides that failure to comply with Regulation 7 results to a penalty that is equivalent to a minimum of 52.5 million TZS. In addition to this, failure to comply with the arm’s length principal results to a penalty of 100% of the tax liability resulting from the transfer pricing adjustments.
Meaning of contemporaneous
Contemporaneous means happening or existing at the same time. In the transfer pricing document, a taxpayer is required to demonstrate that the transactions entered with its related parties, are conducted at arm’s length. In other terms, the price charged between related parties should be similar to the price charged by independent third parties under similar circumstances. Therefore, to interpret the contemporaneous documentation requirement in simple terms, it means, related party transactions need to be documented and benchmarked against independent third-party transactions that are happening at the same time. So, if a tax payer is preparing a transfer pricing document for the financial year ended 31 December 2021, then the transactions documented should be benchmarked against independent third-party transactions that also took place in the year 2021.
Compliance with contemporaneous documentation requirement
In order to comply with the contemporaneous documentation requirement, one has to prepare and update their transfer pricing documentation on a year-on-year basis. Firstly, this ensures that, the transactions documented are benchmarked against transactions taking place under the same circumstances. For example, in 2020, there are industries that were significantly affected by the COVID-19 pandemic which ultimately had an impact on their overall profits. If transactions that took place in 2020 are compared with independent thirdparty transactions that took place in 2019, then most likely the transactions may not be considered at arm’s length due to the significant difference in the economic circumstances in which the two transactions (although similar) took place.
Secondly, preparation of transfer pricing documentation on a year-on-year basis, cushions a taxpayer from the risk of being penalized for not meeting the deadline for maintenance of transfer pricing documentation, which is six months after the financial year end. I have witnessed scenarios where taxpayers were penalized 52.5 million TZS per year for maintaining one
transfer pricing documentation covering multiple years. For example, if a transfer pricing document is submitted to the TRA covering the years 2019, 2020 and 2021, most likely the document was prepared in the latest period which is 2021. Therefore, it may be interpreted that the taxpayer did not have the documents for 2019 and 2020 ready when they were due.
A typical question that follows after responding to the first question, of how often a transfer pricing documentation needs to be updated is, what if my transactions
have not changed from the last time, I prepared my transfer pricing document? Preparation of transfer pricing document on a year-onyear basis may cause an administrative burden to a taxpayer especially if the transactions being documented did not change. Although, the transactions may be the same, the terms of transacting or economic circumstances in which the transactions took place may have changed. In most cases, the terms of transacting may not have changed in the written agreement, but changed in terms of how the parties conduct themselves while undertaking the transaction, in a manner that may deviate from the arm’s length principle.
The best practice is to review the transactions on an annual basis and update the transfer pricing documentation, to ensure it is compliant with the contemporaneous documentation requirements. Generally, the cost of being compliant is significantly minimal compared to the cost of non-compliance.