Case for Tanzania adopting advance pricing agreement

It now seems like every other day some tax related, usually transfer pricing, issue makes the big headlines. Three weeks ago, the European Commission ruled that Ireland granted undue tax benefits of up to €13 billion to Apple.

The exact term the EC used is ‘illegal state aid’. We are yet to see closure to this case which is perhaps going to set some precedent. This tells us that the future of international taxation is far from predictable and the current laws have some catching up to do with the modern realities of global businesses. What we know is that Ireland has appealed the decision.

Closer to home African, tax authorities have been increasing their capacities in dealing with cross-border transactions. About two thirds of the African Tax Administrators Forum’s (ATAF) activities, training and collaborative efforts with Paris based Organisation for Economic Cooperation and Development has been transfer pricing related. This is exemplary of where the focus lies. And it is not surprising, with over two third of the world trade being between related parties, this increased focus is not only logical, but also likely to intensify.

This week, the Natural Resource Governance Institute launches its report entitled‘Transfer Pricing in the Extractive Sector in Tanzania’. As the oil and gas sector is still in its nascent phase, the report mainly focused on mining. One of the recommendations of the report is for the Tanzanian government to adopt an Advance Pricing Agreement programme which would help ‘the TRA develop transfer pricing expertise and gain access to valuable information.’ I would like to dwell on this today as I think it provides an opportunity for both the revenue authorities and taxpayers.

Essentially, an Advance Pricing Agreement (APA) is a written agreement between a taxpayer and one or more tax authorities covering the pricing of related party transactions. This agreement is for a fixed period. The taxpayer and tax authority (ies) mutually agree on the transfer pricing method(s) to be applied and their application for a certain future period of time, say five to seven years.

The agreement might be between a taxpayer and one tax authority (unilateral) or it may involve more one tax authority (multilateral). Scopes differ for each APA, it could be limited to a few key industries/ types of transactions, or it may cover any specified transfer pricing issue between related parties, including transfers of tangible and intangible property.

There are many benefits to an APA. It might be a cliché, but multinationals, especially in the extractive sector, commit huge sums of money in upfront investments. For instance, the envisaged LNG plant, the gas liquefier and the export terminal expected to be built at Likong’oin Lindi will cost USD 30 billion. You want to be sure, when investing that much money, that rules will not change mid-way. That your taxes are predictable. In fact, any economic feasibility for such a project requires some fiscal certainty. An APA provides just that.

One of the key issues highlighted in the recent PwC and World Bank Doing Business Survey in Africa was that it takes too long, and is often costly, to resolve tax matters and disputes with tax authorities. What an APA does is actually prevent most of these disputes. Both the taxpayers and the authorities have a chance, during the negotiations, to pre-empt and clarify any potential areas of tax disputes beforehand. Another advantage to having an APA programme is that it provides a platform, prospectively, for collaboration between taxpayers and the Revenue Authority.

Often during transfer pricing audits, areas of conflict are around transfer pricing methodologies and suitable benchmarking comparables. For those readers who might find these terms foreign, a comparable essentially provides a basis with which related party transactions are tested. Typically, in an APA process would take care of this. The taxpayer will provide comparables and the tax authorities will have to be comfortable with them or adjust them accordingly. Once again, a potential clash of interpretation is averted well in advance.

Perhaps more importantly, an APA is an effective time investment for both the taxpayers and Revenue Authorities. By taking time to go through detailed negotiations – and APAs involve a great deal of detail – the tax authority gets to understand the entire value chain and business model of the taxpayer, the nature of the investment made, the project economics and the resultant tax implications. This is often missed during typical audits, which often leave taxpayers frustrated. In other words, APAs are not just time saving, they are also useful tools to get the tax authorities to really understand the business of their customers; the taxpayer.

In my last article, I talked about the importance of Tanzania investing in getting more double tax treaties with other countries.

APAs work best when two countries have a double tax treaty. This is because double tax treaties typically provide an avenue for tax authorities across those jurisdiction to work together through the APA programme. By way of example, there is currently a tax treaty in place between Tanzania and Norway (the home jurisdiction of one of the major oil and gas investors in Tanzania, namely Statoil) – so this could be a starting point. But even in the absence of a treaty Tanzania can still go into unilateral APAs which will provide some measure of certainty, albeit from the Tanzanian side, to investors.

Just over a month ago the President expressed his frustration at bureaucratic delays that have held back progress of the LNG plant. In seeking to move the project forward there are clearly many issues to discuss, but one thing that will be top of mind for the investors is certainty around the tax regime. Against this background, an APA programme would be invaluable as one of a number of measures to bring additional tax certainty.

The good news is that our current transfer pricing regulations provides the opportunity to start an APA programme. No new laws are required. It is my hope that the TRA will make good on this opportunity sooner rather than later

Mr Ndandala is tax manager – International Tax Services, PwC Tanzania. He spent two years working on secondment with PwC Switzerland. His emai is [email protected]. The views expressed do not necessarily represent those of PwC.