OPINION: Transfer pricing paradox in Tanzania
The Tanzanian Transfer Pricing (TP) landscape experienced a shift when the Tax Administration (Transfer Pricing) Regulations, 2018 were released in November 2018. These Regulations precede the Income Tax (Transfer Pricing) Regulations, 2014. The perplexity of it all began with the question of when the effective date of the new regulations was! Some, relying on guidance from the preceding regulations, understood the effective date to be the date of publication i.e. April 2018, while others understood the effective date to be the date when the superseding regulations were made available to the public, i.e. November 2018.
It is undeniable that the new regulations have introduced substantial changes, which affect the transfer pricing practise significantly in Tanzania. Among others, there was an introduction of mandatory filing of the TP documentation for entities that have met the threshold of Sh10 billion, in conjunction with the respective entities’ final returns.
The threshold has created much controversy among tax payers and tax consultants alike, on whether this relates to the balance sheet amount or actual costs of transactions entered into during the year, it is upon the tax revenue authority to provide clarity on the matter.
The new regulations further provide that failure to file the TP documentation attracts a penalty equivalent to Sh52.5 million.
It is common knowledge that final returns are filed six months after tax payers’ year end. However, there are instances when a tax payer requests for an extension of time to file the final return. In these instances there are multiple questions that arise, such as to the applicability of the penalty, since the TP documentation should be filed with the final return.
Also there is the question of whether the tax payer is required to request for an extension to file the TP documentation as well or whether the final return extension request suffices. Hence, the revenue authority needs to clarify on when the penalty for late filing of the TP documentation is applicable.
Moreover, the superseding regulations require tax payers to avail financial statements of all related party entities that have transacted with the domestic entity during the year.
This is an onerous process for tax payers due to the magnitude of the information requested especially for domestic entities that have transacted with numerous related parties. The revenue authority should revisit this requirement with the aim of making it less onerous.
Another concern, with the entities that meet the mandatory filing requirement, is that there is a difference in preparation and submission of financial statements requirement for some countries, whereby some countries have a six months after year end window to prepare their financial statements, others have a year up to a year and a half after year end window.
Due to this difference, it will be a challenge to collate all the financial statements and submit within the prescribed time period as per the new regulations.
The superseding regulations have changed the mechanism in which the penalty for non-compliance with the arm’s length principle whereby, the penalty for a domestic entity to undercharge a related party or be overcharged by a related entity, is computed by taking into account a penalty equivalent to a hundred percent of the adjusted amount by the revenue authority, over and above the tax charged on the TP adjusted amounts.
However, the revenue authority is yet to clarify on the exact methodology to be used to compute the amended penalty.
This shows that the tax payer’s burden for non-compliance with the arm’s length principle, has been tremendously increased with the new regulations.
With a lack of guidelines on the implementation of the new regulations, tax payers are basically stumbling in the dark, overwhelmed by all the changes passed, and there is lack of clarity over some of the regulations. This demonstrates that there is an urgent need for the revenue authority to issue TP guidelines, in order to steer tax payers through the whole process of compliance with the new TP regulations.
Asia Mti is a tax advisor at KPMG in Tanzania ([email protected]).The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG
