Tanzania in International Tax Law: How to minimise transfer pricing exposures

I wrote last week’s column to synopsize the Tanzanian transfer pricing regime. Under the new Tax Administration (Transfer Pricing) Regulations, 2018 (the “TP Regulations”), all related-party transactions in which Tanzania tax resident companies are involved must follow the “arm’s length principle”.

This principle states that the price charged by one related party to another for a particular product or service must be the same as if the parties were unrelated.

Hence, an arm’s length price of a transaction is what the price of that transaction would be on the ‘open market’.

The rationale for the TP Regulations is the increasing integration of the Tanzanian economy with other economies, the growth of multinational enterprises (MNEs), and the right of Tanzania as a sovereign State to tax profits on income arising from its jurisdiction.

The political sensitivity of transfer pricing cases and the likely imposition of additional taxes, interest, and penalties for violations of the TP Regulations, including the possible penalty of 100 percent of the adjusted amount that is applicable for failure to comply with the arm’s length principle when transacting with related parties, indicates a rather complicated transfer pricing landscape for MNEs operating in Tanzania.

Moreover, aggravating the landscape is the dire shortage of transfer pricing experts in the country which impacts not only MNEs, but also the Tanzania Revenue Authority.

Be that as it is, transfer pricing compliance obligations are also important for Tanzanian small and medium enterprises (SMEs) that are active in international business.

Therefore, in this week’s column, I will attempt to summarize some of the best practices that MNEs and SMEs need to implement in order to minimize transfer pricing exposures in Tanzania.

Under the TP Regulations, pricing requirements for all transactions, including licenses of intellectual property rights, must be in accordance with the arm’s length principle. This is pretty standard. But contemporaneous documentation requirements for taxpayers that reach the Sh10 billion threshold pose a serious challenge.

Contemporaneous documentation is required to support the arm’s-length character of controlled transactions in the face of wide powers of the Commissioner General of the Tanzania Revenue Authority (TRA) to request a person to supply “any other information” in the event he disagrees with the underlying pricing. In this sense, it is vital to have an updated and accurate transfer pricing report containing all information on related party transactions in order to avoid additional information requests, which could essentially negatively affect the initial assessment of the transactions in question for the taxpayer.

However, it is unrealistic to document everything; nevertheless, the best practice is to document material transactions.

Fresh, practical insights into the Tanzanian transfer pricing landscape are critical to completing a transfer pricing risk assessment for Tanzania. But then it is not easy to harvest such insights; therefore, in addition to engaging an international transfer pricing expert, working with on-the-ground local experts who are familiar with the TP Regulations as well as the attitude and thinking of the TRA can be very valuable.

This will help to facilitate useful compliance planning discussions on transfer pricing, from a global standpoint.

Another best practice for minimizing transfer pricing exposures in Tanzania is developing a compliance plan for both pricing and documentary requirements set out in the TP Regulations. Here, I would like to echo the words of Confucius “A man who does not plan long ahead will find trouble at his door” and remind readers of the stiff penalty regime for violations of the TP Regulations.

Accordingly, developing a compliance plan cannot be overemphasized. By way of example, the plan should entail the kind of transactions that are to be documented; work/activity timeliness and deadlines; and whether to engage a tax advisor/lawyer.

It is also a best practice to craft and implement a practical transfer pricing policy for determining, for example; how related parties that benefit from shared services will reimburse shared costs, or the amount of royalty to be charged for exploiting intellectual property rights. The policy has to be continually revised and improved.

Outdated or missing transfer pricing policies do not leave a positive impression on TRA tax audit officials. Therefore, annual reviews of transfer pricing policies for material transactions should be conducted.

This is by no means an exhaustive discussion on the best practices that MNEs and SMEs in international business need to implement in order to minimize transfer pricing exposures in Tanzania.

Other best practices include avoiding miscommunication or lack of communication with the TRA, especially during transfer pricing audits.

Ease of communication reduces the risk of the findings of the TRA being inaccurate to a company’s documentation and information.

Moreover, it is imperative for MNEs and SMEs in international business to ensure that intercompany agreements and contracts are up-to-date to ensure a smooth transfer pricing audit.

Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst, and the chief executive of Isidora & Company.