The Government of Tanzania published the Tax Administration (Transfer Pricing) Regulations, 2018, G.N. No. 166 of 2018 (the 2018 Regulations) on 27 April 2018. The 2018 Regulations revoke and replace the Income Tax (Transfer Pricing) Regulations, 2014, G.N. No. 27 of 2014. The 2018 Regulations introduce more transfer pricing rules and requirements that were not incorporated in the earlier regulations.
This article provides major highlights of the key changes introduced by the 2018 Regulations.
The 2018 Regulations require taxpayers with related party transactions above Sh10 billion in a year of income to file their transfer pricing documentation with the final corporate income tax return.
Although taxpayers that do not reach the threshold of Sh10 billion do not have to submit the contemporaneous transfer pricing documentation to the Tanzania Revenue Authority (TRA), nevertheless they must have the documentation in place by the due date for filing the corporate income tax return for that year.
Upon request by the TRA, the transfer pricing documentation must be submitted to the TRA within 30 days.
The 2018 Regulations provide a synopsis of all information that taxpayers should include in the contemporaneous transfer pricing documentation to support the arm’s-length character of controlled transactions.
Actual computational workings that were prepared when determining the transfer prices of controlled transactions are some of the records required. The Regulations also grant the Commissioner General of the TRA wide power to request by notice in writing from a person—whether or not liable to tax—to supply “any other information.”
Another key change is that an entity outside Tanzania can be used as tested party only if all relevant information, including financial statements of that party, is provided.
With regards to intragroup services and financing, the cost of performing the identified and rendered intragroup services shall be the designated method to determine the arm’s consideration for intragroup services.
If these services are supplied jointly to various associates, and it is not possible to identify specific services provided to each entity, then allocation is to be based on reasonable allocation criteria.
The criteria shall be accepted if it is measurable and relevant to the type of the service.
In this sense, if indirect methods of allocation are in situations where services cannot be directly attributed to a specific entity, it will be challenging to convince the TRA on the supporting documentation for benefits received from intragroup services.
The 2018 Regulations require the determination of the arm’s length interest rate for intragroup financing regardless of whether there is consideration for such financing.
According the 2018 Regulations, the owner of a locally developed intangible that is transferred outside Tanzania should be compensated appropriately at the time of the transfer. That intangible cannot attract a royalty when licensed back for use in Tanzania.
This measure is in accord with the base erosion on profit shifting (BEPS) actions on intangible assets.
Controlled commodity transactions should be priced using the comparable uncontrolled price (CUP) method.
Quoted spot rates obtained from a domestic or international commodity exchange market may be used as a benchmark to determine the arm’s length price for a controlled commodity transaction.
The Regulations stipulate that if the price agreed between associates is higher than the quoted spot price, then the agreed price shall be considered as the sale price.
This change is aligned to the approach adopted by many tax administrators in Africa for commodity transactions.
For companies dealing with commodities, the impact is likely to be significant; therefore, companies must revise their transfer pricing arrangements and consider the role of related parties in the supply chain.
The 2018 Regulations list the factors that should be considered when determining whether transactions are comparable.
Further the Regulations confirm that where domestic comparable data cannot be obtained, external comparable data may be used. Where four or less comparable data points are used, the Regulations provide that the average is the arm’s length result. If more than four comparable data points are used, the arm’s length result shall be the data point between the 35th percentile and 60th percentile.
And if the result falls outside the arm’s length range, the price should be adjusted to the median point of the range. Finally, to determine the penalty for taxpayers that fail to comply with the transfer pricing regulations, a currency point system is introduced.
The penalty is fixed at a minimum of 3,500 currency points as prescribed from time to time by the Commissioner General (1 currency point = Sh15,000) which results in a minimum penalty of Sh52,500,000.
In addition to this penalty, there is a possible penalty of 100 per cent of the adjusted amount that is applicable for failure to comply with the arm’s length principle when transacting with associates.
Paul Kibuuka (email@example.com) is a tax and corporate lawyer, tax policy analyst, and the chief executive of Isidora & Company.