How to stay compliant in a complex tax landscape

What you need to know:

  • Through APAs, companies can minimize or eliminate disputes with revenue authorities from different jurisdictions

By Seif Adam

Transfer Pricing has undeniably become a term frequently used by associated entities due to the increasing number of cross-border transactions. It involves pricing of goods, services, and intangible assets that are exchanged between related parties in their business transactions.

In Tanzania, Transfer pricing is regulated by the Income Tax Act, 2004, Transfer pricing guidelines 2018 and Tax Administration (Transfer Pricing) Regulations 2018 which are construed and applied in line with OECD or UN Documents but take precedence in the event of any inconsistency. In a nutshell, all these rules and guidelines exist to ensure consistency during payments of goods and services between entities, whether they are related or not.

Transfer Pricing is a complicated process, and even with the best intentions of most related entities, they are often closely scrutinized by revenue authorities. Disagreements between the tax authorities and the taxpayer have become more intense due to discrepancies in the tax base. These disagreements often result in prolonged and costly legal proceedings, heightened tax obligations, as well as fines and penalties.

Revenue authorities are normally concerned by the amount of tax revenue that a country fails to collect due to related entities’ profits being between low-tax and high-tax jurisdictions. Conversely, interrelated entities are wary of the risk of incurring higher tax liability when tax authorities hold differing views on Transfer Pricing basis and disallow the expense for deduction. These concerns have led to differences of opinion between the taxpayer and the revenue authority during Transfer Pricing audits, where Transfer Pricing documentation no longer serves as a mere means to an end.

How can interrelated parties navigate the complexity of pricing their transactions across different jurisdictions? To begin with, it is recommended that interrelated entities should develop internal transfer pricing policies that will govern cross-border transactions in advance.

These policies need to be harmonized with Transfer Pricing regulations and guidelines to ensure that compliance with these regulations remains the primary objective. The policies will allocate the expenses and benefits of these transactions within the organization, ensuring that the price charged for inter-divisional transactions is at the market price.

In addition, these policies will serve as evidence of arm’s length pricing, should any query regarding the transaction be raised by revenue authorities. Furthermore, these policies will enhance transparency among the interrelated entities, and enable each entity to substantiate the economic relationship and benefits of the group.

Subsequently, the companies may consider pursuing Advance Pricing Arrangements (APAs) which are predetermined agreements that establish a suitable framework for evaluating Transfer Pricing during a specified period before any controlled transactions take place. The APAs are provided by Transfer Pricing regulations, 2018, which are construed and applied in line with OECD Transfer Pricing Guideline for Multinational Enterprises or the UN Model Tax Convention on Income and Capital and the UN Transfer Pricing Manual.

There are different types of APAs that companies can pursue depending on the nature and scope of their transactions. For transactions conducted within a single jurisdiction, a unilateral APA’s is preferable. On the other hand, bilateral APAs that involve two tax authorities and the taxpayer and are more suitable for transactions that span across two jurisdictions. Consequently, companies may consider pursuing multilateral APAs for transactions that span across more than two jurisdictions, as they are designed to provide tax clarity across multiple jurisdictions. Although implementing these APAs can pose significant challenges due to the complexity and lack of experience in most jurisdictions, they can effectively mitigate uncertainty surrounding the tax treatment of cross-border transactions.

Through APAs, companies can minimize or eliminate disputes with revenue authorities from different jurisdictions. Moreover, APAs can also serve as knowledge sharing platforms to help understand technicalities and conditions of global taxation. Therefore, it is vital for companies to understand and implement the best transfer pricing practises that work for them in different jurisdictions.

Seif Adam ([email protected] ), is a tax associate at KPMG in Tanzania, The views expressed here are the author’s and do not necessarily represent the views and opinions of KPMG.