Imagine sailing your ship through stormy seas – you seek refuge in a secluded cove (safe harbour) where the waters are calm, and you can rest assured that your vessel is secure. Actually, this is the genesis of the name Dar es Salaam (literally “Haven (bandari) of Peace”). Similarly, in the realm of transfer pricing (TP), safe harbour rules offer a sheltered spot for multinational businesses, providing a simplified and secure way to comply with the arm’s length principle for their transactions with related parties. The multinational companies can steer clear of uncertainties and confidently sail towards compliance.
Tanzania, like many other countries, draws on the TP guidelines of the Organisation for Economic Co-operation and Development (OECD) and those of the United Nations (UN). The overarching objective is to ensure that transactions between related parties (controlled transactions) are conducted at arm's length, akin to transactions between unrelated parties in the open market. To achieve this, taxpayers are required to determine and document the appropriate transfer prices for their intra-group transactions, demonstrating compliance with the arm's length principle.
Local regulations require a corporate income tax return to be accompanied by a contemporaneous TP documentation if a person participates in controlled transactions totaling more than TZS 10 billion (approximately USD 4 million). Even entities whose controlled transactions fall below the TZS 10 billion threshold and thus are exempted from the mandatory inclusion of TP documentation with their tax return must be able to furnish such documentation upon request by the Tanzania Revenue Authority (TRA) within 30 days. The TRA emphasises the importance of having this documentation readily available to ensure compliance. The potential consequences of non-compliance are equally weighty, with a substantial penalty of TZS 52.5 million (approximately USD 21k) for entities that fail to submit the required TP documentation.
Complying with the above requirements can be a burdensome task especially for small taxpayers. Gathering and maintaining contemporaneous TP documentation demands significant resources in terms of time, personnel and financial cost. During a two year stint working on secondment in Ghana, I became aware that businesses there greatly benefit from so-called “safe harbour” rules, an approach taken by a number of jurisdictions. However, my exploration into Tanzania's TP regulations reveals a surprising twist – the country's seas remain uncharted territory for safe harbour provisions as our TP regime has yet to embrace the safe harbour concept.
But what exactly are safe harbour rules? What features do they have? These are rules that relieve small taxpayers, or specific industries from certain compliance obligations under the TP regime. Essentially, the rules may prescribe specific TP methods or benchmarks for taxpayers to use to calculate their transfer prices (especially for low-risk (less complex) transactions). These methods are often straightforward and may include fixed mark-up percentages or predefined margins.Thus, they tend to reduce the burden of maintaining detailed documentation and reducing compliance complexities whilst safeguarding the tax revenue interests of the government.
So, how do safe harbour rules work in practice? Well, taking the example of Ghana, a taxpayer is exempt from documenting its controlled transaction(s) for a specific year of assessment if the total amount of such transaction(s) is less than USD 200,000 by nature of transactions (i.e., technical services, management and administration services, purchase/sale of goods etc.). Additionally, even if above this threshold a taxpayer can elect for exemption where services procured are either (i) low-value adding intra-group services (with a cost markup of not more than 3%), or (ii) intra-group services (royalties, know-how, management, or technical fees) supported by a registered technology-transfer agreement with the Ghana Investment Promotion Centre and not exceeding 2% of net profit.
Safe harbour rules can greatly ease compliance requirements, as illustrated by the Ghanaian example. Transfer prices within the safe harbour parameters would be accepted by Ghana Revenue Authority with little or no examination, thus reducing the chance of TP adjustments or disputes. Moreover, these rules tailor the compliance burden to the taxpayer's size, functions, and TP risks in its controlled transactions, which may encourage more compliance among small taxpayers who might otherwise think that their TP practices would go unnoticed. On the other hand, the Revenue Authority can use its resources wisely to focus on more complex or higher risk transactions and taxpayers. So a “win win” scenario!
By contrast in Tanzania, in the absence of safe harbour rules, the intricate challenge of determining arm's length prices, requiring comprehensive analysis of comparable transactions and market data is applied indiscriminately. This resource-intensive process not only burdens taxpayers but also heightens the risk of TP disputes with tax authorities - risking taxpayers potentially “sailing too close to the wind”. As we continue to evaluate how to better improve our business environment, a quick win would be to introduce some safe harbour rules so as to ease compliance and reduce the number of tax disputes.
By Dilip Thawery, Senior Associate - Tax Services, PwC Tanzania
