The World Cup: insights for Transfer Pricing?

Croatia and Morocco were amongst the teams that progressed further than many expected in the 2022 World Cup.  A key to their success was a very well organised defence. So what is the insight here as regards Transfer Pricing (“TP”)? 

Well before we go there, we first need to understand the concept of TP, which broadly refers to the pricing of transactions between related parties (“associates”), with the transactions in question referred to as “controlled transactions”.  Where there are such transactions, Tanzania’s  Income Tax Act (“ITA”), 2004 requires these to be on an arm’s length basis (basically at a market comparable basis). 

Documenting these transactions forms a key part in establishing that (i) the concerned entities are transacting on an arm’s length basis; and (ii) due consideration has been given so as to determine the nature of the transactions performed.  One documentation requirement, as detailed in Tanzania’s TP Regulations 2018, is that any entity engaging in a controlled transaction must document such a transaction in a permissible format and have this documentation in place by the respective year end of the company (or by the time the tax return is submitted). 

My focus today however is not on the format of the document itself or simply having it in place,  but rather on the preparation and completeness aspect - particularly, bearing in mind that TP is an increasing area of focus.  For example, my experience has been that most clients that are part of an international group have been subject to a recent TP audit but sometimes could have been better prepared.  This pressure is only likely to increase - for example, a March 2021 report from The Controller and Auditor General’s Report (CAG Report), titled “Performance Audit Report on Controls over Transfer Pricing in Tanzania’s business sector”, cited a backlog of TP audits; in particular, it noted that as of March 2021, at least 444 multinational corporations (MNCs) were yet to be audited since 2016. 

One thing that is clear is that the Tanzania Revenue Authority (“TRA”) have certainly invested in capacity building in relation to TP with increased recruitment and upskilling of the International Tax Unit (“ITU”). So looking forward, it is reasonable to expect even more TP audits and reviews.

Against this background, what actions should taxpayers consider?  Well, back to lessons from the World Cup, namely that the foundation should be a solid defence - or in the TP context, the so-called “defence file”, which is a supplementary file to the actual TP policy document.

So, what do we mean by “defence” in this context? The origin of the word is the Latin word “defensa”, which meant “protection” and broadly conveyed “staying an attack” of sorts. Whereas what is considered here is not an attack in the literal sense, a taxpayer is well advised to proactively consider what documentation he should prepare in advance of potential TP related queries or audits. In any case, the TP guidelines introduced in 2020 do explicitly require documentation of controlled transactions as additional evidence to support the pricing of transactions whose functional analysis is already included as part of the TP documentation.

TP inherently remains a fact based study and the most important aspect is that one is able to defend and explain the documented transactions depending on the core nature of the transactions. For instance, what can be considered as part of a defence file for transactions relating to services could be an agreement for the services (signed and dated, including any novated agreements) - clearly demarcating roles and functions performed, people performing the said functions, accurate and detailed description of the nature of services received or provided, and the basis of the charge for these services.

This is by no means an exhaustive list, as different transactions require their own different bits of information. The key takeaway though is that the renewed focus on TP within the Tanzanian landscape does now make it imperative to go beyond mere documentation, and embrace “evidence-based defence”. Overlook this and you may score a TP “own goal”!

By Novat Matoju -  Senior Associate, Transfer Pricing at PwC Tanzania