Transfer pricing regulations bring significant change

Transfer pricing in Tanzania has recently become a boardroom topic due to the focus of tax authorities on this area. The controversy on this subject may be due to perception, the subjectivity on its fundamental principle of “arm’s length” and the adjustments which can be substantial.

In an effort to provide more clarity in the Tanzania context and offer more directives on how businesses should set prices of transactions between related entities, on 21 November 2018  the Government released new transfer pricing regulations (The Tax Administration (Transfer Pricing) Regulations, 2018 (“the Regulations”) (replacing the previous 2014 Regulations).

Probably the most dramatic change introduced by the Regulations is a requirement for taxpayers to submit transfer pricing documentation at the time of filing the annual corporate income tax return, if their annual transactions with associates exceed TZS 10 billion. Whilst taxpayers below this threshold are not required to submit the documentation unless requested to do so, they still have an obligation to prepare and maintain contemporaneous transfer pricing documentation.  The term contemporaneous has still not been defined and this has led to differences in interpretation as to whether this implies a need for an annual update of the documentation or not. The practical concern in this regard is that an annual update offing the documentation would create a significant cost burden for taxpayers even if there are no significant changes in the transactions with related parties.

Those interested in the more technical aspects of transfer pricing will have noted that the Regulations classify the arm’s length range for a set of more than four comparable data points to be between the 35th percentile and 60th percentile; or, where the comparable set is four or less, the average of the data. Further, it provides for the use of the median point of an arm’s length range in order to make any adjustments during a transfer pricing audit. There has been no explanation as to why the arm’s length range should be between the 35th to 60th percentiles or why the median would be used when making audit adjustments. My expectation was that the Regulations would have aligned with international best practices such as the OECD Guidelines Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations which states that any point in the data set can be a comparable rather than narrowing the range.

Perhaps one of the most significant recent developments globally in relation to taxation is the Action Plan on Base Erosion and Profit shifting (BEPS) to counter tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. In particular, 15 BEPS actions have been designated by the OECD as mechanisms to equip governments with domestic and international instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created. My expectation was that the Regulations would have adopted some of the recommendations: for example, action 13 refers to the master file/ local file approach and country by country reports (CBCR). CBCR is a part of a wide range of international measures aimed at combating tax avoidance through more comprehensive exchanges of information between countries.  However the Regulations do not reflect any of the BEPS action points.

Transfer pricing is clearly a very complex area, and becomes even more challenging given the judgment aspect that results in some element of subjectivity.  Given this background and the focus of the authorities on this aspect, it is paramount that businesses with related party activities do ensure that they take appropriate steps to comply.

By Colman Korosso Senior Associate at PwC Tanzania – Tax Line of Service

The views expressed do not necessarily represent those of PwC. For PwC updates on tax and other matters do follow @pwc_tz or visit our website www.pwc.com/tz.

Article first published in The Citizen (29.01.2019).