Transfer pricing - the transparency imperative!

Alignment of understanding on transfer pricing has become arguably the most contentious issue globally between Tax Authorities and Multinational Enterprises (MNEs). On the one hand, tax authorities strive to continuously establish and enforce (new) guidelines and regulations to plug potential loopholes, while on the other hand MNEs wish to conduct their transactions with associates without being subjected to double taxation. The need for a better and quicker dispute resolution mechanism to transfer pricing disputes between tax authorities and MNEs is paramount.

The latest PwC and World Bank survey on Paying Taxes highlights the inefficiency of domestic dispute resolution mechanisms such as tax tribunals as one of the factors that lead to lengthy and burdensome tax disputes.

In Tanzania, transfer pricing dispute resolution mechanisms are relatively complex, time-consuming and expensive. The process normally starts within the tax authority with a transfer pricing audit, followed by objections process before moving outside the tax authority to the appellate bodies in the first instance, the Tax Revenue Appeals Board (TRAB) followed by the Tax Revenue Appeal Tribunal (TRAT) and ultimately the Court of Appeals (CAT). It is important to note that the TRAT and CAT rulings are not on technical matters but rather on points of law and a review of the whole process.

Based on my experience from attending several TRAB hearings, there seems to be an information asymmetry between the taxpayer and the tax authority. In many cases the tax authority has asserted that the taxpayer provided insufficient information and evidence at the audit or objection stages, and will challenge the acceptability of new evidence brought in during the hearing stage.

In light of this, it is recommended to carefully consider how sufficient evidence can be provided so as to adequately demonstrate to the tax authority, during the audit stage, that the related party transactions are at arm’s length. Ideally, a taxpayer should provide as much detail as possible in their transfer pricing documentation, including an outline of the bigger picture of their business, an overview of the industry in which they operate and its transfer pricing practices.

New regulations, in the form of the 2018 Transfer Pricing Regulation, require taxpayers to submit an annual transfer pricing documentation at the time of filing their corporate income tax return, if their related transactions with associates exceeds the threshold of TZS 10 billion. Rather than seeing this as simply a compliance obligation, MNEs should be more strategic and use this opportunity to be as transparent as possible by ensuring that their documentation is as comprehensive as possible and turn it into a useful defense document. Their documentation should not only meet the requirements laid out in regulations (including a description of the organisational structure, nature of industry, description of controlled transactions, pricing policies and relevant strategies and assumptions, functional analysis, comparability analysis, financial analysis, selection of appropriate transfer pricing methods to tested party) but be more comprehensive to include evidence.

As far as compliance is concerned, in addition to ensuring that its transactions are conducted at arm’s length, the transfer pricing documentation is the opportunity for the taxpayer to explain its business and transactions. Tax authorities start their review by relying on the transfer pricing documentation and endeavour to understand the taxpayer's business and choice of transfer pricing methodology based on this documentation before making conclusions on the arm’s length nature of the related party transactions.

Therefore taxpayers who view documentation as a strategic tool rather than a mere compliance obligation will have a greater chance of avoiding misconceived transfer pricing disputes. The TRA has a specialised International Tax Unit who is well equipped to understand and resolve the complexities of transfer pricing. In the long run, we would expect the transfer pricing dispute resolution mechanism to continue to improve and so lead to earlier resolution of transfer pricing disputes.

By Agnes Koni is an Associate with PwC Kenya on secondment from PwC Tanzania , specialising in International tax and transfer pricing.

Article first published in The Citizen (01.30.2019).