IN the wake of budgetary constraints, the Government of Tanzania is bolstering its transfer pricing enforcement actions in order to create and raise revenues and meet the 2017/18 Budget targets; and in doing so, has increased the administrative compliance cost and burden for multi-national companies and other taxpayers.
Indeed, the Government’s apex body charged with the administration of taxes, the Tanzania Revenue Authority (TRA), is continuing to build the capacity of its International Taxation Unit to deal with multinational companies and to monitor the key tourism, banking, telecoms, mining, oil and gas and construction sectors in all enforcement matters involving international taxation, including transfer pricing.
The International Taxation Unit has been viewed by the Government as being very important in addressing the transfer pricing challenges that Tanzania faces; to wit, inadequate transfer pricing rules, limited knowledge and skills to enforce the rules, limited information on comparables, and the tightening of penalties for non-compliance.
It should be remembered that two years ago, today, the TRA expressed commitment to provide clarity in the application of the Income Tax (Transfer Pricing) Regulations, 2014, which were issued by way of a gazette notice published on 7 February 2014. The TRA also called upon stakeholders to collectively support the effort to administer transfer pricing aspects of cross-border transactions.
While a correct transfer pricing practice can save companies big tax dollars, an erroneous practice can lead to the imposition of heavier penalties than the original tax. Evidently, this risk is increasing with the unparalleled level of regulatory reform currently taking place in Tanzania under the presidency of Dr John Pombe Magufuli. As a consequence, it’s no wonder that transfer pricing compliance has become a major concern for companies and other taxpayers operating in the country.
So then what could companies do to develop a complete transfer pricing practice that will cut their tax bills ethically and; at the same time, minimize the risk of a TRA audit?
In simple terms, transfer pricing involves the pricing of transactions between related parties to be conducted at a market rate, often referred to as an “arm’s length price”. From the perspective of the TRA, the overarching objective here is to prevent companies from using intercompany pricing as a means of evading taxes by inflating or deflating the profits of a particular entity.
However, arriving at the most precise approximation of an arm’s length transfer price acceptable by the TRA remains a challenge. Yet, if executed accurately, transfer pricing can save companies millions of dollars; on the other hand, if implemented incorrectly, companies increase their exposure for TRA audits, interest, and pecuniary (and imprisonment) penalties.
Tanzania’s international tax policy for cross-border transactions was originally provided for under Section 33 of the Income Tax Act, 2004. Earlier, in 1979, the Organization for Economic Co-operation and Development (OECD) developed transfer pricing guidelines. And thirty five years later, in 2014, the TRA issued regulations governing the procedures for applying the arm’s length principle and specified the appropriate transfer pricing methodologies, documentation requirements, deadlines and penalties.
But, what do Tanzania’s transfer pricing regulations mean for businesses? Do the regulations take into account existing economic conditions? And, what about today’s world-wide internet business model that has rendered conventional geographical and governmental boundaries almost meaningless? These questions are tied to many other issues that have established a sense of urgency to tackle economic policy, including taxation.
At present, the Government is targeting transfer pricing. By tightening up transfer pricing regulations, Tanzania has discovered that it can collect significant additional revenues every year. Addressing Parliament recently, Finance Minister Dr Philip Mpango unveiled the 2017/18 National Budget, which included proposals to boost tax compliance to deal with the “tax gap” i.e. the difference between the taxes owed and the taxes paid on time.
To put it briefly, the Government aims to eliminate tax loopholes and raise revenue for the unprecedented budget deficits.
The bottom line, however, is that Tanzania is adding more resources to collection and enforcement, and the TRA is auditing regularly and imposing stringent penalties. There’s general feeling amongst finance, tax and legal executives in Tanzania that tax audits are becoming more systematic. Hence, companies’ tax practices are coming under tighter scrutiny and a heavier burden of tax compliance.
Non-compliance by companies can lead to transfer pricing adjustments with huge tax bills, and that’s why companies are keen to efficiently mitigate potential transfer pricing risks. It is widely believed that there’s too much scrutiny by the TRA. The truth is that the Tanzanian Government needs revenue and one of the targets for generating that revenue are multinational companies with branch or subsidiary operations in the country.
In that regard, the TRA will look for obvious ‘red flags’ in assessing transfer pricing risks. Such red flags include, but are not limited to, unreasonable or unexplainable losses or low profitability, cross-border restructurings which shift profits outside Tanzania, poorly documented big year-end transfer pricing entries, and transactions with low-tax jurisdictions like Singapore, British Virgin, Bermuda, Cayman Islands, Mauritius, Netherlands, and Monaco.
As a country seeking to enhance tax yields, Tanzania is paying special attention to transfer pricing. To ensure that a fair share of tax on any international business conducted by related parties is collected, the TRA is increasing its audit teams; and because of this, companies of almost any size should be ready for a review and defense of their related party transactions.
Beyond the shadow of a doubt, Tanzania is systematically enforcing its transfer pricing regulations, which have a direct impact on the resources needed for companies to remain in compliance. By ensuring that operations are conducted in step with proper transfer pricing policies (and agreements) and assiduously meeting contemporaneous documentation requirements to confirm the same, companies will not only save a lot of money by implementing a proactive approach to transfer pricing, but will also protect themselves against potential tax audit troubles.