Tanzania issues transfer pricing guidelines

Transcription

1 30 June 2014 Global Tax Alert News from Transfer Pricing EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Tanzania issues transfer pricing guidelines Executive summary The Tanzania Revenue Authority (TRA) has developed transfer pricing guidelines (Guidelines) following the recently issued the Income Tax (Transfer Pricing) Regulations, 2014 by the Government of Tanzania. The Guidelines are largely based on the governing standard for transfer pricing, which is the arm s length principle as set out under the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and the United Nations (UN) Practical Manual on Transfer Pricing for Developing Countries, (OECD/ UN Guidelines). Detailed discussion Objectives of the Guidelines The Guidelines set forth the following objectives: The rationale for adoption of the arm s length principle The framework upon which application of the acceptable transfer pricing method is based The general principles of comparability that form the foundation of transfer pricing analysis Documentation by taxpayers that should be prepared and maintained in support of their determination of the arm s length price Treatment of intra-group The underlying principle adopted in the Guidelines is based on the domestic tax statutes and the OECD/UN Guidelines. Key areas highlighted in the Guidelines Arm s length principle: The Guidelines recognize the definition stated in paragraph 1 of Article 9 of the OECD Model Tax Convention.

2 For determination of an arm s length price the Guidelines prescribe the following steps: Analysis of and functions (i.e., details of functions performed, risks assumed and assets employed) Characterization of the entity the most common characterizations are manufacturing (full-fledged, licensed, contract or toll); Distribution (full-fledged, limited risk); and service provider Identification of comparable Selection of the tested party the TRA does not accept foreign tested parties where information is neither sufficient nor verifiable Selection and application of transfer pricing methodologies (TPM) Profit level indicator (PLI) due consideration must be given to the choice of PLI, which measures the relationship between profits and sales, cots, costs incurred or assets employed Comparability analysis This involves comparing conditions in a controlled transaction with the conditions in between independent enterprises. Factors determining comparability The following should be observed in determining comparability for transfer pricing purposes: Characteristics of property or services Details of functions performed, risks assumed and assets employed Contractual terms allocation of responsibilities, risks and benefits between enterprises are normally defined in a contract agreement Economic circumstances different economic circumstances may influence variations in arm s length prices Business strategies the strategies adopted by an enterprise influence the price charged for a product Acceptable methods of determining an arm s length price: The Guidelines recommend the use of five methods as applied by the OECD/UN guidelines The Transactional Profit Methods (i.e., Transactional Net Margin Method (TNMM) and the Profit Split Method (PSM)) may be used only when traditional transactional methods cannot be reliably applied or exceptionally cannot be applied at all; Practical application of arm s length principle: Application of the law under section 33 (2) of the Act, the Commissioner is empowered to adjust transfer prices where the are not at arm s length Issues to consider in transfer pricing adjustment In a comparability analysis for transfer pricing adjustments, the commissioner may consider the following: Comparable period undertaken/ carried out during the same year as the controlled transaction Multiple year data the use of multiple year data does not imply the use of a multiple year average Arm s length range should be made using only comparable uncontrolled that have a high level of reliability in comparison to the controlled Separate and combined transfer pricing may need to be dealt with at the level of a product line or business unit rather than at the level of each particular transaction Re-characterization of Transfer pricing adjustment the adjustment will also be reflected by a corresponding adjustment upon request of the other party of the controlled transaction Losses a taxpayer is expected to maintain contemporaneous documentation that outlines the non-transfer pricing factors that have contributed to the losses 2 Global Tax Alert Transfer pricing

3 Tax treaties if a transfer pricing adjustment has been made by a foreign tax administration that results in double taxation, a taxpayer may request competent authority consideration under the Mutual Agreement Procedure Article in Tanzania s tax treaties. Documentation requirements the taxpayer is required to keep sufficient records as provided for under Section 80 of the Income Tax Act (ITA), Cap.332. List of Documentation transfer pricing documentation may consist of the following: Organization structure Group financial report Nature of the business, industry, and market conditions Controlled Pricing policies Assumptions, strategies and information regarding factors that influenced the setting of pricing policies Comparability, functional and risk analysis Selection of transfer pricing method Application of the transfer pricing methods A list of advance pricing arrangements entered into by members of the group with respect to to which the taxpayer is a party Available documents and information that were used in preparing the transfer pricing documentation as they are necessary to support the transfer pricing analysis Acceptability of Documentation the Guidelines outline characteristics that should be observed to ensure acceptability of the contemporaneous transfer pricing documentation. Special considerations for Intangible property: Categorization of intangible properties two broad categories i.e., trade intangibles and marketing intangibles Existence of intangible properties when a company demonstrates a higher than average rate of return on assets or higher than average profits for a given level of physical assets over a period of time, it indicates the likely presence of intangibles The Commissioner considers the guidance provided in chapter VI of the OECD Guidelines highly relevant in establishing arm s length conditions in agreements with associates involving intangible property Special considerations for intra group services the Guidelines recommend use of Comparable Uncontrolled Price (CUP) or Cost Plus Method for pricing intragroup service. Intra-Group financing: Financial assistance between associated persons an arm s length interest rate on such should be charged Substitution and imputation of arm s length interest, where interest imposed or would have been imposed on a controlled financial assistance is not arm s length Determination of arm s length interest CUP method is considered to provide the most reliable measure Interest and penalties the ITA does not impose specific penalties with respect to non-arm s length practices. Additional tax, penalties and offense provisions as contained in the Act, will apply in all cases of transfer pricing. These among others include: Penalty for failure to maintain documents or file statement or return of income is determined as the higher of 2.5% per month of the tax arising or Tshs.100,000 Interest for understating estimated tax payable by installment is determined based on the statutory rate (currently 12%), compounded monthly Failure to pay tax on or before due date attracts interest at statutory rate plus 5% per annum, compounded monthly Advance pricing arrangements the Guidelines provide guidance on making an APA request (which involves pre-filing meetings, formal APA submission, review and negotiations, and post-agreement meeting and implementation of APA). Global Tax Alert Transfer pricing 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young (Tanzania), Dar es Salaam, Tanzania Silke Mattern Laurian Justinian Emmanuel Mkaro Ernst & Young (Kenya), Nairobi, Kenya Jemimah Mugo Global Tax Alert Transfer pricing

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