Transfer Pricing: A challenge in Tanzania’s taxation system-2

18Oct 2021
Francis Kajubi
Dar es Salaam
The Guardian
Transfer Pricing: A challenge in Tanzania’s taxation system-2

IN yesterday’s edition we saw how TRA failed to audit 444 multinational corporations (MNCS), of the 504 with their subsidiaries in Tanzania during the past four years. Who knows what TRA lost from not auditing these MNCs, Excerpts…

Finance and Planning Minister, Dr Mwigulu Nchemba

“Transfer pricing is a challenge to us because it is a practice that is done mostly by large companies who are well established and have enough resources to facilitate fraudulence acts. We are losing billions of unaudited taxes but have taken a number of initiatives and are continuing to consider more new approaches to stop it;

We are also taking initiatives to strengthen the international taxation unit (ITU) to have enough capacity to handle transfer pricing cases. It is indeed a challenge and I must confess that,” admits TRA’s Commissioner General Alphayo Kidata at a recent special meeting with large taxpayers held in Dar es Salaam, as he called upon them to abide by the country’s law by paying taxes voluntarily.

Kidata however commended investors who don’t think of evading or avoiding taxes “We collect more than 1trn/- just in the first two months of the current fiscal year only from large taxpayers. This shows that there are large taxpayers who are honest in paying taxes;

In the last fiscal year the authority called 18.063trillion/- of which large taxpayers contributed about 6.5trillion/- which is equivalent to 38 percent of the whole collections. In the current fiscal year the authority targets at collecting 22trillion/- of which 9trillion/- will come from large taxpayers,” asserted Kidata.

Alfred Mregi, TRA’s Commissioner for Large taxpayers told The Guardian that of the estimated 3.5million taxpayers, large taxpayers have increased to 508 as of July this year.

“Transfer pricing is a problem to many African countries but we are working hard to stop it. It takes up to five years to audit a single multinational company. We are on the right track,” said Mregi.

How does transfer pricing work?

In an interview with The Guardian, Godvictor Lyimo, President of Tanzania Association of Accountants (TAA), elaborates by giving solid examples of how transfer pricing is done by MNCs:

“Let’s say that a Computer manufacturer has two divisions: Division A, which manufactures software, and Division B, which manufactures Mather body or hardware. Division A sells the software to other computer manufacturers as well as its parent company. Division B, pays Division A for the software, at the prevailing market price that Division A charges other computer hardware manufacturers;

Let’s again say that Division A decides to charge a lower price to Division B, instead of using the market price. As a result, Division A’s sales or revenues are lower because of the lower pricing. On the other hand, Division B’s cost of goods sold (CoGS) are lower, increasing the division’s profit. In short, Division A’s revenues are lower by the same amount as Division B’s cost savings so there’s no financial impact on the overall corporation,” said Lyimo.

Tanzania’s transfer pricing challenges

Lyimo said that given the complexities of transfer pricing issues, there are several challenges for any new changes or tax reforms that are introduced. He said the knowledge gap between multinational corporations and revenue authority officers mandated to enforce the law is one of the main challenges.

According to him, transfer pricing regulations apply to all controlled transactions to persons located in and are subject to tax in Tanzania and the other person who is a party to the transaction in or outside the country. It is important to note that even subsidiaries are impacted.

Lyimo asserted that there are different transfer pricing methods that are recommended under the Tax Administration (transfer pricing) Regulations, 2018. The choice of the method to use remains to be a challenge for most business enterprises. Under the Act, an enterprise can opt for either comparable uncontrolled price method (CUP) or Comparable Uncontrolled transaction method or Resale price method or Cost plus method.

“The selection of the most appropriate transfer pricing method should be based on a functional analysis that provides a clear understanding of the enterprises’ global business processes and how for example the transferred intangibles interact with other functions, assets and risks that comprise the global business. This is a challenge for many enterprises as there is little guidance on this matter,” said Lyimo.

He acknowledged that TRA has taken a proactive role to conduct training, seminars and workshops to build capacity at all levels. However, due to the evolving nature of technology and ways of doing business, there is a need to make the training and seminars a continuous initiative in order to mitigate risks emanating from new technological developments.

Lyimo pointed out that documentation requirements for transfer pricing compliance pose a second challenge. Any person participating in a controlled transaction, is required to prepare contemporaneous transfer pricing documentation as prescribed in Regulation 7. Regulation 7 prescribes a number of documents which must be prepared and accompanied with the final income tax return for that year.

“For companies with related party transactions that exceed 10billion/-, the contemporaneous documentation must be filed together with the Income Tax return for that year at the due date of filing. In any case, the documentations must be in place even for companies with a lesser than 10billion/- related party transactions threshold prior to the due date of filing the final income tax of that year,” he clarified.

Samwel Ndandala, a Senior Tax Manager with Deloitte Consulting, said that protecting the country’s tax base is very important. If tax authorities are not careful, they could be left with nothing to tax. That is why transfer pricing keeps tax authorities on their toes. Not because it is illegal, but because it has the potential, if abused, to erode much of the domestic tax base.

He said the new transfer pricing regulations have an additional element of benchmarking, a process of finding similar companies and testing how much they charge for similar goods and services. The results are then compared with what the tested company charges to determine if the prices are indeed at arm’s length.

“The new regulations seek to build on the four years of the country’s collective learning experience. There is certainly more clarity for taxpayers. Transfer pricing has never been an exact science. There needs to be ongoing consultations to see how we can make them work,” said Ndandala.

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