According to TRA, transfer pricing of goods, services and intangible properties are intercompany pricing arrangements between associated parties in their transactions.
Though it is striving to widen its tax base, TRA has managed to secure only 108.610billion/- in the four past years from transfer pricing audits with only 60 audited MNCs out of the 504 registered MNCs.
Late March this year President Samia Suluhu Hassan gave the Finance minister Dr Mwigulu Nchemba a tax revenue collection target of 2trn/ per month from the estimated 3.5 million small and large taxpayers out of the estimated population of 60 million people.
The President, however, among other directives, urged TRA to widen its tax base by creating new taxpayers.
According to the Controller and Auditor General’s report of March 2021 dubbed ‘Performance Audit Report on Controls over Transfer Pricing in Tanzania’s Business sector’ CAG Charles Kichere notes that at least 444 MNCs were yet to be audited since 2016 as of March 2021 thus denying the government millions of revenues that were to be paid through taxation.
He notes that at the time of the audit, 504 MNCs in the TRA’s database which were attended by its own International Taxation Unit (ITU), TRA was able to initiate only 60 transfer pricing audits from the financial year 2016/17 to 2019/20.
“Out of the 60 audits initiated from 2016/17 to 2019/20, TRA was able to complete only 23 audits for the four financial years. This was equivalent to 38 percent of the anticipated accomplishments. In this case, at least 444 MNCs were yet to be audited;
There were no documented efforts that showed how transfer pricing audits and cases were complementary within TRA departments,” notes Kichere.
According to him, the International Taxation Unit (ITU) was receiving less of the entire budget allocated to the large taxpayer department (LTD). The maximum budget allocation was in 2019/20 where about 20 percent of total budget was allocated to ITU.
He warned that ITU is understaffed with only 19 experts at the end of the financial year 2019/20 that also contributed to the poor performance noting that more experts are needed to bring efficiency.
He said ITU has the potential to audit about 16 percent to 38 percent of all MNCs leaving 75 percent to 84 percent unattended. The number of MNCs which could not be attended per year ranged between 116 and 153 during the period.
“From financial year 2016/17 to 2019/20 MNCs with a total turnover of $1.965trillion (4.557trillion/-) were audited. From these transfer pricing audits, tax recovered was 108.610billion/- while another 44.070billion/- which is supposed to be recovered is still disputed between TRA and audited MNCs,” asserts Kichere.
The CAG recommends a way forward that should be strengthening the ITU by employing more experts and taking the issue seriously as a taxation strategic agenda with long term plans.
In Tanzania, transfer pricing is regulated by Section 33 of the Income Tax Act 2019 and the Tax Administration (Transfer Pricing) Regulations 2018. Section 33 of the Income Tax Act is intended to curb transfer pricing practices which may have adverse implications for the Tanzania's tax base.
The Income Tax Act 2019 and Transfer Pricing Regulations 2018 states that any person participating in a controlled transaction, is required to prepare contemporaneous transfer pricing documentation as prescribed in Regulation 7. Regulation 7 prescribes documents which must be prepared and accompaned with the final income tax return to that year. Fo companies with related party transactionsthat exceed 10billion/-, the contemporaneous documentation must be filed together with the income tax return for that year at the due date of filing.
TRA’s Director for Taxpayer, Services and Education Richard Kayombo, told The Guardian “Our key initiative for now is building capacity for our staff to identify and deal with transfer pricing frauds which includes entering international agreements for sharing information with international organizations,”
He asserted that Tanzania is among 150 members of the Global Forum which is part of the global Organization for Economic Co-operation and Development (OECD). The membership gives TRA an access to information of MNCs from all those 150 countries.
“We are also members to the African Tax Administration Forum (ATAF) and have signed an instrument through this forum that gives as access to MNCs transaction information across the continent;
We have also entered double taxation bilateral agreements for sharing MNCs information with India, Zambia, South Africa, Sweden, Norway, Denmark, Finland, Canada and Italy. All these agreements are assisting us in fighting Base Erosion and Profit Shifting (BEPS),” added Kayombo.
Associate Professor of Economics at Mzumbe University, Honest Ngowi, counseled the regulatory body to strategize on information asymmetry aspect with international organizations alongside strengthening its technical department because MNCs are now using digital transactions as a new way of either avoiding or evading tax.
Going by the Finance Act 2021 part xxi of the Amendment of Tax Administration Act CAP 438 Section 79 on transfer pricing, it imposed a penalty of 100 percent of the tax shortfall for MNCs failure to use arm’s length prices on controlled transactions.
However, section 74 of the Act, limits the powers of the TRA Commissioner General to demand short-levied tax or erroneous refund after expiry of five years except for cases of fraud.
Previously, in the Tax Administration (Transfer Pricing Regulations 2018) Act, MNCs were subjected to a penalty of 30 percent for evading tax they are liable to pay and another 100 percent penalty of the actual evaded tax value that was supposed to be paid in the first place.
Parliamentary Budget Committee Vice Chairman Omari Kigua defended that the decrease in penalty is purposely meant to attract more MNCs to establish subsidiaries in the country and therefore boost revenue collections through taxation.
“This is part of initiatives taken by the government to create a conducive environment for foreign direct investments,” said Kigua.
Jerry Slaa, Ukonga Legislator CCM, told The Guardian that
“The decrease in penalty will no longer attract foreign investments as the government wishes but deny it billions of money to be collected in taxes from MNCs by giving them a wide room for fraudulence,”
Hamis Tabasamu, Sengerema Legislator CCM, argued that TRA must be empowered with all necessary tools to enable it to demand transfer pricing documents (TPD) from MNCs and their subsidiaries.
“These documents shows daily global arm’s length prices of different commodities. In Tanzania, transfer pricing is mostly done through procurement of machineries and raw materials for manufacturing;
With these documents, TRA can track down procurement details of such companies by making a comparison of prices at the global market on the day of procurement versus the prices written on their receipts,” said Tabasamu.
But, Finance and Planning Minister Dr Mwigulu Nchemba told the National Assembly during budget sessions in June that the 100 percent of penalty to MNCs is enough for punishing fraudulence companies.
“The good thing is that the penalty has been maintained and the way forward is making sure that companies found guilty are fully penalized,” said Dr Nchemba.