Impact of New Transfer Pricing Regulations in Tanzania - - PowerPoint PPT Presentation

Classification: Nexia General

Impact of New Transfer Pricing Regulations in Tanzania

Classification: Nexia General

An Overview

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Transfer Pricing | Landscape

2018 – Tax Administration (Transfer Pricing) Regulations, 2018 (“New Regulations”) were introduced vide Government Notice No 166 on 27 April 2018, however, released in November 2018 Arm’s length principle introduced in Section 33 of Income Tax Act 2004 2014 – Income Tax (Transfer Pricing) Regulations, 2014 (“Old Regulations”) were introduced vide Government Notice No 27 and Transfer Pricing Guidelines were published

2004 2014 2018

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Transfer Pricing | Introduction

• Price charged for the “Controlled Transaction” between the “Associates” shall be computed

having regard to the “Arm’s Length Principle”

• Arm’s length principle shall be consistent with the OECD and UN Model Tax Convention on

income and capital for the time being force Associates

Controlled Transaction

Associates

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Transfer Pricing | Introduction

Associate as defined in Section 3 of the IT Act

Note: Individual and his relatives are also covered under the definition of Associate *unless tax authority is satisfied that it is not reasonable to expect that either individual will act in accordance with the intentions of the other

Any one who is expected to act in accordance with the intention of other, who is not an employee Branch and HQ - deemed associates Partners in the same partnership*

In case of Entity A person who either alone or together with associate;

• r

through one or more interposed entities, controls more than 50% of rights to income, voting power or capital

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Transfer Pricing | Introduction

Controlled Transaction

Transaction between associates

Arm’s Length Price

Denotes

price between independent persons

• perating under the same or similar circumstances

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Methods and Process

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Transfer Pricing Methods

Hierarchy to apply the methods

Transaction Profit Method: Transactional Net Margin Method Profit Split Method Other Method: As prescribed by the commissioner CUP Method Resale price Method Cost Plus Method Traditional Transaction Method:

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Transfer Pricing Process

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Documentation Requirements

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Fixing the Jigsaw Puzzle!

A taxpayer who has entered into controlled transactions with associates is required to prepare contemporaneous transfer pricing documentation.

Organizational Structure Industry Analysis Industry Analysis Controlled Transaction FAR and Comparability Analysis Method Selection Documents Supporting TP Analysis

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Documentation Requirements

Organisational Structure

• Description of group
• Legal/ operational structure of group

Controlled Transaction

• Description of the controlled transactions
• Description of each adjustments, if any
• Description of functions performed, assets utilised and

risks assumed

ALP Computation

• Record of transactions considered for determining

price of controlled transactions

• Analysis performed to evaluate comparability
• Description of all methods considered and reasons for

selection of the most appropriate method

• Record of actual working for determining arm’s length

price

• Details of comparable data used in applying most

appropriate method

Other Supporting Documents/Information

• Relevant agreements and contracts entered into with

associates or with unrelated enterprises

• Letters and correspondence documenting terms

negotiated with the associates

• Government publications, reports, studies, databases
• Market research studies and technical publications of

recognized national or international institutions

• Price publications including stock exchange and

commodity market quotations

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Documentation Requirements

Maintenance and Submission of Transfer Pricing Documentation Total transaction with Associates

TZS 10 Billion or more Less than TZS 10 Billion Penalty for contravening the requirement of contemporaneous documentation shall be minimum

• f 3500 currency points. (currently 1

currency point = TZS 15,000)

New Regulation casts obligation

• n taxpayer for submission of

TP documentation

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Determination of Arm’s Length Price

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Key Aspects

Important aspects for determination of Arm’s Length Price

Range concept shall apply and arm’s length price shall be the data point between 35th percentile and the 60th percentile of the comparable dataset

Comparable Data > 4

Arm’s length price shall be Average of the comparable data

Comparable Data ≤ 4

Adjustment shall be made for the difference between median

• f arm’s length range and

the price of controlled transaction

Price outside the Arm’s length range

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Consequences of Non-Compliance

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Overview

New Regulations has widen the powers of Commissioner

Reject (with reasons) the whole comparability analysis

May direct the taxpayer to resubmit the analysis after considering the commissioners reasons for rejection Commissioner may make his

• wn analysis, if he deems fit

Reject (with reasons) part of the comparability analysis Commissioner may make adjustments as appropriate

If the commissioner has a reason to believe that the controlled transactions are not at arm’s length, he may make adjustment to reflect the arms length price Commissioner may call for additional information by serving a written notice on a person who may or may not be liable to tax

Penalty for contravening arm’s length principal shall be 100%

• f amount adjusted

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Specific Transactions in the Regulations

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Overview

Intra group services and intra group financing

Taxpayer is required to demonstrate the following

• Intra group services have been actually rendered
• Provision of such services has conferred an economic

benefit or commercial value to business

• Charge for the intra group services is justifiable and

at arm’s length

Services excluded from intra group services

• Shareholder or custodial activities
• Duplicative services
• Services that provide incidental benefits or

passive association profits

• On call services

Other Points in the regulations

Appropriate Method to determine arm’s length price shall be the cost of the intra group services rendered Taxpayer who directly provides or receives intra group financing (with or without consideration) shall determine the arm’s length interest rate for intra group financing When services are rendered jointly to more than one associate, service charge (not directly identifiable) shall be allocated between associates based on “reasonable allocation criteria” such as number of computers, license, employee, net sales, etc.

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Overview

Arm’s length consideration to be determined in commensurate with the future expected benefit Arm’s length consideration to be determined in commensurate with the future expected benefit Taxpayer (may or may not legal owner) is required to determine arm’s length price based on the comparability analysis in relation to development, enhancement, maintenance, protection and exploitation of intangible property and other factors (expected benefits, commercial alternatives, etc) Taxpayer (may or may not legal owner) is required to determine arm’s length price based on the comparability analysis in relation to development, enhancement, maintenance, protection and exploitation of intangible property and other factors (expected benefits, commercial alternatives, etc) Owner of locally developed intangibles shall receive consideration for its contribution made on such Intangible including marketing intangibles. Owner of locally developed intangibles shall receive consideration for its contribution made on such Intangible including marketing intangibles. Owner of locally developed intangible property shall receive appropriate consideration for transfer of intangible outside. No royalty shall be paid if the same intangible is subsequently licensed back for use in Tanzania. Owner of locally developed intangible property shall receive appropriate consideration for transfer of intangible outside. No royalty shall be paid if the same intangible is subsequently licensed back for use in Tanzania.

Intangible property Intangible property

Commodity Transactions

CUP method is the most appropriate method to benchmark commodity transactions Commodity includes physical goods such as grains, oil seeds and other goods obtained from the land, hydrocarbons and derivatives thereof Quoted spot price means price obtained in domestic or international market for the relevant period and includes price obtained from recognised statistical agencies or governmental agencies Quoted spot prices may be used as CUP to determine arm’s length price

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Advance Pricing Agreement

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Key Features

An APA is a contract Usually for five years Between a taxpayer and at least one tax authority Mainly to prospectively resolve real or potential transfer pricing issues Involving transactions between related parties

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New Regulations vs Old Regulations

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Comparative

Parameters Old Regulations New Regulations Act/ Guidelines Income Tax (Transfer Pricing) Regulations, 2014 Tax Administration (Transfer Pricing) Regulations, 2018 Range Concept 25th-75th percentile (in all cases) 35th-60th percentile if more than 4 comparables Documentation TP documentation to be in place prior to the due date for filing the income tax return TP documentation to be filed along with income tax return if transactions with associates exceeds the prescribed limits Specified transactions Guidance provided for intra-group services and intangible property

• New introduction of guidance on commodity transaction
• Widen the guidance on intra-group services and intangible

property transactions Power of Commissioner Limited power Enhanced power Penalty Non maintenance of TP documentation: a.) imprisonment up to 6 months or; b.) fine of not less than Fifty Million TZS or; c.) both Contravening arm’s length principle: 100% of underpayment of tax Non maintenance of TP documentation: Fine of 3500 currency point (currently 1 currency point = TZS 15,000) Contravening arm’s length principle: 100% of amount adjusted

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Transfer Pricing in Africa

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Overview

Country Arm’s Length Principle Applicable Separate TP Regulations Statutory TP Document Requirements Inclusive Framework On BEPS Signatory CBCR Adopted Tanzania

• ×

× Nigeria

• Zambia
• ×

Kenya

• ×

Mozambique

• ×

× Uganda

• ×

×

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Way Forward

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Way Forward

Transfer Pricing is an area of focus for tax authorities in most jurisdictions, it is a reality in Tanzania now Taxpayers in Tanzania should formulate an acceptable transfer pricing policy that aligns with TP requirements in Tanzania; Existing TP policies shall also be reviewed Taxpayers need to be ready to face the challenges Contemporaneous documentation is the key – most companies fail to maintain and produce documents which costs them dearly Interestingly, Transfer Pricing mechanism can also be used as a planning tool for achieving tax efficiency

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Any Questions?