Auditax International provides various services on Transfer Pricing for Multinationals in Tanzania including preparation of transfer pricing documentation. Transfer pricing refers to the price that related enterprises charge each other for transactions between them. Transfer pricing arrangements are key because it is the transfer price charged between related entities which largely influence the amount of the taxable profits, hence the final taxes paid by MNEs or received by Governments.
With the continuing discoveries of natural resources in East Africa, Multinational Enterprises (MNEs) are flocking to the region through their subsidiaries. MNEs have particularly been attracted by the presence of extensive mineral resources such as gold, diamond and Tanzanite and of recent a significant foreign direct investments have been directed to the oil and gas sector. MNEs have also been operating in other sectors of the East Africa economy such manufacturing, agriculture, and the service sector etc.
The ability to deal with transfer pricing issues in terms of legislation, resources, knowledge and skills, availability of price comparable and e-commerce transactions etc. varies between companies. Further, Transfer pricing is becoming complex and a dynamic tax issue which should be accorded important attention by tax payers.
Regarding Transfer Pricing for Multinationals in Tanzania, Section 33 of the Income Tax Act, 2004 requires that transactions between associates to be conducted at arms’ length. However detailed guidance in the form of Income Tax Transfer Pricing Regulations in Tanzania were published in February 2014 and released to the Public in May 2014.
Non-compliance with the Income Tax Transfer Pricing regulations in Tanzania attract heavy penalties including criminal sanctions. For instance, a penalty of 100% of the underpaid tax is charged for any transfer pricing adjustment made as part of a tax audit. Further, non-compliance with transfer pricing documentation requirement attracts a penalty which includes imprisonment for a maximum of 6 months and/or a fine of not less than 50m Tanzanian shillings on conviction.
Section 7 of the Income Tax Transfer Pricing Regulations imposes specific documentation requirements and significant penalties on non-compliance. Contemporaneous transfer pricing documentation is required to be prepared before the tax return is submitted. The regulations do not require the transfer pricing documentation to be submitted with the tax return, but stipulate that it should be provided to the tax authority within 30 days when requested. The list of information to be included in the transfer pricing documentation include the organizational structure; the nature of business or industry and market conditions, the controlled transactions, strategies and assumptions used to set the price; comparability, functional and risk analysis; selection and application of the transfer pricing methods etc.
The requirement for contemporaneous transfer pricing documentation is one of the major challenges to tax payers as it would require substantial resources in terms of staff, finance and time to be invested in preparing the documentation. Auditax International can provide support to manage tax transfer pricing exposures.