The following are the key challenges faced by Taxpayers on preparation of Transfer Pricing documentation, as written by the Managing Partner of Nexia SJ Tanzania, Mrs. Sujata Jaffer.
1. Lack of awareness or knowledge by taxpayers on transfer pricing laws
Despite issuing regulations on how the transfer pricing (TP) rules should be applied, many taxpayers are still not familiar with the transfer pricing regulations enacted in 2014 and revised in 2018.
Transfer pricing regulations and guidelines are as per standard by which the “arm’s length principle” enshrined in section 33 of the Income Tax Act 2004 (the “Act”) which should be applied to controlled transactions.
2. Lack of availability of comparable companies and transactions
Finding comparable items and transactions to carryout comparability analysis and determine an arm’s length range poses a huge challenge for both TRA Transfer Pricing Auditors and taxpayers. Having an internal Comparable Uncontrolled Price (CUP) helps reduce this tax compliance burden but it is not always easy to have an internal comparable uncontrolled price.
This is because some intragroup transactions or services are provided solely to members within the same group. Like many other developing countries, Tanzania does not have a national comparability database, the tasks of conducting a comparability analysis becomes difficult.
If a taxpayer lacks an internal comparable uncontrolled price and information on the transactional prices from other competitors are not readily available, a taxpayer has no option than to take a margin and defend it. This challenge is fueled by use of tax havens whereby goods or services are often sold by a related party to the tax haven entity which simply acts as a re-invoicing entity. An inability to access financial statement of the tax haven entity can make it hard to test whether re-invoiced prices are arm’s length prices.
3. Mandatory filing of TP Documentation with final tax returns for companies that meet the threshold of TSHS10 billion.
This has created much controversy among taxpayers as to whether this relates to balance sheet amount or transactions entered during the year. This need more clarity.
Further there is a penalty for not filling the TP documentation on time and there are instances where taxpayers ask for extension of filling tax returns. In these circumstances what is applicability of penalty since the TP documentation need to be filled with the final return?
There is uncertainty as to whether there is a need to file for extension of TP Documentation.
4. Transfer pricing documentation requirement
The legal requirement by the TRA in Tanzania to taxpayers of preparing transfer pricing documentation to cover each transaction entered into between related parties is another challenge for both taxpayers and TRA auditors during conducting of transfer pricing audits. The taxpayer must avail the financial statements of all related party entities that they have transacted with during the year.
This is an onerous process due to the magnitude of information requested especially for domestic entity that has transactions with numerous related parties.
Also, each country has their own filling requirement and so the date of filling will be different in each country, meaning it is difficult to collate information and file on time.
While taxpayers claim that this requirement imposes a huge cost burden to build and maintain contemporaneous documentation to support intra group transactions and prices; TRA auditors often face several challenges during requesting these transfer pricing documentations from the taxpayers. Such issues include:
- Delayed submission of the documentation;
- Sometimes with multiple extensions requests.
- Most of the submitted transfer pricing documentation are not meeting the standards as per transfer pricing regulations and guidelines requirements.
- There are difficulties in obtaining relevant information from the taxpayers especially from multinational parent companies.
- Consequently, lack of requested information from the taxpayers by TRA auditors, may make it extremely difficult for TRA auditors to prove that transfer pricing concerns of the taxpayers are well founded.
- In many cases key information is thought to be deliberately withheld from the tax administration in order to hide the potential tax liabilities.
- In other circumstances, multinational enterprises overwhelm tax administrations with volumes of irrelevant information with the result that the attention is diverted from the real information that the tax administration needs to reach proper conclusions.
5. Availability of transfer pricing audits working tools such as a comparability database
Since establishment of the International Taxation Unit, the Management of TRA has been striving to ensure important requirements in terms of working tools and facilities are in place to enable it becoming fully operational and meet the goals and expectation for its establishment. However, in some areas, the process of making such working tools and facilities available has been a challenge and gradual in terms of their timely availability despite the efforts deployed. These working tools and facilities include transfer pricing databases, subscriptions and access to reliable internet connection etc. Moreover, payments of the transfer pricing databases and subscriptions has been facing budgetary constraints since the products are expensive. Similarly, taxpayers also face the same challenges in preparation of their transfer pricing documentation.
6. TP method selected may be challenged by the TRA and therefore it is important to support the method selected with a proper TP study and benchmarking analysis in order to avoid penalties.
7. Capacity building
While both TRA and Taxpayers, including auditing firms have taken various commendable initiatives to build staff capacity to a level where they can administer tax laws with high degree of competence and professionalism that would enable effective administration of international taxation matters. Yet, there are very few specialists with limited expertise to build capacity building initiatives. This indicates that more need to be done to build the capacity of the vast majority of inexperienced tax specialists currently in the learning stage. This category of technical tax people need to undergo intensive practical training programs and support to get sufficient exposure. However, to a great extent, compared to tax authorities worldwide, it is essential to recognize that multinational companies and their tax advisors always employ the most talented individuals available in the labor market and subject them to a continuous and rigorous training programs.
Possible Solutions and Recommendations
i. Developing a comparability database
There is the need for concerted efforts to develop a national comparability database to serve as a guide to both TRA auditors who will undertake transfer pricing audits and taxpayers who engage in related party transactions that require the preparation of transfer pricing documentation.
Alternatively, improving access to international commercial information and comparable transfer pricing databases would be a solution. Currently, the identification of comparable can create particular difficulties in determining arm’s length prices for independent companies. In this alternative, both TRA and taxpayers would be forced to use non-domestic comparable and in some cases to make company specific adjustments for the difference between the domestic market and the foreign market.
ii. Transparency initiatives
At the governmental level, the challenge of obtaining information for transfer pricing audit purposes could be encountered if the availability of financial data in a country is greatly improved like in many developed countries; whereby, there is a reporting system that encourages financial transparency in the corporate sector. This can be achieved by having in place a legislative framework that imposes a requirement on companies, including private companies, to file accounts and for those accounts to be publically available. This sort of requirement can be found in the company law systems of many countries. There are very good non-tax reasons for doing this, as it helps to improve the transparency of markets and helps them to be more efficient. It helps to create the climate in which third party investors can make informed decisions about which corporations to lend to, or directly invest in. In the absence of this kind of transparency, investors and enterprises are much more likely to have to rely on personal and family connections when making financial decisions.
iii. Expanding exchange of information and Double Taxation Agreements (DTA) Network
In addition to the above proposed initiative, there is a great need for strengthening continued efforts of expanding Exchange of Information and DTA Network with countries that trade with Tanzania significantly for smooth transfer pricing audits.
iv. Training and Development of People
There is a critical need to build capacity in transfer pricing skills as quickly as possible for both TRA and taxpayers by employing both local and global resources if necessary to ensure that there is competitive expertise needed to handle transfer pricing cases.
v. Settling transfer pricing disputes out of courts
Transfer pricing audits and enquiries can often take a long time and involve significant amounts of resources. Unfortunately, transfer pricing is not to be considered as an “exact” science; and generally, there is no single right answer. As a result, most transfer pricing disputes need to be settled through negotiation with the tax administration and the Multinational Enterprises (MNE) making compromises. In most transfer pricing cases acceptable outcomes are usually achieved through negotiation and settlement out of court appeal procedures.
vi. Treatment of Intra-Group Management and technical services
There is a need to differentiate between High Value Adding Services and Low Value Intra Group Services. The Organisation for Economic Cooperation and Development (OECD) Discussion Draft on Action Plan 10 defines low value-adding intra-group services as:
- Services performed by one member of an MNE group on behalf of other group members which are of a supportive nature;
- Are not part of the core business of the MNE group; do not require the use of unique and valuable intangibles, do not lead to the creation of unique and valuable intangibles, do not involve the assumption or control of substantial or significant risk and do not give rise to the creation of significant risk.
- The proposal is limited to services such as accounting and auditing, human resources activities, information technology, internal and external communications, legal services and activities with regard to tax obligations.
- The mark-up on such services should range between 2 – 5 %.
There is a need to treat these intra-group management and technical services as Low Value Adding Intra Group Services as explained above. However, for intra-group package deals, the OECD guidelines recommend that such transactions should be evaluated using principles on aggregation and segregation. This may involve segregating the entire transaction into individual elements to determine whether the individual components conform to arm’s length principle or in other instances evaluating the entire transaction to determine whether it conforms to the arm’s length principle.
vii. Awareness to management and other stakeholders
There is a need for creating awareness and taxpayers’ education among all stakeholders involved in the taxation of international transactions and transfer pricing in specific. Stakeholders include taxpayers, TRA auditors, technical assistance development partners, Government line ministries and agencies. Government involvement is essential at this level since most of the initiatives require funding from the Government and development partners.
TRA should issue comprehensive guidelines on the implementation of the new regulations, as the taxpayers are basically in the dark due to lack of clarity over some of the regulations. For example, on the exact methodology used to compute the amended penalty.
Mrs Sujata Jaffer,
Nexia SJ Tanzania
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