Business Kenya, Uganda, Tanzania to tighten laws on transfer pricing

Richard Tusabe, Rwanda Revenue Authority Commissioner-General. PHOTO | FILE 

By James Anyanzwa and Allan Olingo

In Summary

• $6.6 tr - Amount developing and emerging economies lost in in illicit financial flows between 2003 and 2012.

East African governments are to tighten their tax laws in a bid to stem revenue loss through cross-border transactions by multinational firms.

Transfer pricing — one of the biggest tax rip offs the recent past — has become a flashpoint as governments come to realise how large multinationals shift costs between items and avoid paying huge amounts of corporate tax within their borders.

The malpractice, in which multinationals enjoy low-tax profits, has seen Kenya, Uganda and Tanzania enact transfer pricing laws to deter foreign firms from moving taxable profits to other jurisdictions.

Transfer pricing legislation and practice in Africa is based on the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. Some countries also use the United Nations Transfer Pricing Manual.

Kenya and Uganda issued their transfer pricing regulations in 2006 and 2011 respectively while Tanzania formally issued its Income Tax (Transfer Pricing) Regulations 2014 last year.

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The guidelines recommend stiff penalties for taxpayers who fail to comply with the arm’s length principle of transfer pricing, which states that the amount charged by one related party to another for a given product must be the same as if the parties were not related.

In Tanzania, taxpayers who fail to comply with the arm’s length principle will attract a penalty of 100 per cent of the underpaid tax.

In addition, a taxpayer that fails to prepare and maintain transfer pricing documentation commits an offence and is liable on conviction to imprisonment for a term not exceeding six months or a fine not less than $30,000 or both.

The move by the EAC member states to clamp down on transfer pricing is expected to shore up government revenues, which have come under pressure due to growing expenditures.

“Transfer pricing is a really serious business issue. The way multinationals are going to operate in future is going to change because of these tax laws. I see shifts of company headquarters to other jurisdictions,” said Richard Ndung’u, partner and head of tax at KPMG East Africa.

Data from the Global Financial Integrity Report (2014) shows that developing and emerging economies lost a total of $6.6 trillion in illicit financial flows between 2003 and 2012. Illicit financial outflows in sub-Saharan Africa grew from $12.1 billion to $68.6 billion over the same period.

“It is not just a perception that multinationals are fleecing governments through transfer pricing; it is a reality.  All the East African countries are trying to control that,” said Caxton Kinuthia, director in-charge of the tax services department at KPMG East Africa.

Governments view transfer pricing as a means for companies to avoid paying full tax while multinationals consider the move as critical to preventing double taxation on their part