Transfer pricing risks for multinationals

 

Straton Makundi, is a partiner with Auditax International         

By Straton Makundi

In Summary

Pre-filing Meetings with TRA i.e. the taxpayers submit information including company’s business model and industry information, transactions to be covered, the duration of the APA etc.

Advanced Pricing Arrangements (APAs)

Having a robust transfer pricing policy and documentation as well as entering into Advanced Pricing Arrangements i.e advanced rulings with a tax authority are among the best ways to get assurance and deal with the risk of a transfer pricing challenge.

Advance Pricing Arrangement is an agreement between a tax payer and the tax authority on treatment of future transaction(s) with transfer pricing implications over a specified period of time (normally 3-5 years). Part V of the Tanzania Income Tax Transfer Pricing Regulations allows taxpayers to apply for Advance Pricing Arrangements (APAs). This is a good provision given the increasing number of appeals against TRA adjustments on related party transactions.

What can be agreed in advance?

Various matters about a transfer pricing transaction can be agreed in advance including the transfer pricing method to use and how to apply it; the prices/rates to charge etc. APAs can be agreed on any transaction between associates including acceptable interest rates to charge on intragroup financing; basis for determination of management and technical fees; profit splits on intangibles etc. APAs can be unilateral (involving only the tax payer and TRA), multilateral or bilateral (involving Tanzania and one or more of its tax treaty partners) and can apply to different types of transactions.

Advantages of seeking APAs

APAs provide certainty to Multinational Enterprises (MNEs) on the tax treatment by the tax authority on a particular transactioni, i.e by having an agreement on the treatment in advance; possible time saving through prevention of a transfer pricing audit; creation of a better relationship with the revenue authority; avoidance of double taxation etc. In terms of the revenue authority (TRA)APAs guarantees it certain streams of tax collections.

Disadvantages of pursuing APAs

APAs can take a considerable amount of time to conclude/agree and companies maybe lacking adequate resources (financial and manpower) to undergo the process. Experience may also be lacking in drafting APAs. Also, MNEs should also be aware of the possible risks of failure to reach an agreement during negotiation of APAs despite investing time and money. Further, disclosure of confidential information to tax authorities i.e. an entity may actually enable the revenue authority to know how to audit them.The regulations have also given discretional power to the Commissioner on whether to accept an APA request and whether to accept the taxpayer proposal, modify it or completely reject it. The APA shall only be valid for future periods and for a maximum period of 5 years during which there are yearly compliance requirements.

Should companies in Tanzania pursue APAs?

Overall the benefits of APAs outweigh the costs. However, if an entity’s transfer pricing transactions are straight forward, and if entering into an APA and going through TRA transfer pricing audit will lead to the same results or if an entity has an informal agreement with TRA on treatment of its transfer pricing transactions which are simple and at lower costs, there is no need to pursue an APA. However, if the transactions are complex and there is uncertainty on which is the most appropriate transfer pricing method to apply or any other uncertainty then an APA should be pursued.

APAs Procedures as per the Tanzania Transfer Pricing Guidelines