Negotiating an Advance Pricing Agreement can, however, be time-consuming and may require the submission of extensive documentation to the URA and any other tax authorities involved. PHOTO/courtesy
In an earlier discussion, I drew the readers’ attention to the increasing scrutiny by the Uganda Revenue Authority (URA) of trading transactions between sister companies. These dealings technically known as transfer pricing transactions are susceptible to mispricing. Taxpayers may deliberately inflate prices beyond normal market rates on related party dealings building up deductible costs that reduce their tax bill resulting into revenue loss to the government. By auditing historical transfer pricing transactions between sister organisations, the URA expects to collect additional tax revenues. This article now highlights how taxpayers can prepare for and manage URA transfer pricing audits.
In 2011, Uganda enacted elaborate transfer pricing rules after which the URA established a dedicated transfer pricing unit. This unit has been supported by the African Tax Administration Forum and Tax Inspectors Without Borders among others providing training, coaching and support with audits. The unit has been operational for several years and has carried out audits on a number of large taxpayers, some of which have now escalated to dispute resolution stages.
Both local and transnational enterprises should always be thoroughly prepared for URA audits. Transfer pricing policies and related documents recording how prices are determined on transactions between sister companies should be prepared timely and reviewed regularly. The review ensures that the transactional prices are aligned to current market realities.
Since URA audits cover past periods, it is important that organisations retain “corporate memory” when key staff move on to other roles. This can be achieved by ensuring that any finance, tax or commercial staff are debriefed in relation to decisions on the pricing of related party transactions before they move on.
Taxpayers should be mindful that the URA has an advantage as it has access to confidential information on all registered taxpayers. It is thus able to carry out its own benchmarking with information not available to taxpayers. When initiating transfer pricing audits, the URA may also have information from other jurisdictions where the taxpayer’s sister companies are domiciled, but this may not be disclosed to the taxpayer under audit.
A cooperative approach to dealing with the URA audit team is advisable. The URA has extensive powers which it may invoke if a taxpayer is perceived to be obstructive. While it is preferable to settle tax audits by negotiation, given the subjective element in transfer pricing, this is not always possible. It is therefore advisable to involve litigators with transfer pricing expertise at an early stage to ensure that actions are not taken during the audit which prejudice subsequent litigation. This can also strengthen the taxpayer’s negotiating position, encouraging the URA to settle rather than proceed to Court.
If the transfer pricing audit by the URA involves a party based in a jurisdiction with which Uganda has a double tax treaty, the taxpayer may also consider involving the competent authority of that treaty jurisdiction for intervention if it considers the URA position to be unreasonable. Tax treaties require tax authorities to negotiate to attempt to find common ground but usually do not provide any dispute resolution mechanism if they cannot reach agreement. If an agreement cannot be reached with the taxpayer, the URA will adjust the taxpayer’s records and issue assessments for additional tax. If the taxpayers dispute the URA decision, they have a right of objection in accordance with the procedures laid down in the law including appealing to the Tax Appeals Tribunal.
CONCEPT
Advance Pricing Agreement
The law also provides a mechanism for taxpayers to reduce the risk of protracted transfer pricing disputes with the URA by seeking an Advance Pricing Agreement (APA). Though APAs are becoming more common internationally, we are not aware that the URA has entered into any, and it seems likely that at present the URA would find it challenging to deploy sufficient staff to carry out its planned audit programme and negotiate APA.
The author is managing partner, Cristal Advocates
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