NBAA ACCOUNTANTSANNUAL CONFERENCE 2014

EXPLORING THE OPPORTUNITIES AND MEETING

THE CHALLENGES OF THE ACCOUNTANCY
PROFESSION IN A GLOBAL, DYNAMIC AND
CHALLENGING ENVIRONMENT
04th-06thDecember, 2014 Arusha International Conference Centre (AICC) Arusha, Tanzania
Tanzania Transfer Pricing
Regulations, 2014
A global perspective,
a changing role of Professional Accountants and
related tax policies

Luckson Kataraihya, (ACPA, BA Eco, MSc. Fin)

Finance Manager DAWASCO.
- Consultant.
 Foreword
3

Tanzania Revenue Authority (TRA) has issued the

transfer pricing regulations Income Tax (Transfer
pricing) Regulations, 2014 which was released and
came to operations on 7th February 2014.
Transfer pricing guideline -May 2014

Prior to that, the transfer pricing issues in Tanzania

were guided by Section 33 (1) and 33 (2) of the
Income Tax Act, 2004, and the Income Tax
Regulation 2004 regulation number 6 and 33.
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Foreword
4

With new regulations come new challenges and an

increasing role for professional accountants.
This paper highlights these changes and give more

insight on transfer pricing issues and how they

become an important aspect in the global taxation
arena.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Agenda
5

Transfer Pricing (TP) Explained the basics

The need of TP regulations

Tanzania TP regulations

Regional and global TP regulations

Other tax policy issues

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Introduction
6

What is Transfer Price ?

A Price at which one person transfers goods or provides services to
another person.
What is Transfer Pricing (TP)?
Transfer Pricing is the PROCESS, the act of pricing goods or services
when the same is transferred to another person.
What is Transfer Price from TAX perspective ?
A Price at which one person transfers physical goods and intangibles or
provides services to a related party/associated person.
What is Transfer Pricing from TAX perspective ?
Pricing of the related party transactions.
Transactions that take place between two associated enterprises
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Meaning of Associate/related enterprise
7

Where two enterprises act in the interest of one

party or of the interest of common third party
whether directly or indirectly

one of the enterprises participates directly or

indirectly in the management /control / capital of
the other Example: a parent company and its subsidiary
Or the same person(s) participate directly or
indirectly in the management / control/or capital of
both enterprises Example: two sister companies,
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Type of related parties
8

Direct and indirect

Local related parties and cross-border
E.g. Azam Media/Azam bottling Barclays PLC /Barclays Tanzania

Complex both local, cross-border, direct and

indirect Barclays PLC
E.g. Barclays Tanzania /NBC Tanzania
Barclays PLC/ABSA foreign & cross-boarder, direct
ABSA /NBC - cross-border & direct ABSA
Barclays PLC/NBC - cross-border & indirect
Barclays Tanzania / NBC - indirect and local
Barclays T . NBC.
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Arms Length Principle (ALP)
9

The arms-length principle requires that transfer

prices charged between related parties are
equivalent to those that would have been
charged between independent parties in the
same circumstances.
This is the foundation of the transfer pricing

It can be termed as the taxation version of fair

valuation as used in financial reporting and
likewise it is very subjective and complex

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Arms Length Principle (ALP)
10

The assumptions behind (ALP)

Objective of business is to maximize shareholders
wealth
The same objective reflects in all transactions
Buyer aims lower price, seller - higher price
Within Price limits, buyer(max), seller(min)
The independent parties will reach at efficient
price consideration the AL Price
This price is between sellers(min) and buyers(max)

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 ALP(Arms length principle) vs. Related parties
11

The ALP require parties to act in their best

interest
Related parties will act in the best interest of
the controlling party
The prices between the related parties may
not reflect the ALP
This refers to transfer miss-pricing

The transfer pricing regulations aims at

regulating these miss-pricing
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 The need of Transfer pricing regulations (TPR)
12

Just how big is transfer miss-pricing?

Around 60% of the world trade consists of transfers between
multinational corporations Action Aid
Christian Aid estimates that developing countries lose $160 billion of
tax revenue annually to transfer pricing.
50% of world trade is reported to take place through tax havens
4 companies controls 50% of beer industry, 75% of profits
90% the media is now controlled by just 6 companies, down from 50
in 1983
37 banks merged to become 4 banks JPMorgan Chase, Bank of
America, Wells Fargo and CitiGroup in a little over two decades

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Multinationals mergers& acquisition
13

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

14

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 How transfer pricing works -local
15

Suppose a company A and B are associated both

located in Tanzania with projected profit of
TZS1,000m and loss of TZS-800m respectively.
If A shifts 700m of its profits to B in TP arrangements
Without TP A B With TP A B
Projected profit 1,000 -800 Adjusted profit 300 -100
Tax at 30% 300 nil Tax at 30% 90 nil
Total Group tax 300 90

Tax saving for the year TZS 210m

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 How transfer pricing works - cross- borders
16

Key ingredients
Presence of Multinational enterprises

Presence of tax heavens

Tax arbitrage opportunities

Sophiscated accountants and lawyers

Loose transfer pricing regulations

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 How transfer pricing works tax heavens
17

Jurisdictions with favorable tax treatment and

legal frame works
Netherlands royalties
Ireland Intellectual properties (IP)

Switzerland Management fees

Mauritius - Corporate tax

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Cross- borders TP -simple form
18

Suppose company A can sale a product in the open

market at 400 TZS
Suppose a company A purchases/manufacture goods
for 100 TZS and sells it to its associated company B in
another country for 200 TZS, who in turn sells in the
open market for 400 TZS.
Had A sold it direct, it would have made a profit of 300
TZS. But by routing it through B, it restricted it to 100
TZS, permitting B to appropriate the balance. The
transaction between A and B is arranged and not
governed by market forces.
The profit of 200 TZS is, thereby, shifted to the country
of B. The goods is transferred on a price (transfer price)
which is arbitrary or dictated (200 hundred TZS), but
not on the market price (400 TZS).
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Cross- borders TP - arrangements
19

Royalties
Management fees

Thin capitalisation

Miss-invoicing

Tax heavens

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Cross- borders TP - Tanzania case
20
study
In January 2008 Members of Presidential Mining Review Commission
visited Resolute Goldmine in Nzega, Tanzania. At the time Gold
Prices were around US$1200/ounce but the company was selling at
US$530/ounce. The explanation was that resolute hedged at that
price. Later it was found that they were selling to a sister company
offshore. This denied Tanzania millions of dollars as royalty (at the
time royalty was 3% charged at netback value) as well as tax
revenues. The mine was closed in 2012 after exporting US$3.5
billions value of gold and paid corporate tax only once since1997
when it started operations.
Action taken The commission proposed a new formulae to charge
royalty. That, royalty be charged at spot price on London metal
markets and on gross value. This is due to the fact that a country like
Tanzania has no control on the deductable costs like transportation,
insurance, refinery and even mechanics of hedging. The new law,
Mining Act 2010, includes the new rule.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Cross- borders TP case studies
21

Thin capitalisation
Tanzania lost US$830 millions from 2001-2007 -(Bomani
Mining Review Report, 2008 and Masha Mining Review Report,
2006).
Examples of ratios of debts to equities of 3 main gold mines in
Tanzania during the year ending December 2007 are
Geita Gold mine Bulyanhulu Gold mine Resolute Gold
mine
12,597,000 % 791 % 5088%
D/E of Geita Gold Mine was at 125,970:1, The company
which started to produce gold in 1999 as the largest gold mine
in sub Saharan Africa excluding Ghana and South African
mines, paid its first corporation tax in 2012.
The thin 70:30 cap. Rule was introduced in 2011
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Cross- borders TP case studies
22

Miss-invoicing
Cashew exports where India reported imports of 120,000 tons
from Tanzania in 2011 and Tanzania reported export of
80,000 tons.
This exports under invoicing aims to evade
export taxes

Corporate tax for the exporting company

The exchange of information between trading countries will

help to reduce these tax dodging arrangement.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Cross- borders TP the SABMiller case
study
23

A Large number of Trade marks for SABMiller's

African Brands are registered in the Netherlands
set of tax rules offered by the Netherlands,

enables companies to pay next to no tax on the

royalties they earn.
Register a management company Bevman Services

AG, in Switzeland where the tax on management

company is charged at 7.8%
Incorporate a brewery in Mauritius where corporate

tax for multinational is 3%

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Cross- borders TP the SABMiller case
studies
24

Thin capitalization
Finance local operations from a related
party located in tax heaven.
Developing
country profits

Management Production value interest -

fees. -Switz Royalty -Ned added -Mauritius Mauritius

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

25

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Tanzania TP regulations
26

Section by section review

Scope and selective interpretation

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Scope
27

Transfer Pricing Regulations ("TPR") are applicable on

controlled transactions for the acquisition or supply of
property or services between associated persons, where
at least one person is assessable or chargeable to tax in
the United Republic of Tanzania.

Applies also to transactions between persons who are both

assessable and chargeable to tax in the United Republic
of Tanzania.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Selective translations ...
28

"associate" in relation to a person, means

In a case of individuals

- individual and a relative of the individual,

- partners in the same partnership,
that of an entity

controls or may benefit from 50 percent or more of the

rights to income or capital or voting power of the entity; or
in any case such that one may reasonably be expected to

act, other than as employee, in accordance with the

intentions of the other;
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Selective translations ...
29

Arm's length price (ALP)

Arm's length principle

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Tanzania TP regulations...
30

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Tanzania TP regulations...
31

Consistency with arm's length principle - sec 4(1)

The regulation requires a person carrying out a related
party transaction to determine the income and expense in
the manner consistent with arms length principle
Tax adjustments by commissioner - sec 4(1)
The commissioner may make necessary adjustments in case
of any inconsistency.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Methods of determining the ALP
32

The Comparable Uncontrolled Price (CUP)

method Traditional

The Resale Price Method (RP method)

Cost Plus Method

Transactional
Transactional Net Margin Method (TNMM) Profit
Methods
method)
The Profit Split Method

Any other method as commissioner may prescribe

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Transfer Pricing Methods..
33

CUP Method compare prices

Resale Price Method compares gross margins

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Transfer Pricing Methods..
34

Cost Plus Method compares profit mark-ups on costs

Profit Split Method splits total profits from transactions among the
parties based on the level of contribution

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 ..Transfer Pricing Methods..
35

Transactional Net Margin Method analyses net profit in relation

to an appropriate base, such as costs, sales or assets

other method as commissioner may prescribe

If the methods above fails to give the Arms Length Price,
commissioner may prescribe other method to be used.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Choosing ALP Methods...
36

Not every method can be applied to each taxpayer

and business transaction
no one method is suitable in every possible situation
the applicability of any particular method depends
on the facts and circumstances which should be
evaluated on transaction to transaction basis
The taxpayer can select the most appropriate method
to be applied to any given transaction, but such
selection has to be made taking into account the
factors prescribed in the TPR.
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 ....Choosing ALP Methods
37

The most appropriate method shall take into

account-
Strength and weakness of the TP method
Nature of the controlled transaction
functional analysis
Availability of reliable information

Degree of comparability between controlled

and uncontrolled transaction & reliability of
the adjustment required to eliminate
differences.
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 ..Transfer Pricing Methods..
38

Priority among methods

taxpayer is given the right to choose any method,

the emphasis should be on arriving at an arms

length price
Tanzanian Regulations gives priority to the

traditional methods
Transactional Profit Methods, be used only when
traditional transactional methods cannot be applied
reliably
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 ..TP Methods - comparability
39

Characteristics of Property or Services

tangible property: the physical features, quality and the volume of
supply of property
intangible property: the form of transaction (e.g. licensing or sale);
type of property (e.g. patent, trademark or know how); the
duration and degree of protection; and the anticipated benefits
from the use of property.
Functional analysis
functions performed,
Risks Assumed and
Assets Employed
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Problems in determining AL Price
40

Establishing the most suitable method

Availability of comparables

Availability of information on

comparables
Subjectivity of the assumptions

Changing economic times

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Documentation
41

Additional to the documentation requirement under

section 80 and 140 of the Income Tax Act 2004,
The taxpayer is require to maintain contemporaneous
TP document, the document that will enable the
commissioner to determine the arms length price
Organization structure of all party involved
Nature of business and market conditions
Controlled transactions
Strategies and assumptions on factors influencing prices
Comparability, function and risk analysis
Selection and application of TP method
Other relevant information
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 ...Documentation due dates
42

There's no requirement to file TP documentation in

Tanzania
However TP documentations are required to be ready
prior to due date of filling the income tax for the
year
Six month after the end of the financial year
th st
30 June for a January -31 December financial year.

Or
Thirty day from the demand notice from
commissioner

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Advance Pricing Arrangements (APA).
43

The Regulation allows taxpayers to apply for

Advance Pricing Arrangements (APA).
Set the way the pricing of controlled transactions
will be determined to avoid costly penalties on tax
adjustments
For the specific period up to five years
The taxpayer will propose on the APA, the
commissioner can accept, amend or decline
APA is binding - no tax adjustment if complied to
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 OECD and UN guidelines
44

Further guidance can be obtained from

OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administration
and
UN Transfer Pricing Manual for Developing
Countries.
Where there's inconsistency between the Act, the TP
regulation, UN and OECD guidelines, the act shall
take precedence.
OECD: The Organisation for Economic Co-operation and Development.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Penalties
45

The Income Tax Act, 2004 does not impose specific

penalties in respect of non arms length practices.
The penalties under the TPR
Failure to Maintain/Furnish Prescribed
Documentation attract
Imprisonment -not exceeding six month

Fine - not less than TZS 50million

Failure to comply with the ALP attracts 100%

penalty on the tax underpaid/evaded

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Actions Expected of Enterprises to Prevent Occurrence
of Transfer Pricing Problems - penalties
46

Knowledge of transfer pricing regulations

Involvement of top management
Recognition of status and problem areas in foreign
related party transactions
Implementation of global transfer pricing policies
Transaction price setting taking into account transfer
pricing methodologies
Communications with the tax administration

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Critics
47

Non exclusion
Local and cross border
Company size/turnover
Unreasonable fixed penalty (TZS50m) irrespective

of company and transaction size.

Prioritizing on traditional TP Method

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Global outlook TP methods
48

UN/OECD Tanzania* Kenya Uganda

Comparable Uncontrolled YES YES YES

Pricing Methods
Resale Price Method YES YES YES
Cost Plus Method YES YES YES
Profit Split Method YES YES YES
Transactional Net Margin YES YES YES
Method

* Gives priority to traditional method

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 East Africa TPR
49

Narrations Tanzania Kenya Uganda

Regulation est. 2014 2006 2011
Scope Both local & cross - Cross-boarder Cross-boarder
border
Associate >50% >25% >50%
Control - commercially
unspecified dependent
arrangement.
Documentation 30 days/ Not specific on final income tax
on final income tax /on final tax return
return return
TZS50m or/and UGX500k or/and
Penalties imprisonment No penalties Imprisonment
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 East Africa TPR
50

Narration Tanzania Kenya Uganda

Advanced Price available Not available available
Arrangement
Penalties on TP Tax 100% penalty 20% Not specified
adjustment 2 % per
month like all
other taxes

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Other tax policy issues
51

Withholding taxes on foreign payments

Repatriated income
Thin capitalization
Double taxation agreements
Tax rates
- corporate tax
- capital gain taxes

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 The bigger picture
52

It is in the interest of all Tanzanian to see stronger

TP regulations secure our tax base
Accountant are not exceptional bigger role
On the flip side
With increased multinationals in Tanzania and
global
The stronger TP regulation is good business for
Professional Accountants.
See an opportunity in this challenge

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 Recap
53

OLD NEW REGULATION

Time line Before Feb. After fib 2014
2014
Applicability 50% or more 50% or more
TP Documentation Not applicable Very comprehensive
Penalty on Not applicable 50m or/& imprisonment
Documentation
Penalty on As per ITA 2004 ITA 2004, and 100% on TP
misstatement
Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.
 Disclaimer
54

Unless otherwise directly quoted from Tax laws, the

names, examples and wordings reflects my best
understanding of the Tanzania Transfer pricing
regulation and may not necessarily reflect the
position of TRA or DAWASCO my employer.

This paper is for training purpose and will provide

the general guideline, it can not be used as a
guideline for specific transaction without seeking an
advice from competent tax advisor.

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.

 the end
55

Thank you

Mr. Luckson Kataraihya, NBAA Annual Conf. Dec. 2014, Arusha.