Transfer Pricing

As multinational investors engage in cross-border transactions with their affiliates, transfer pricing (TP) rules become crucial. Transfer pricing refers to the pricing of goods, services, and intangibles between related parties (e.g. between a Tanzanian subsidiary and its foreign parent or sister company). Tanzania has established transfer pricing regulations to prevent profit shifting and ensure related-party transactions reflect arm’s length terms (as if the parties were unrelated).

TP Rules and Arm’s Length Principle

Tanzania’s Income Tax Act mandates that transactions between associates be carried out at arm’s length​.. This means the pricing, terms, and conditions should be consistent with what independent parties would agree in comparable circumstances. If a company’s taxable income is understated due to non-arm’s length transfer prices, the Commissioner of TRA can adjust the income (or deductions) to reflect arm’s length amounts.

Key points of Tanzania’s TP regime:

• It covers all types of related party transactions: sale of goods, provision of services, royalties for intellectual property, intercompany loans (interest rates), cost sharing arrangements, etc. For example, if a Tanzanian subsidiary buys raw materials from its foreign parent, the price should be what it would pay an independent supplier for similar materials.
• The law provides that one must “quantify, apportion, and allocate” amounts in accordance with the arm’s length principle​.. This broad language covers both price levels and allocation of common costs between related entities.
• The term “associate” is defined broadly (including direct/indirect ownership or control relationships).

Transfer Pricing Methods

Tanzania’s regulations (the Income Tax (Transfer Pricing) Regulations 2018, replacing 2014 regs) align with OECD TP Guidelines. Acceptable methods include:

• Comparable Uncontrolled Price (CUP) – comparing price of similar transaction between independents.
• Resale Price Method, Cost Plus Method – traditional transactional methods.
• Transactional Net Margin Method (TNMM) and Profit Split – transactional profit methods for complex cases. Taxpayers should choose the “most appropriate method” given data availability and nature of transaction. The aim is to find comparable or a reasonable benchmark margin.

For instance, if a Tanzanian company provides IT support services to its overseas affiliate, it might apply Cost Plus: charge all costs plus, say, 5% markup, if independent IT firms earn a 5% margin per benchmark studies.

Documentation Requirements

The 2018 TP Regulations impose significant documentation obligations:

• Contemporaneous TP Documentation: Any taxpayer with related-party dealings must have TP documentation in place by the due date for filing the tax return (6 months after year-end)​. This documentation should demonstrate how their transfer prices were established and why they are arm’s length.
• Mandatory Filing of Documentation: If the value of related-party transactions exceeds TZS 10 billion in a year (approximately USD 4.3 million), the taxpayer is required to submit the TP documentation along with the tax return​. So large multinationals must proactively file a full TP report to TRA.
• Other cases: Taxpayers below the TZS 10b threshold don’t file docs automatically, but must avail them upon request. On TRA’s request, they must submit documentation within 30 days​.
• Documentation should include details on the company structure, nature of related transactions, pricing policies, comparables search, functional analysis (functions, assets, risks of each party), economic analysis applying methods, and actual calculations supporting the prices​. The 2018 regs outline specific info to be included, akin to a Master file and Local file concept.

Thresholds: TZS 10 billion is roughly USD 4 million. So, large companies (like telecoms, mining, etc.) are definitely in scope to file annually. Smaller companies (with say USD 1 million of intercompany charges) still need documentation on hand.

The regulations also emphasize that actual workings used to determine transfer prices (like how you computed a cost base or markup) should be part of the record​.

Having robust documentation is critical because it shifts burden of proof. If taxpayer shows a reasonable effort and analysis pointing to arm’s length, TRA would need strong counter-analysis to make adjustments.

Penalties and Compliance

Penalties under TP rules in Tanzania are stringent:

• There is a specific penalty for failure to prepare or submit TP documentation. The law introduced a currency point system for penalties; currently the minimum penalty for non-compliance can be about TZS 52.5 million (based on 3,500 currency points at TZS 15,000 each in older rate)​. With currency point now at TZS 20,000, minimum penalty is TZS 70 million (USD 28k). So not having documentation can be costly.
• Additionally, if upon audit TRA adjusts transfer prices, any resulting underpaid tax is subject to normal penalties and interest. Notably, the 2018 regs specify that a 100% penalty on the tax underpaid will apply to adjustments during audit​. Essentially, if TRA finds you underpaid tax by, say, TZS 1 billion due to non-arm’s length pricing, an extra TZS 1 billion penalty can be levied on top of the tax and interest. This draconian penalty is to encourage honest compliance​.
• In practice, TRA tends to scrutinize large intercompany charges such as management fees, royalties, or import prices for goods especially if the Tanzanian entity is consistently in loss or low profit while affiliates profit.

The PanAfrican Energy case (2019) in Tanzanian courts, while primarily about objection deposit, underscores that TP disputes can escalate. PanAfrican (in oil & gas) had disputed large TRA adjustments (over USD 100 million) on grounds of pricing of gas sales to a government entity – though that was a domestic pricing issue, it highlights TRA’s aggressive stance on pricing. The case indirectly showed the costs of disputing – requiring deposit for objection (which in their case was huge). Ultimately many TP disputes end up settled or in tax tribunal if not resolved.

Intragroup Financing and Others

The TP regulations also require arm’s length interest on intercompany loans. Tanzania’s thin capitalization rule (debt-equity 7:3) limits amount of deductible interest (see CIT section). But even within allowed debt, the interest rate should be arm’s length. TRA will expect to see that a loan from a parent carries interest similar to what an unrelated lender would charge a Tanzanian borrower of similar risk. If a parent charges an excessive interest (to strip profits), TRA could disallow the extra portion via TP adjustment.

Likewise, intragroup services must confer a benefit and be charged reasonably. The 2018 Guidelines emphasize needing evidence of services actually rendered and benefit received by the Tanzanian entity. Allocation keys for regional management costs should be “measurable and relevant” and reflect usage. If a service can’t be justified, TRA may deny the deduction entirely (saying it’s shareholder cost or duplicative). They also put onus on showing the charge is at cost plus reasonable mark-up, not an arbitrary amount.

In intragroup tangibles, customs import valuations also come into play. The Tanzania Customs (under EAC rules) can challenge import prices if not arm’s length. So undervaluing imports to reduce customs duty might conflict with desire to overprice imports to reduce profits – companies must be consistent.

Example: A Tanzanian subsidiary imports goods from its parent at $120 per unit, and sells locally at $130, making only $10 gross margin. If similar goods could be bought from third parties for $100, TRA may argue the $20 extra is shifting profit out. They could restate import price to $100, adding $20 profit per unit to Tanzanian taxable income. Proper documentation might show perhaps the parent’s product had unique features justifying $120 or that $120 includes provision of warranty services, etc. Without that, an adjustment likely.

Practical Advice for Investors

• If you establish a local company that will transact with group companies, set up intercompany agreements documenting the nature of transactions and pricing policies at the outset.
• Conduct a benchmarking study (consultants or databases) to support margins on services or distribution activities. For commodity products, get comparable price quotes.
• Prepare the required TP documentation annually. If transactions are significant, budget for a TP study each year (or an update if similar to prior year).
• Pay attention to local comparables vs regional. Tanzania’s market may have limited comparables, so often pan-African or global comparables are used with adjustments.
• The TRA may particularly scrutinize cases where the Tanzanian entity is in a persistent loss while affiliates abroad are profitable (an indicator of TP issues). If that’s the situation (perhaps due to startup costs), document non-tax reasons for losses and show that pricing is fair.
• Commodity Transactions Safe Harbour: Tanzania hasn’t formalized specific safe harbors except small loans from foreign-controlled banks might have some leeway if below market.

Dispute Resolution

If a TP adjustment is proposed, taxpayers can dispute via the normal objection and appeal process. However, no advance pricing agreement (APA) program exists yet in Tanzania – meaning one cannot pre-agree prices with TRA beforehand (some neighbouring countries have APAs, but Tanzania currently does not, as of last review). So, investors face some uncertainty and should err on conservative, well-supported pricing.

International Tax Coordination: Tanzania is not yet a participant in the OECD’s Country-by-Country (CbC) reporting, but being part of BEPS inclusive framework might bring that. Large multinationals might anyway prepare CbC for other jurisdictions which TRA could obtain via exchange.

Conclusion

Transfer pricing is a complex but vital area for any multinational business in Tanzania. The combination of stringent documentation requirements (with tight deadlines)​, material penalties, and TRA’s increasingly sophisticated audits means investors must treat TP compliance as a high priority, not an afterthought. Engaging qualified advisors for benchmarking, keeping evidence of services and justifying any royalties or fees (for example, showing how a brand name adds value to the Tanzanian entity to justify a royalty) will pay off by avoiding protracted disputes or double taxation.

In a nutshell: price your intercompany transactions as if dealing with an independent party, keep the evidence, and file required disclosures. This will allow you to focus on business operations without unexpected tax hits from transfer pricing adjustments.

For more information and inquiries reach us out through info@auditaxinternational.co.tz