The Regulations came into force on 27 April 2018 thus revoked the previous Income Tax Act
(Transfer Pricing) Regulations 2014. The Regulations are mainly centered on the following: –
Arm’s Length Principle
The Regulations require that income and expenditures in all transactions to which the Regulations apply be consistent with the arm’s length principle.
Transfer Pricing Methods
The same methods under the 2014 Transfer Pricing Regulations have been maintained under the 2018 Regulations with the explicit requirement to apply the traditional transaction method first.
The Regulations go on to further provide that where the most appropriate method requires selection of a tested party outside the United Republic, then such a party shall be considered only when a person provides all relevant information of the person. Relevant information could be taken to mean the transfer pricing documentation as per the Regulations (records and documents detailing organizational structure, nature of business, description of the controlled transaction, financial etc).
Comparability factors and analysis
The Regulations provide for factors to be considered in determining whether two or more transactions are comparable to the extent that they are economically relevant to the facts and circumstances of the transactions.
The Regulations further provide that the Commissioner may reject wholly with reason and direct a person to resubmit an analysis or reject partly with reasons and make necessary adjustments.
Where comparability analysis is conducted on more than four comparable data, the arm’s length shall be the data point between thirty fifth percentile and sixty percentile. Otherwise where four or less comparable data is used the average of the data shall be the arm’s length.
A person in a controlled transaction is required to prepare contemporaneous transfer pricing documentation which should include records and documentation that provide a description of the organizational structure, nature of business, description of the controlled transaction, financial statements for the parties to the controlled transaction including where the tested party has been selected outside the country etc.
The contemporaneous transfer pricing documentation is also required to be filed together with the income tax return for the year of income by a person whose transactions with associates exceeds TZS 10 Billion.
Intra Group Services and Intra Group Financing
The Regulations itemize points to be considered in demonstrating an arm’s length transfer price for services.
A person in a controlled transaction who provides or receives intra group financing directly with or without consideration is required to determine the arm’s length interest rate for such assistance.
Where services are rendered by a person jointly to various associates and it is not possible to identify specific services provided to each of them, then the total service charge shall be allocated among the associates that benefit or expect to benefit from the services according to reasonable allocation criteria
Where in a controlled transaction an intangible property (Intellectual Property) is transferred or licensed out, the owner or licensee is required to charge an arm’s length price and the value of that property to the transferee or licensee is required to be commensurate with the benefit that the intangible property is expected to generate.
Further, a person who is not a legal owner of an intangible property but is involved in the development, enhancement, maintenance or protection of that intangible property is required to receive an arm’s length consideration.
Moreover, the owner of a locally developed intangible property that is subsequently transferred outside the United Republic is required to be compensated appropriately at the time of the transfer, but in the event that the intangible property is licensed back for use in the United Republic, then such Intangible Property will not attract any royalty charges.
The Regulations require the use of the comparable uncontrolled price (CUP) method for commodity transactions by reference to the quoted spot price except in cases of commodities exported from the United Republic where the price agreed upon by the associates is higher than the quoted spot price.
Advance Pricing Arrangements
An Advance Pricing Agreement (“APA”) can only be entered into for a period not exceeding 5 years.
An APA may be cancelled in the event of: –
Failure to materially comply with a fundamental term of the APA; material breach of critical assumption underlying the agreement; change in tax law materially relevant to agreement; and APA was entered into based on misrepresentation, mistake or omission.
A taxpayer who has entered into an APA is required to file an annual compliance report together with his return of income.
The penalty for any adjustment made by the commissioner to the taxation of a transaction(s) is 100% of the adjusted amount.