15 October 2013

Tanzania: Transfer Pricing Haunts the Nation

TANZANIA, being one of the major recipients of Foreign Direct Investments (FDIs), is not immune to global transfer pricing that multinational enterprises practise to maximise profits at the expense of government's tax collections.

Transfer pricing happens when two related companies - a parent and subsidiary companies or two subsidiaries under the control of one parent company - trade with each other, with ill intention to maximise profits through tax evasion.

And like in many other African countries, most companies in Tanzania's mining sector in particular are subsidiaries of multinationals with huge FDIs to the country.

"Closely integrated companies trade in ways that enable them to minimise or evade taxes in countries where their operations are located and transfer their profits to tax havens," says the Lawyers Environmental Action Team (LEAT) Executive Director, Dr Rugemeleza Nshala.

He told a team of journalists attending training in Kilwa Masoko in Lindi Region recently that it was difficult to tell whether the mining firms were making profit or loss based on their declaration as the companies could be inflating operating costs to fictional levels.

The mining industry has remained complex with most companies integrated vertically and horizontally, making it difficult for the vague and untested country's pricing regime.

Dr Nshala argued that the country's tax law relating to transfer pricing and party transactions remains underdeveloped, with intervention of the tax regulator varying from one case to another.

Transfer prices tend not to differ much from the price in the market because one of the entities in such transaction will lose out: They will either be buying for more than the prevailing market price or selling below the market price and this will affect their performance.

The Tanzania Mineral Audit Agency (TMAA) concurs with the fact that transfer pricing was a complex phenomenon in some aspects, but says it has to a great extent managed to monitor transactions in some big mining investors, thus boosting government collections.

TMAA Tax Audit and Analysis Manager, Venance Bahati, told the 'Business Standard' in an interview that the agency has managed to control transactions in the big gold mining firms by accessing their consolidated financial statements of their parent or affiliate companies.

"The parent or affiliated financial statements of the parent or affiliate firms are owned by shareholders and listed in the world's largest stock exchanges, thus the financial reports published are genuine," he observed.

He said TMAA laboratory tests the quality and quantity of the minerals before exports, but through the consolidated financial reports of the companies, it is possible to track down the value of the metals after being processed, thus helping the agency to impose the just charges.

One of the challenges, according to Mr Bahati was tracing transfer pricing on mining companies with undisclosed markets and affiliate or parent companies.

A typical example is on mining firms dealing with jewellery like Tanzanite. Reacting to the issue of transfer pricing onmining industry, a Dar es Salaam based economic lecturer said there was information asymmetry particularly on the disclosure of truth regarding the production and sale of the mineral products.

He said efforts by TMAA were commendable and most big mining firms were paying taxes as their production chain portrays. However, the challenge that remains was on inflating production costs, purposely to reduce the amount of tax to be paid to the government.

"We do not have a good mechanism to track down transactions particularly in the procurement of various items and it is in this aspect where transfer pricing remains to be a complex issue," he noted.

The tax authority is generally of the view that the multinationals are focused on repatriating as much profit out of the country as possible, while suffering the least possible tax costs. For this reason, the tax authority is aggressively challenging transactions between Tanzanian operations and their non-resident related parties.

The Tanzania Revenue Authority (TRA) is yet to issue detailed guidelines on how the rules will be applied particularly the 'arm's length principle' contained in section 33 of the Income Tax Act 2004 for controlling mining firms transactions.

The United Nations Tax Committee have both endorsed the 'arm's length principle' and it is widely used as the basis for bilateral treaties between governments.

Thus it is high time for the tax authority to go extra mile, scrutinise the appropriate ways of dealing with the complexity exerted by the transfer pricing, that multinational companies apply in their operations in the country with the end goal of evading taxes.

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