Transfer Pricing in the Oil and Gas industry in Tanzania

=Definition= A transfer price is a price adopted for book-keeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels to effect an unspecified income payment or capital transfer between those enterprises. Suppose a Tanzania based subsidiary of an International Oil and Gas Company (IOGC) trades either goods or services with a Swiss based subsidiary of the same company and establishes a price for the transaction, that process is called transfer pricing. If the Swiss based subsidiary sells goods and/or services at an artificially high price to the Tanzanian subsidiary, the Swiss based subsidiary has artificially high profits while the Tanzanian based subsidiary has artificially low profits. Thus, the profit margins of the Tanzanian based subsidiary are determined by the artificial prices which, in turn, determine the tax revenue accrued by the Government of Tanzania.

=The Income Tax (Transfer Pricing) Regulations (2014)= The Income Tax Transfer Pricing Regulations of 2014 have been made under the Income Tax Act, Cap 332. They apply to a controlled transaction when a person, who is a party to the transaction, is located in and subject to tax in the United Republic of Tanzania (URT) and when the other person, who is a party to the transaction, is located in or outside the URT. The guideline document states that all transactions to which the regulations apply have to be conducted in a manner that is consistent with the arms’ length principle—meaning that commercial or financial transactions between associates are taking place on the same terms as if such transactions had taken place between independent persons under comparable conditions and circumstances using market prices. Moreover, the regulations require a contemporary transfer pricing documentation and set penalty provisions for non-compliance. Penalties may be imprisonment for a maximum term of six months and/or a fine of not less than 50 million Tanzanian shillings.

=Challenges= Transfer pricing poses a challenge to governments as international companies might manipulate prices to minimise tax obligations. The fact that oil and gas companies tend to have a significant number of related party transactions suggests that the scope for international oil and gas companies to use artificially low and/or high prices for their related party transactions is very high. Thus, the issue of transfer pricing is of special relevance to the oil and gas sector in Tanzania. Moreover, it is particularly difficult for the Government of Tanzania to establish whether real market prices were in force when auditing oil and gas companies, especially when it comes to services and intellectual property. Thus, establishing whether the arms’ length principle has been violated remains difficult and potentially vague. Some critics argue that only few members of the Tanzania Regulatory Authority (TRA) staff understand the transfer pricing techniques, which are often complicated since they involve different countries and tax jurisdictions. Even the TRA admits the existence of an ineffective legal and administrative framework and lack of skilled human capacity as well as lack of co-operation among jurisdictions, problems which continue to present difficulties in their work.

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