Transfer Pricing as a concept is about transferring and/or manipulation of price which leads to tax avoidance in a transaction with the aim of reduction of tax liability. The price that is involved in these sorts of transactions is referred to as “Transfer price” as it is the price charged in the transaction between related or associated entities with the aim to avoid tax. Transactions of multinationals tend to be highly scrutinized for transfer pricing as they are taken to be more likely to carry out these forms of transactions.

Transactions between associated entities are termed as “Controlled transactions” as provided for under Regulation 3 of the Tax Administration (Transfer Pricing) Regulations, 2018 and these are defined as transactions between associates e.g., entities in same corporate structure.

An example of a Transfer Pricing arrangement can be observed where a multinational corporation in a high-tax country will sell its products to its subsidiary in a low-tax country at a price that is below the market value . Hence, where the product is sold at below the market price then the profits that the multinational corporation records are much lower than they would have been had the products been sold at the fair market value. This overall reduces the taxable income that may be charged at its home country.

After the subsidiary company in the low-tax country purchases the products at a discounted price it will proceed to sell the same product at a much higher price thus maximizing the profits gained and losing little to the tax regimes in the respective country due to the lower taxes compared to the home country of the multinational corporation.

Transfer Pricing Compliance

For related/associated parties, the law as under Regulation 7 requires that  where such transactions are being carried out there must be provided an extensive Transfer Pricing documentation by the parties to the transaction.

This documentation must provide complete organizational structure of all related parties, nature of the business, descriptions of these transactions and so on. The purpose of these extensive documentations as per Regulation 7(2) is to capture and scrutinize all transactions that meet the 10-billion-shilling (and above) threshold so as to determine compliance with transfer pricing rules and the arm’s length principle.

The law, however, under Regulation 7(3)b also provides that the Commissioner General may also require the transfer pricing documentations to be provided even by controlled entities who do not meet the 10-billion-shilling threshold.

Regulation of Transfer Pricing in Tanzania

If the Tanzania Revenue Authority determines that a transfer pricing arrangement has taken place the Commissioner General has the discretion to exercise his statutory authority under the Tax Administration (Transfer Pricing) Regulations, 2018 to analyze the level of tax avoidance in order to reverse the tax benefits realized. A local example can be observed in the Court of Appeal case: ALLIANCE ONE TOBACCO TANZANIA LIMITED V. COMMISSIONER GENERAL (TRA) [CIVIL APPEAL NO. 118 OF 2018]. In this case we can observe how the TRA exercises its authority in detecting transfer pricing arrangements and proceeding to issue adjusted assessments to eliminate the tax benefits created.

Adjustment of Transfer Pricing Transactions

In the recharacterization of a price used in transactions deemed to involve transfer pricing the concept that comes about is one termed as “Arm’s Length Price”.

Regulation 3 of the Tax Administration (Transfer Pricing) Regulations, 2018 defines an arm’s length price as the price that is charged between independent persons. This basically means that the price that one entity would charge another when they are unrelated is regarded as the arm’s length price and anything considerably higher or lower is regarded as going against the arm’s length principle.

Methods of Determining the Arm’s Length Price

In the determination of whether a transaction involved an arm’s length price or not Regulation 5(1) of the Tax Administration (Transfer Pricing) Regulations, 2018 provides six (6) ways to determine the arm’s length price that is involved in a transaction among controlled entities.

1. Comparable Uncontrolled Price Method

Compares the prices of goods and services between related parties to the prices of identical goods or services between unrelated parties. For the sake of clarity pricing for related entities is referred to as uncontrolled price or pricing for related entities has referred to as controlled price. This method is applied by taking the prices of transactions which was similar between independence parties and the aim is to determine whether the transfer prices differ from the prices between unrelated prices. This is regarded as the most reliable method of determining the arm’s length price.

2. Resale Price Method

The arm’s length price is obtained by deducting the resale margin from the resale price. After deduction of gross margin and other expenses of transferring the goods or services between associated entities the transaction can be regarded as arms-length transaction of the supplied goods or services if the gross margin is similar to that of uncontrolled transactions. This is considered as a very useful approach in determining arm’s length prices for distributors.

3. Cost Plus Method

This method is used to calculate production related direct and indirect costs incurred by a supplier of goods or services in producing the goods or services. The method starts with the supplying associate and not with the buying associate. The markup is what is used to determine the arm’s length price however this method is mostly applicable to manufacturers of semi-finished goods who do not incorporate intangible assets or service providers who did not provide unique services.

4. Transactional Net Margin Method

This determines the arm’s-length price by using the net profit that was obtained following the controlled transaction. The net profit that is observed is then compared to the net profit earned from uncontrolled transactions. If a non-profit is similar in both transactions then it is taken that the control transaction used an arms-length price.

5. Profit-Split Method

This method is applied where the transactions of controlled entities are extremely integrated in a way that they cannot be extracted separately from the activities of controlled entities. What happens here is that the profits that are split between the entities are observed in comparison to independent entities following a similar business arrangement and the economic validity of the split and the apportionment is used to determine whether the profit-split was at an arm’s length.

6. Finally, the Commissioner General can also apply any other method that is deemed fit.

CONCLUSION

Business entities, therefore, must always take transfer pricing regulations into account whenever they intend to take part in considerable business transactions with associated entity/entities. Rigorous compliance with the laws and regulations will help to ensure that no unexpected tax liability will arise due to non-compliance.

Contact Person and Contributors

Comfort Mugisha Blandes- Managing Partner

blandes@cymbellattorneys.com

Harry Godfrey Mbise- Associate

hmbise@cymbellattorneys.com

Disclaimer:

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its partners, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

The post THE CONTROL OF TRANSFER PRICING IN TANZANIA appeared first on Cymbell Attorneys.

The United Republic of Tanzania has legal authority over any mining activities and minerals found on, in, or beneath Tanzanian continental soil. Some of the minerals found in Tanzania include gemstones, gold, silver and copper.

Any person with valid mineral rights may deal in minerals depending on the scope of their licence, according to the Tanzanian law.

A foreigner can get a licence and/or permit to trade and export minerals and the conditions are outlined in the later parts of this Article.

Therefore, approvals from the licensing authority, the Tanzania Mining Commission, are needed for trading and exportation of minerals. The Commissioner for Minerals, through an application for prospecting minerals, may grant the necessary licenses and permits to trade in and export minerals in Tanzania

Who Can Trade and Export Minerals in Tanzania?

As elaborated above, minerals in Tanzania can be owned or possessed by a  person with valid licences mineral licences. With regards to trade and exports of minerals however, the following licences and permits are involved:

Persons with Mining Rights

A person with mining rights such as prospecting, smelting, processing and so on is allowed to sell their acquired minerals to a licenced broker via a mineral buying station.

Licenced Brokers

A broker’s licence authorizes the licence holder to buy or acquire gold or gemstones in a designated buying station specified by the licence and sell the same minerals to a licensed dealer at a Mineral and Gem House.

A broker licence only grants the licence holder with a domestic market and does not authorize the holder to export any minerals.

Licenced Dealers

A dealer’s licence allows a licence holder to buy and sell minerals specified in their licence from a licenced Broker at a Mineral and Gem House and to persons within Tanzania or to persons outside Tanzania through exporting the minerals specified in their licence.

Gem Trade Fairs

As per Regulation 2 of the Mining (Minerals and Mineral Concentrates Trading) Regulations, 2018, a Gem Trade Fair means an exhibition or trading event, organized periodically, aimed at allowing many buyers and sellers to meet for purpose of trading gemstones and gems at a fair market price and promoting mineral trading or value addition activities of gems or other precious minerals.

Since Gem Trade Fairs are state established, the conditions for participation by mineral rights holders are two-fold depending on the level of participation.

Where a person wishes to sell minerals in a Gem Trade Fair, they must make an application for an import permit for the minerals to be traded at the Gem Trade Fair. A requirement for a permit also applies where a person wishes to export minerals acquired through a Gem Trade Fair.

This right is also granted to a non-resident with a special permit who acquires minerals from an authorised miner, licensed dealer or a Gem Trade Fair in Tanzania and exports the same after fulfilling specified legal requirements provided by the law highlighted below.

THE EXPORTATION OF MINERALS FROM TANZANIA

The law prohibits an authorised miner, licensed dealer or any other person to export minerals without having an exportation permit of minerals from an authorised officer. In this case, any mineral produced by any authorised miner or minerals purchased by a licensed dealer from either an authorised miner or licensed broker, shall not be exported from Tanzania without having an exportation permit.

The Right to Export Minerals

The Tanzanian government as the owner of minerals in Tanzania  charges royalties based on two factors: the gross value of the minerals to be exported and the type of minerals to be exported. For instance, gemstones and diamonds are charged 5% of the gross value of the consignment while the rate for gold, copper, silver, and platinum minerals is 4% and a gem is charged 1% of the gross value. All minerals within the industrial mineral, including building material and salt are chargeable at a rate of 3%.

The right to trade or export minerals has been given to the classes of people with the right to possess minerals in Tanzania.

A special export permit is granted to non-residents to export minerals from Tanzania while export permits for minerals from a gem trade fair are granted after payment of requisite fees and royalties.

A major limitation is that non-residents are not be permitted to export minerals more than twice a year. A non-resident with a tourist visa is permitted to export minerals after paying the required export permit fee for minerals not exceeding a value of USD 1,000. The application fee is USD 200 for minerals worth USD 1,000 or less. However, if the value of minerals is above USD 1000, the amount of export permit fee payable is USD 2,000 regardless of the excess of value over USD 1000.

1. Requirements for Export Permit

An authorised miner and licensed dealer must pay the applicable royalties, fees and taxes due for a particular export before they can be granted with an export permit. Therefore, a permit is issued only upon application, approval of applicant and payment of all government fees. The Permit expires once a specified Mineral consignment has left the Tanzania customs barrier.

These minerals are exported pursuant to the conditions, set out in the Act and applicable regulations, as outlined in the permit. In the case of geological samples, cores or chips, an export permit from the authorised officer.

A holder of a processing, smelting or refining licence is not permitted to export any mineral which has been processed, smelted or refined by the license holder themselves unless they have obtained from the Commissioner a permit to export the mineral which evidences the payment by the authorised miner of royalty or provisional royalty.

In the case of a holder of a processing, smelting or refining licence, they may only export minerals upon making a provisional payment, as per the provisions of the law, instead of royalties.

The exported minerals are expected to meet the conditions set out in the Act or applicable regulations and also outlined in the permit. The application fees also have to be paid in all cases.

1. Application for Export Permit

The application for an export permit of mineral by either an authorised miner, licensed dealer or holder of a processing, smelting or refining licence shall be done to the authorised officer appointed by the Commissioner for Mineral through Form MTF. 1 (Application for Permit to Export Minerals and Samples of Minerals). An application for a permit to export processed minerals shall be made in Form MBF. 1.

1. Issuance of Export Permit

A permit to export minerals and samples of minerals shall be issued only in respect of minerals and samples of minerals which have first been examined and weighed by the authorised officer and packed in a container the outer cover of which has been sealed at every opening with the seal of the Minerals Division or such other seal as the Commissioner may, in writing, may approve.

A permit to export processed minerals shall be issued only in respect of processed minerals which have first been examined and weighed by the Commissioner and packed in a container the outer cover of which has been scaled at every opening with the seal of the Minerals Division or such other seal as the Commissioner may, in writing approve.

1. Cessation of Export Permit

A permit to export minerals, samples of minerals or processed minerals shall cease to be valid if any of the seals affixed to the container are broken before export.

The time limitation for the exportation of minerals is stated on the permit Form MTF.2 titled “Export Permit for Minerals and Samples of Minerals” as under the Mining (Minerals and Mineral Concentrates Trading) Regulations, 2018.

The validity period on an export permit is prescribed on a case by case basis. Where the period for exportation lapses, the permit becomes invalid.

1. Requirement for Export Permit by Non-Resident

The Tanzanian law prohibits any mineral acquired by a non-resident either from an authorised miner, licenced dealer or gem trade fair to not being exported by a non-resident without having an exportation permit to export those minerals. The permit obtained by the non-resident to export minerals from Tanzania may be either a special export permit or an export permit.

1. Special Export Permit

This type of permit is issued to a non-resident who intends to export minerals that had been originally purchased from a licensed dealer or an authorized miner. The non-resident shall apply and pay the application fee before the Commissioner for Minerals is to issue this permit. The application for Special Export Permit shall be done through Form MTF. 13.

However, the payment of the application fee can differ in case a non-resident is in Tanzania by virtue of a tourist visa and the value of the mineral to be exported is less than USD 1,000 and the royalty for the mineral is proved to be paid.

1. A special export permit is granted to a non-resident only once a year.
2. Export Permit

This permit is only granted to a non-resident who intends to export minerals that they purchased from the gem trade fair. The Commissioner will grant this permit after receiving a request from a non-resident and receiving payment of the requisite fee. The application to the Commissioner shall be through a special Form.

Once issued, every export permit for tanzanite minerals must be accompanied by a certificate of origin issued by an officer authorised for that purpose. The custom official or any authorised officer shall have the power to confiscate any tanzanite minerals being exported without a certificate of origin.

1. Re-Export Permit of Minerals from Tanzania

Where a person had previously imported minerals into Tanzania under a valid import permit as per the old and revoked Mining (Mineral Trading) Regulations, 2010 they shall be required to apply for an export permit where they wish to re-export the minerals out of Tanzania for instance where they are unable to market the minerals.

For the exportation the Commissioner examines the import permit for those minerals and upon satisfaction that the minerals to be exported consist entirely or in part of the minerals to which the import permit refers he shall issue an export permit.

1. Surrender of Export Permit

At the point of exit from Tanzania, the holder of any permit to export minerals, samples of minerals, or processed minerals must present the original relevant permit to a government official (customs or postmaster). The original permit is then forwarded to the authorized officer by whom it was issued.

CONCLUSION

The mineral export permit is an essential document that  allows dealers and miners to export minerals out of Tanzania. It is important to note that mineral export permits are issued only once per consignment and are valid only for the period specified on a permit and the period shall be dependent on the nature of minerals and discretion of the Commissioner.

Since permits and licences are subject to the payment of prescribed fees and royalties, persons must ensure that all payments are made on time and at the amounts billed/levied by the State.

Where a person fails to pay annual rent, royalty or to make payment in lieu of royalty payable by him they shall be subjected to pay a penalty of:

• Twenty five per centum of the amount which is due, in case of an individual person
• Fifty per centum of the amount which is due, in case of a body corporate.

Failure to pay penalties and the other fees, annual rents, royalty or payments in lieu of royalty shall create a debt which shall be recovered in a court of competent jurisdiction by the Court for the State.

Where a person exceeds the scope of his licence or permit or acts without a permit or licence in dealing of minerals they are regarded to commit an offence as per Section 18 of the Mining Act of 2010. Upon conviction, such person shall be liable to:

• In the case of an individual, to a fine of not less than five million shillings but not exceeding ten million shillings or to imprisonment for a term of not less than one year but not exceeding three years or to both
• In the case of a body corporate, to a fine of not less than twenty million shillings but not exceeding fifty million shillings.

Contact Person and Contributors

Comfort Mugisha Blandes- Managing Partner

blandes@cymbellattorneys.com

Harry Godfrey Mbise- Associate

hmbise@cymbellattorneys.com

Disclaimer:

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its partners, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

The post The legal and procedural requirement for establishing mineral trading and export operations in Tanzania appeared first on Cymbell Attorneys.

Salient features of the amendment:

1. Definition

The amendments have amended the defining regulation by deleting the definition of the following terms and substituting them for the following;

1. Mining Activities

Mining activities include provision of goods and services for purposes of mining operations. The Amendments now define mining activities as any activity engaged in within and outside Tanzania related to the exploration for, development and production of minerals, the acquisition of data, mining and extraction or mining of minerals, storage, transportation and decommissioning and the planning, design, construction, installation, operation, provision of goods, services and use of any facility for the purpose of the mining operations.

1. Contractor

The amendments define a contractor as a person who has entered into a contract with a licensee within or outside the United Republic for provision of goods and services in mining operations. Previously, a person became a contractor upon acquiring a mining agreement with the United Republic to undertake mining exploration and production activities under the Mining Act.

With these amendments, the subjects to which the Regulations apply is widened, such that, all persons who are contractually obliged to provide services or goods to the mining sector are required to comply with the Regulations as contractors. Thus, service providers such as law firms, telecom companies, financial institutions, and caterers are now required to comply with reporting requirements under the Regulations, including submission of local content plans and performance reports to the Mining Commission.

1. Subcontractor

The term ‘subcontractor’ is amended, to the extent that, a subcontractor is a third party to whom a corporation or contractor has entered into a contract for provision of goods and services for mining operations. Before these amendments, a subcontractor ought to have a mining contract with a corporation or contractor for provision of services for mining operations.

2. Procurement of Goods and Service for mining operations

The amendments have introduced the conditions where a proposed contract for goods and services for mining operation shall be deemed to be sole sourced. The conditions are where:

1. a contractor, subcontractor, licensee or other allied entity has issued an advertisement relating to expression of interest for the provision of the particular goods or services and is only able to obtain one particular tenderer who is suitable for the provision of the goods and services; or

1. there is an urgent need for the goods and services and engaging in tendering proceedings would therefore be impractical, where the circumstances that gave rise to the urgency were neither foreseeable by a contractor, sub-contractor, licensee, other allied entity nor the result of dilatory conduct on its party.

The conditions have been put in place to encourage the competitive bidding procedures in procuring goods and service providers to the mining operations.

3. Submission of Annual and Quarterly Local Content Performance Reports

The amendments now require submission of annual local content performance reports to the Mining Commission within sixty days of the beginning of each year after commencement of mining activities.  To make the process easy, the Fourth Schedule to the Regulations, provides for the format of the annual and quarterly performance reports. Failure to submit any quarterly or annual performance report within the required time is punishable by payment of a fine of Tanzanian Shillings Ten Million (TZS 10,000,000/-). Furthermore, failure to effect payment or continuous non-submission of the report leads to prohibition of bidding on provision of goods and services until the requirement for submission of the reports is complied with.

4. Penalty to the Contractor, Subcontractor, Licensee or Other Allied entity.

The amendments still requires the contractors, subcontractors, licensees or other allied entities to carry out mining activities by adhering to the local content requirement, submission of local content plan and inform the Mining Commission of each proposed contract or purchase order. Failure to satisfy the content requirement of a local content plan; and failure to inform the Mining Commission of each proposed contract or purchase order shall lead to cancellation of a contract in respect of mining activities and payment of administrative penalty of five percent of the value of the proceeds obtained from the mining activity in respect of which the breach is committed or Tanzanian Shillings Fifty Million (TZS 50,000,000/-) whichever is greater. The amendment has reduced the penalty which initially was USD 5 Million.

Conclusion

Tanzania local economy depends on effective integration and involvement of local stakeholders. The Amendments are aimed at putting this phenomenon into reality. We call upon every stakeholder to participate fully and comply with the requirements of the law to avoid unwanted liabilities.

Important Notice: 

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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