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Kenya, Uganda, Tanzania to tighten laws on transfer pricing

Saturday May 02 2015
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Richard Tusabe, Rwanda Revenue Authority Commissioner-General. PHOTO | FILE

East African governments are to tighten their tax laws in a bid to stem revenue loss through cross-border transactions by multinational firms.

Transfer pricing — one of the biggest tax rip offs the recent past — has become a flashpoint as governments come to realise how large multinationals shift costs between items and avoid paying huge amounts of corporate tax within their borders.

The malpractice, in which multinationals enjoy low-tax profits, has seen Kenya, Uganda and Tanzania enact transfer pricing laws to deter foreign firms from moving taxable profits to other jurisdictions.

Transfer pricing legislation and practice in Africa is based on the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. Some countries also use the United Nations Transfer Pricing Manual.

Kenya and Uganda issued their transfer pricing regulations in 2006 and 2011 respectively while Tanzania formally issued its Income Tax (Transfer Pricing) Regulations 2014 last year.

READ: Big global firms face stiffer checks in African operations

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The guidelines recommend stiff penalties for taxpayers who fail to comply with the arm’s length principle of transfer pricing, which states that the amount charged by one related party to another for a given product must be the same as if the parties were not related.

In Tanzania, taxpayers who fail to comply with the arm’s length principle will attract a penalty of 100 per cent of the underpaid tax.

In addition, a taxpayer that fails to prepare and maintain transfer pricing documentation commits an offence and is liable on conviction to imprisonment for a term not exceeding six months or a fine not less than $30,000 or both.

The move by the EAC member states to clamp down on transfer pricing is expected to shore up government revenues, which have come under pressure due to growing expenditures.

“Transfer pricing is a really serious business issue. The way multinationals are going to operate in future is going to change because of these tax laws. I see shifts of company headquarters to other jurisdictions,” said Richard Ndung’u, partner and head of tax at KPMG East Africa.

Data from the Global Financial Integrity Report (2014) shows that developing and emerging economies lost a total of $6.6 trillion in illicit financial flows between 2003 and 2012. Illicit financial outflows in sub-Saharan Africa grew from $12.1 billion to $68.6 billion over the same period.

“It is not just a perception that multinationals are fleecing governments through transfer pricing; it is a reality.  All the East African countries are trying to control that,” said Caxton Kinuthia, director in-charge of the tax services department at KPMG East Africa.

Governments view transfer pricing as a means for companies to avoid paying full tax while multinationals consider the move as critical to preventing double taxation on their part.

Most multinationals engage in such malpractices with the aim of transferring their profits to the countries with the most favourable tax regimes.

“Transfer pricing is a new reality for tax collectors. Revenue authorities in East Africa are however alert to the fact that those companies are expanding and that they also want a piece of the revenue pie,” said Mr Kinuthia.

It is estimated that nearly two-thirds of the world’s cross-border trade occurs within rather than between multinational corporations.

The Transfer Pricing Rules were introduced in Kenya in 2006 by the Minister of Finance to supplement Section 18(3) of the Income Tax Act. These regulations empower the Commissioner for Domestic Taxes to conduct an audit and make adjustments to the taxable profit when applicable.

Where the commissioner has made a transfer pricing adjustment that results in the collection of any tax due and unpaid, such tax shall be deemed to be additional tax, which under the Income Tax Act l attract penalties and interest for the period of time the tax has been understated.

The growing involvement of multinationals in developing countries has put transfer pricing high on the agenda for governments and international organisations that seek to promote growth, development and trade.

For example, in 2005, the Kenya Revenue Authority lost a court case, which compelled the Ministry of Finance to develop transfer pricing legislation.

The case involved Unilever Kenya Ltd, which had manufactured and sold various household goods to Unilever Uganda Ltd — both companies are part of the UK-based Unilever group and related parties under section 18 of the then Kenyan Income Tax Act.

Rwanda is expected to enact a similar legislation this year. Last year, Rwanda Revenue Authority Commissioner General Richard Tusabe said that the country was reviewing its OECD-based transfer pricing rules.

“We are in the last stages of drafting guidelines, a move that will allow for more detailed regulations touching on transfer pricing to be put in place,” he said.

Currently, Rwanda transfer pricing regulation is set out in Article 30 of Law No. 16 of 2005, which came into being together with a ministerial order.

Jeffrey Owens, director of the Centre for Tax Policy and Administration at the OECD, said that most developing economies are crafting legislative and administrative frameworks to deal with transfer pricing.

“Their greatest concern is establishing a balance where as much as they will want to protect their tax base, they do not hamper foreign direct investment and crossborder trade,” Mr Owens said.

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