In this year’s (2021/22) budget speech Tanzania’s Minister for Finance, Mr Mwigulu Nchemba, made a surprising announcement that government would/had scrapped the 100% penalty for transfer pricing. The announcement was surprising as transfer pricing or mispricing in international transactions and currently a point of discussion globally as one of the leading enablers of illicit financial out flows and capital flight from developing and extractive rich countries. From a Tax justice perspective, the government’s decision was received as a slight slip in the gains scored over the past 10 years.
According to Global Financial Integrity (GFI) and the Mbeki High-Level Panel Report on IFFs latest reports, shows that IFF’s from the African continent have been increasing with losses estimated between USD50 Million and USD 80 Million over the past years. Corruption and the extractive sector has constantly provided a major conduit for tax avoidance and illicit resource outflow from Africa
Transfer pricing is an accounting practice that represents the price that one branch, subsidiary or division in a company charges another branch, subsidiary or division for goods and services provided. Transfer pricing allows for the establishment of prices for the goods and services exchanged between a subsidiary, an affiliate or commonly controlled companies that are part of the same larger enterprise.
A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered. Transfer pricing can lead to tax savings for corporations. However, companies have used inter-company transfer pricing to reduce the tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries. This is what is also often referred to as transfer mispricing which is problematic for tax collection purposes. We have discussed this concept in detail via another publication via: https://gepc.or.tz/how-to-curb-transfer-pricing-tax-dodging-and-illicit-financial-flows-in-extractive-sector/
Why were heavy penalties imposed in Tanzania’s statutes?
Heavy penalties were imposed for transfer pricing in Tanzania’s tax statutes because many companies dodged taxes through complex structures and subsidiaries in foreign jurisdictions which made it difficult or impossible for government to track transactions for tax purposes.
According to Financial Secrecy Index (2018) reported that Tanzania lost billions of shillings through potential transfer arrangements between mining companies.
The government was not explicit why it had taken this dramatic decision and therefore left experts and civil society actors bewildered and speculating. The reasons given were pointing towards improving Tanzania’s investment climate. The investment motive was more than the tax revenue imperative.
The potential hefty penalty for transfer mispricing was an inhibiting factor for attracting foreign investments as companies feared or found it difficult to structure their businesses with an international network of subsidiaries and branches anchored to Tanzania making sourcing for foreign financing and sourcing or procurement difficult.
The difficulties in determining market price or an arms price in transactions between related parties and establishing without any iota of doubt whether a given transaction was a mispricing arrangement and illicit in the face of Tanzania’s statute may have been another factor.
The Minister made another drastic announcement. Effective 2021/22 the Minister responsible for finance was empowered to grant tax exemptions on specific projects without full cabinet approval.
The Minister proposes to restore the power of the Minister to grant income tax exemption on projects funded by the government on specific projects, grants and concessional loans if there is an agreement between the donor or lender with the government providing for such exemption. The measure would streamline and make it efficient for such exemptions to be provided as it has been a pain sticking point for many projects.
The government was attempting to address bureaucracy in approving exemptions and waivers which was a major stumbling blocks to investment and vitality to the success of some strategic projects. This was certainly a welcomed change for players in the construction and large-scale investment projects. At the time of presenting the budget some big and strategic projects were in offing. These included the OreCorp Nyazanga Gold Mine project in Mwanza, Kabanga Nickel project, the ongoing Standard Gauge Railway project and the East African Oil Company project (EACOP). The government announced a specific exemption of VAT on imported and local purchases of goods and services for East African Crude Oil Pipeline (EACOP). The government aimed to ensure the costs of EACOP are minimised.
However, by doing this, the government is walking a very tight rope and contentious terrain with a significant risk of returning to bedeviled fiscal policy regime era which dogged its tax revenue collection efforts in the early 2000s. Hon Jerry Slaa, Member for Parliament for Ukonga Constituency in Dar es Salaam posted a passionate that perhaps the Minister may have been deceived or even this dangerous paragraph may have been smuggled into the Minister’s Speech. He passionately appealed to the Minister does not sign off this years financial appropriation bill which this provision. It is a dangerous route to take with potential risks.
In our opinion, for these latest decisions to be effective government will have to
- Strengthen its monitoring and surveillance capacity to ensure the international companies do not structure their operations and tax arrangements in a manner that facilitates tax avoidance and evasion.
- Strengthen its (TRA’s) International Tax department to detect in advance and reverse any transactions of a potential transfer pricing arrangement before they happen.
- Improving data collection capabilities to establish the true arm’s length price for potentially contentious transactions, such e-commerce, services, and intellectual property.
- Increase transparency around exemption by perhaps requesting the Minister to publish the list of all exempted projects and values within a short period of 30-90 days after approval, clearly stating the purpose and rationalisation for the exemption.
- Retain some mechanism for punishment for noncompliance to the commensurate level deterrent enough to the induce compliance.
Highlights of Tanzania’s Budget 2021/22
|Projected Total Budget||36.6% Trln (3.2% increase)||Domestic||26.0 Trln (72%)|
|Expected GDP Growth||5.6%||Grants||2.9 Trln (8%)|
|Inflation forecast||3.3%||Development||13.3 Trln|
|Tax to GDP ratio||13.5% from 12.9% (2020/21||Recurrent||23.0 Trln|
|Debt to GDP ratio projections||37.3%||Domestic Loans||5.0 Trln (14%)|
|Projected Budget Outturn 2020/21||86% – 95%||External Loans||2.4 Trln (6%)|
** The key challenge to government will be to raise domestic revenues in the face of shrinking grants and concessional loans and the COVID 19 pandemic which is stiff affecting key sectors such as tourism.