APAs key to resolve transfer pricing disputes
Transfer pricing has emerged as a key focus area both globally and locally.
From an international scene, the OECD/G20 venture — a club of advanced countries in Europe and North America, has been working on action plans to help tax administrations deal with Base Erosion and Profit Shifting (BEPS) project.
This is mainly driven by the concern by governments that multinationals may be exploiting their corporate structures through intercompany pricing such as transfer of licensing rights, inter-group financing, management fees and other similar transactions in order to legally reduce or eliminate tax liabilities for the group.
The civil society and NGOs have not been left behind; they have accused multinationals of dodging taxes through transfer pricing especially in developing countries where tax revenue is critical for development.
As usual, there are always two sides to a story. Whereas on the one hand the concern about aggressive tax avoidance and possible evasion is a valid one, on the other hand, it is imperative for businesses to develop effective business models for their cross-border operations.
One would also appreciate that in an era of increased competitiveness, tax is often a factor that cannot be ignored and therefore multinationals, and indeed every other business, consider tax planning as a critical success factor in strategic and executive decision making.
Transfer pricing is not an exact science thus there is no one price that would be acceptable to all. As such, addressing complex tax issues in a simplistic manner and pointing fingers at the arm’s length principle (based on which different entities within a multinational group, are required to transact as if they were independent, for tax purposes) would not fully address the issue.
The revenue authorities in East Africa should develop tax policy frameworks that eliminate unsuitable non taxation that arise from borderline strategies put in place by aggressive taxpayers while providing certainty to multinationals on the taxation of their business operations in country.
Remarkably, revenue authorities have taken steps by putting in place transfer pricing regulations (Kenya in 2006, Uganda in 2011 and Tanzania in 2014) to provide guidance on their approach to transfer pricing. However, these regulations are generic and do not provide multinationals with the high level of clarity they require when setting up intercompany prices, a key issue for business planning.
In view of the (usual) deficiencies in such regulations, there should be scope for a multinational to confirm their intercompany pricing position with opportunities for rulings to ensure certainty. A real step forward would therefore involve putting in place an effective Advance Pricing Agreements (“APA”) framework.
APA is an administrative approach that attempts to prevent transfer pricing disputes from arising by determining criteria for applying the arm’s length principle to transactions in advance of those transactions taking place.
This contrasts with traditional audit techniques that look to whether transactions, which have already taken place, reflect the application of the arm’s length principle.
Although Uganda and Tanzania transfer pricing regulations provide for APAs, there is no guidance on the APA process and the essential capacity building within the revenue authorities to be in a position to negotiate an APA timeously, fairly and most importantly produce consistent results has not been developed.
For an APA process to be effective, it should be clear, starting from pre-filing meetings, moving on to the filing of a proposal, its evaluation by the tax authorities, the discussion and conclusion of the mutual agreement, the implementation of that mutual agreement and finally the monitoring of the agreement and possible renewal.
For most multinationals, certainty regarding their transfer prices is the most important benefit that would be derived through an effective APA process. Transfer pricing audits are often time-consuming and expensive.
