In an increasingly fluid global economy, both taxpayers and tax authorities would like to have some certainty. Indeed, certainty is a key element to an investor-friendly business environment. This is particularly relevant for Tanzania and the rest of African economies where tax certainty is the second highest concern for business leaders, after political stability, according to PwC’s Africa Tax Survey 2016.
Designed to anticipate potential transfer pricing disputes, an Advanced Pricing Agreement (APA) is an agreement between a taxpayer and at least one tax authority concerning future transfer pricing methods that taxpayers will use for their intercompany transactions. APAs typically cover multiple years.
Through the APA, the tax authority accepts not to make a transfer pricing adjustment for agreed transactions as long as the taxpayer abides by the agreed terms. APAs can be unilateral (that is agreed with a single tax authority), but taxpayers would prefer bilateral or multilateral APAs as this extends the certainty across two or more countries. While primarily forward looking, APAs may in some cases provide a platform for resolving existing historical transfer pricing disputes. APAs have numerous benefits. Firstly they provide certainty to both taxpayers and authorities that the results of the transfer pricing methodology employed by a taxpayer are not going to be subjected to adjustments.
This allows accurate planning and reporting for both sides. APAs also decrease incidences of double taxation and costs linked with audit defense and transfer pricing documentation preparation.
Another benefit is that APAs provide an opportunity for tax authorities to fully understand the business realities of taxpayers. Often, taxpayers complain that authorities do not appreciate the business side of tax and are only concerned about collections. An APA is essentially a negotiation requiring a taxpayer to ensure that the tax authority fully understands and appreciates the complexities of their business and explain its entire value chain.
Naturally, by the end of the process, both taxpayers and tax authorities have a much better understanding of the other party’s perspective. This helps to foster the non-adversarial relationship that is in the mutual interest of both parties.
Administrative burden
APAs provide an amicable platform for taxpayers to readily avail the tax authority with all the information that would usually be requested for during a transfer pricing audit while simultaneously reducing the administrative burden on the side of the tax authority.
Countries that have implemented APA programmes have had significant success. For example, India’s introduction of transfer pricing legislation in 2001 led to an immediate spike in tax disputes stemming from transfer pricing adjustments. This triggered the adoption of an APA programme that was launched in 2012 primarily to provide certainty to taxpayers in respect of the transfer pricing.
Over the last 5 years, more than 800 APA applications have been filed in India with 152 agreements concluded. In 2016/17 alone, 88 APAs have been concluded, which is probably the highest number of APAs entered into by any jurisdiction worldwide in the same period. According to the Indian Tax Authority, the 152 APAs concluded created a cumulative tax certainty of 1010 years for taxpayers.
Since the publication of the Tanzania Transfer Pricing Regulations in 2014, there has been an increased burden on taxpayers to maintain a contemporaneous transfer pricing documentation. Simultaneously, the TRA is burdened by an increasing load of transfer pricing audits, and (similarly to the history in India) a proliferation of tax disputes.
Against this background, Tanzania will be wise to borrow a page from India’s playbook as it stands to achieve more tax certainty for its taxpayers by concluding APAs rather than going through the normal dispute resolution process.
Source: This article is from The Citizen newspaper of Tuesday, November 28, 2017