In this rapidly globalized era where companies operate across different jurisdictions (aptly named multinational enterprises (MNEs)), intragroup services have come under increased scrutiny from tax authorities. In Tanzania, the Transfer Pricing Guidelines 2020 (“TPG 2020”) read together with the Tax Administration (Transfer Pricing) Regulations 2018 (“TPR 2018”), mandates that related-party service transactions and the subsequent fees, adhere to the arm’s length principle. Therefore, to ensure compliance and avoidable disallowances, the Guidelines require that companies must assess intragroup services against three key tests: (i) whether services were actually rendered, (ii) whether they provided economic or commercial benefits, and (iii) whether the charges are at arm’s length pricing.
Test One: Whether intra – group services have in fact been rendered
One of the fundamental requirements for justifying intragroup services is maintaining comprehensive records. Companies receiving or providing intragroup services from related parties in or outside Tanzania must ensure that they have supporting documentation demonstrating the nature and necessity of the services provided. According to the TPG 2020, some of the basic evidences that are expected to be produced to the Commissioner to demonstrate the rendering of services, depending on the facts and circumstances, may include the following:- The service provider’s employees profile, details on experts’ visits to support the business operations of a person, and correspondences between the person and its associate (emails, telephone, work reports, etc.). Therefore, a detailed email showing interaction between service provider and recipient on the initiation of service can be a good start for determining the need for the service. It should be noted that having the transfer pricing document prepared and the intercompany agreements is not sufficient to evidence that the services have been rendered.
In practice, a big challenge under this test when submitting the information to the revenue authority is what entails ‘sufficient documentation’ to substantiate service rendering. In my view, this lack of guidance leaves the taxpayer at a crossroads as in most cases, the approach would be to determine the sufficiency of the evidence on the relevance rather than the magnitude / number. Therefore, my take is that companies should ensure that they document every aspect of the related party transaction (not just for service transactions) covering requests, documentation of what was done, reports indicating the outcome of the services and the billing aspect for instance invoices, proof of payment etc. From the level of detail mentioned above, it should be noted that just having the transfer pricing document prepared and the intercompany agreements will be deemed not sufficient to evidence that the services have been rendered.
Another challenge to companies in complying with this test and documentation in general is the administrative burden since keeping track of all information required to substantiate the evidence of services rendered is quite cumbersome that taxpayers may lose focus of their core business or even incur cost of hiring personnel responsible to keep track of the evidence required.
Test Two: Whether the provision of such services has conferred an economic benefit or commercial value to the business that enhances its commercial position
The benefits test is a crucial step in assessing whether an intragroup service is justifiable under transfer pricing principles. Taxpayers must be able to demonstrate that the intragroup services they receive result in a tangible benefit commensurate with the commercial value. One effective way to substantiate this is by showing a direct impact on performance, which can be profitability, efficiency, or strategic business objectives. For instance, if an entity pays for strategic advisory services from its parent company, there should be clear evidence that these services contribute to either efficiency, revenue growth or cost savings. In essence, what you are looking at is ‘the good that comes from the food.’
Furthermore, the benefit test also analyses and evaluates whether the services provided are assessed to determine if they are shareholder services or custodial in nature, on call services, only provide incidental or passive association benefits or are duplicative in nature. The guidance from the Guidelines is that all services falling under these categories are to be disregarded, i.e., should not be charged to the service recipient.
The challenge under this test is that the revenue authority considers profits of the companies as the only measure of commercial value or economic benefit from the intragroup services while in reality some services facilitate and enhance internal functioning of the company depending on their nature.
Test Three: Whether the pricing is at Arm’s Length
After establishing that intragroup services are supported by documentation and provide measurable benefits, the next step is ensuring that the pricing adheres to the arm’s length principle. In this test, the appropriateness of the amount charged to remunerate the service provider is measured. To carry out this analysis, the mechanism used to charge the fees needs to be carefully and thoroughly examined. From a Tanzanian perspective, all service fees are expected to be charged based on the actual costs incurred in rendering the services and any charging mechanism that does not consider the actual costs of rendering the services would be rejected. In this regard the actual costs of services delivery must be provided. Where the actual costs of rendering the service to a person cannot be directly determined, due to any genuine reason, such costs could be determined using an appropriate allocation key.
Another important aspect of this test is the use of measurable allocation keys. The TPG 2020 and TPR 2018 emphasize that allocation keys should be based on reasonable, objective criteria, such as revenue contribution, headcount, or assets employed. Subjective allocations lacking empirical justification may be challenged by tax authorities, leading to potential cost disallowances. Companies must ensure that their allocation methodologies are transparent, consistent, and in line with the best international practices.
Inherently, businesses exist to make profits and from a service provider perspective, a simple recovery of the costs incurred to provide the services will not provide it with a profit margin. Therefore, an appropriate mark-up can be determined and applied to the actual costs, ensuring adequate compensation for the service provider. However, to ensure that this also adheres to the arm’s length principle, such markup will need to be benchmarked. A detailed and proper benchmarking strengthens a company’s position during transfer pricing audits and reduces tax risk.
A big challenge under this test is where the revenue authority disagrees with the benchmarking analysis of the markup added on the cost, for instance on the basis of what forms part of the costs, are the costs passed down to the Tanzania entity realistic? Are they actual costs incurred? In such cases, the taxpayer is often required to submit the service provider’s financial statements to demonstrate that the costs were genuinely incurred. This becomes particularly challenging when the service provider is a foreign entity, as their financial statements are typically not publicly available or cannot be disclosed. As a result, it can be difficult for the Tanzanian company to substantiate the costs. Once these are not substantiated to the revenue authority it can lead to disallowing the costs or adding back the full amount of intragroup services to the taxpayer’s profit before tax on the basis that the services are not at arm’s length in the event of an audit.
Furthermore, another challenge under this test is the absence of explicit safe harbor rules for low value-adding services under TPR 2018. While the safe habor rules as proffered by the OECD has helped alleviate disputes between tax administrators and taxpayers in other jurisdictions, from a Tanzania perspective, whilst not explicitly mentioned in the legislation, we have seen some semblance of the same. Therefore, a consistent mark-up of 5% on actual costs, supported by proper documentation and reasonable allocation keys (where necessary), may still be acceptable in practice.
Conclusion
Effectively managing transfer pricing outcomes for intragroup services requires a structured approach. Taxpayers must maintain thorough documentation, justify costs, prove service benefits, and apply appropriate pricing methodologies. By aligning with the TPG 2020 and TPR 2018 businesses can mitigate tax risks and ensure compliance.
From a documentation perspective, for a Tanzanian taxpayer (taking into consideration that most intragroup service transactions are in-bound), it therefore becomes important to ensure that details of the service providers are readily available. Additionally, it is important to remember that the tax landscape in Tanzania places the burden of proof on the taxpayer. Therefore, maintenance of relevant documentation is a key component. The Tax Administration Act 2015 also guides that documentation in general must be maintained for a minimum period of five years.
Therefore, whilst operating in a more globalized form of business as MNEs, it is important for Tanzanian taxpayers with these related party transactions to engage with the service providers to ensure that the risk of adjustments in Tanzania is limited, especially from a documentary approach perspective.
From recent experience of transfer pricing audits from the TRA, it has become clear that much of the focus is on evidence to confirm the economic substance of the transaction. Therefore, as highlighted in this article, it should be noted that just having a well-prepared Transfer pricing document does not guarantee intragroup service charges to be allowable for tax purposes especially where supporting evidence is lacking.
As tax authorities intensify their scrutiny of related-party transactions, a well-documented transfer pricing policy becomes not just a compliance requirement but a strategic advantage. Investing in robust transfer pricing analysis and documentation enables companies to defend their service fees and maintain seamless cross-border operations.
With the June corporate income tax deadline looming for taxpayers with a year end of 31 December 2024, this is a good time as any to engage with your consultant to ensure compliance. A simple adage to this is ‘Failing to prepare is preparing to fail.’