Progress made in constructing cashew nut processing plants

Intra-group Services

In the previous article we noted that the two most important questions for MNEs to consider before recognition of the fees for intra-group services are (i) whether intra-group services have actually been provided or not and (ii) whether the charges/fees for the services are at arm’s length or not.

Regarding whether intra-group services have actually been provided or not, we noted that intra-group services provided by a group can be charged if it can be proved that they provide a group member with economic or commercial value to enhance its economic position and they don’t duplicate a service which is already in place or offered in full as an incidental benefit as a result of being part of the larger group.

However, before deciding whether to charge intra-group services or not MNEs should also consider whether the fees for the services are at arm’s length and ensure that proper documentation is in place to support the transactions.

Are the fees for the services at arm’s length?

The Tanzania Transfer Price guidelines advocate the use of CUP or cost plus method as an arm’s length transfer pricing method for pricing intra – group services.

While this may be true for a large number of intra-group services in line with the nature of services provided by MNE groups associated entities in this economy before a method is chosen, it is important to define the economic character of the service to determine whether it is a routine and support activity or it is a more complex transaction e.g. involving development of intangibles or directly contributing to generation of profit.

For instance routine services such as accounting -costs should be the main driver.

For MNE groups which record time and costs, a direct charge method should be used particularly where services similar to those offered to associated enterprises are also offered to independent enterprises.

For cases where direct charge cannot be applied costs allocation should be used and approximation methods (indirect charge). A profit split method should be considered for intangibles.

Documentation

Normally TRA will require an agreement between the local entity and the group for the intra-group services. The agreement should clearly stipulate the basis of payments/fee/charges and how the fees were established and whether they meet the “arm’s length” criteria.

Further, other proof of service occurrence may be required e.g. travel tickets, receipts etc. For services such as market research MNEs may be required to provide evidence e.g. the report and justification that the results will be a success to the local entity.

Consideration of other taxes

MNEs should also consider the impact of other taxes when charging intra-group services. For instance the VAT implications, personal taxes e.g. when individuals from the group stay in tax in Tanzania, there may be personal tax implications in line with the Income Tax Act, 2004.

Further, Tanzania imposes withholding taxes on certain types of services including management and technical fees.

For instance, the local entity may also be required to account for a 15pc withholding tax.One of the weaknesses of the Tanzania Income Tax Transfer Pricing Regulations is that it ignores the relationship between transfer pricing and other taxes.

For instance in cases where there is downward adjustments on management fees, the regulations are silent on whether withholding tax credit will be made available to the tax payer.

Mr Makundi is a partner with Auditax International