New tax regulation may be the answer to URA’s quest for increased revenues, but it may spark new controversies with high-profile tax payers. It is possible that large companies with various branches hide large sums of money under fictitious management fees and other internal transactions, to understate their own profits and evade taxes.
Government’s new transfer pricing regulations are intended to fix this.
But while exciting URA with the prospect of a dramatic increase in tax revenue, the measure is sending jitters through multinational companies (MNCs) operating in Uganda, and setting the stage for a new battle between URA and the business community.
Adopted by Finance Minister Maria Kiwanuka in the 2011/12 budget, Transfer pricing took effect on July 1, to streamline the way tax obligations of companies with branches and subsidiaries are calculated.
“As the Ugandan economy gets integrated in the global economy, including the set-up of multinationals, the issue of transfer pricing demands urgent attention,” Kiwanuka said.
“I have finalized transfer pricing regulations to ensure that prices charged between associated entities for the transfer of goods, services and intangible property are in line with the arm’s length principle,” she said.
State Minister for Finance (General Duties), Fred Omach, told The Independent on July 1 that the Statutory Instrument introducing the regulations was ready for presentation to Parliament.
The measure will dramatically increase tax revenues by squeezing billions worth of corporate taxes from MNCs and local groups of companies per year.
Regulations
The targets of the transfer pricing regulations are companies that deal in larger groups – either as subsidiaries, sister companies or associates - of multinationals or local groups of companies.
Under the new regulations, URA is required to review the transactions between these subsidiary parties to ensure that they conform to the arms’ length principle – that is, that they charge market rates for any goods or services exchanged between them, as if they were not related.
It is argued that in the absence of transfer pricing regulations, MNCs have had the leeway to overprice or misprice goods, services and intangible assets (e.g. licenses and trademarks) with their subsidiaries, dodging payment of billions of shillings in corporate taxes every year in the process.
Uganda is host to many MNCs, including more than 20 commercial banks, beer and soft drinks manufacturers, telecoms, media institutions, among others.
Uganda also has several local groups of companies owned by tycoons like Sudhir Ruparelia, Patrick Bitature, Mukwano, Gordon Wavamunno and James Mulwana among others, which will directly be affected.
These companies already top the list of Uganda’s largest tax payers.
While most of the MNCs also operate in other markets where transfer pricing regulations apply, they have until now largely used Uganda as a safe haven to siphon large amounts of untaxed funds hidden as fees.
URA and analysts have no estimate how much Uganda will reap in additional taxes from implementing the transfer pricing rules, but it is expected to be more than enough to compensate for the recently announced tax cuts and exemptions on kerosene, sugar, solar energy and hoes.
Expect controversy
While the regulations had not yet been presented to Parliament, by last week companies were working frantically with tax advisors and consultants to review their books and prepare for the new regime of taxes.
Murtuza Dalal, a partner with PKF Certified Public Accountants, told The Independent on July 4 that implementing the new policy would be fraught with controversy and disagreement between URA and taxpayers, and they must hire professional advisors to navigate the new waters.
“There is a lot of litigation likely to arise,” Dalal said.
PKF has scheduled a transfer pricing seminar for company heads and accountants later this month to prepare them for the changes.
There are worries that URA does not yet have the experience and capacity to administer the policy, but Dalal said sharing notes with the Kenya Revenue Authority (KRA) would help.
“I don’t see why they should fail because I am sure they will tap into the experience of KRA which has similar regulations.” Kenya introduced the policy three years ago, and has reportedly recovered more than Shs 90 billion in taxes as a result.
Affected companies have until the next due date for filing annual tax returns to document their pricing practices in compliance with the new regulations. If they don’t, URA will use its own estimates and charge 30 per cent on their profits, including late payment penalties.
Martin Makumbi, tax manager at the audit firm Deloitte, said URA had been losing billions because every company seeks to minimize tax liabilities by under-declaring the prices of goods and services. URA officials declined to comment until the regulations are passed by Parliament.
However, Paul Kyeyune, URA’s public and corporate affairs manager, said they have been working for over a year to build internal capacity to enforce the regulations in line with Organisation for Economic Cooperation and Development (OECD) guidelines on the application of the “arm’s length principle” for the valuation and taxation of transactions between associated enterprises.
Last year, transfer pricing was on top of the agenda of the African Tax Administrators Forum (ATAF) conference, hosted by URA in Kampala.
Recently, US and UK experts were also in Uganda to train officials of the investigations and audit departments how to administer transfer pricing.
Tax havens
Proponents of transfer pricing say multinational companies repatriate billions of shillings per month in untaxed profits to their head offices, hidden from URA as royalties and management fees.
Experts said that URA has been having problems taxing companies with relationships in ‘tax havens’ like the United Arab Emirates with lax taxation rules.
With the new regulations, MNCs will have to provide documented evidence that market prices were paid for any services or goods exchanged, and the same would have been paid to an unrelated party.
Concern is that the temptation will be strong for URA to impose the 30 percent charge on profits. However, taxpayers have 12 months to prepare their documentation. With most audits done after filing returns at the end of the taxable year, both companies and URA have time to prepare for the showdown.
This will improve as URA will get better information and more valid reports on transaction prices, which will probably increase tax collections.
Wait and see
Most targeted companies were reluctant to comment on the issue. Stanbic Bank, a subsidiary of the Standard Bank of South Africa, said it was too early to determine how their operations would be impacted.
“In our view, it is best to discuss the implications of the regulations at least six months after their introduction,” said Daniel Nsibambi, the communications director.
However, Olive Kigongo, president of the Uganda National Chamber of Commerce and Industry (UNCCI), said recently that the policy was good, as it would “shield local businesses from the unfair competition of multinational business interests.”
Growing revenue
Under pressure to increase the tax-to-GDP ratio from the current 12%, the government is anxious to implement policies like transfer pricing to enable URA to meet its revenue target of Shs 6.3 trillion this financial year.
Also, with the commencement of the Common Market Protocol in July last year, a 0% customs tariff rate has meant a significant reduction in revenue sources for the tax body. Transfer pricing regulations are being seen as much-needed compensation for that loss.