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Introduction to transfer pricing in Uganda
Transfer pricing rules
- The legal framework for transfer pricing in Uganda is the Income Tax Act (Transfer Pricing) Regulation 2011 issued under sections 90 and 164 of the Income Tax Act. These regulations are applied in a manner consistent with:
- the arm’s length principle in Article 9 of the OECD Model Tax Convention on Income and Capital; and
- the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations approved by the Council of the OECD for publication on 13 July 1995 (C(95)126/FINAL) as supplemented and updated from time to time.
- The regulations apply to Ugandan taxpayers and the responsibility is on the taxpayer to confirm its transfer prices meet the standard or to adjust its tax return accordingly. The filing of transfer pricing documentation with tax return forms to the Uganda Revenue Authority (URA) is not mandatory, but because it is the taxpayer’s responsibility, transfer pricing analysis and documentation is prepared to help protect against penalties.
- Transfer pricing documentation should be finalized prior to the due date of filing the income tax returns in a given financial year.
- Although Uganda is not an OECD country, Uganda’s transfer pricing regulations are consistent with the OECD transfer pricing guidelines for multinational enterprises and tax administrations. The Guidelines, updated in July 2017, are stated in the Income Tax (Transfer Pricing) Regulations, and are applied in the interpretation and determination of the arm’s length price.
- However, where the OECD guidelines conflict with the Income Tax Act, the Income Tax Act prevails.
Transfer pricing methods
- Acceptable transfer pricing methods include comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method, transaction profit split method and any other method which the taxpayer can apply to reliably measure the arm’s length price in each associated entity transaction. An evaluation of the functions performed, assets owned, and risks undertaken by each entity involved in the inter-company transaction is undertaken to determine which of the above methods, is most applicable.
- Selection of the most appropriate transfer pricing method depends on several factors such as:
- the availability of complete and reliable data;
- the degree of comparability between controlled and uncontrolled companies (or transactions); and
- the number, magnitude, and accuracy of adjustments necessary to apply a method.
- There is no set hierarchy for the transfer pricing methods as Uganda’s regulations are applied consistent with the OECD guidelines. However, the comparable uncontrolled price method is preferred when compared to other methods.
- The responsibility is on the taxpayer to ensure that the transfer pricing regulations are adhered to and to confirm its transfer prices meet the standard.
Transfer pricing documentation
Preparation of transfer pricing documentation
- The transfer pricing regulation states that an entity shall record, in writing, sufficient information and analysis to verify that the controlled transactions are consistent with the arm’s length principle. The documentation should be finalised prior to the due date of filing the income tax returns in the given financial year.
- The URA may, by notice, specify the items of documentation that a person is required to maintain. Any documentation should be prepared in English and be available prior to the due date of filing the income tax returns in a given financial year.
- An entity that contravenes the transfer pricing regulation is liable on conviction to imprisonment for a term not exceeding six months or to a fine not exceeding Ushs 500,000 (25 currency points) or both.
- In addition, the Tax procedures code (Section 49A) state that failure to provide requested transfer pricing documentation will result in a penalty not exceeding Ushs 50,000,000.
Economic analysis and how to demonstrate an arm’s length result
- URA does not require an entity to document that a search for potential internal comparables was undertaken before defaulting to an external database search for comparables.
- Local and regional comparables are preferred, whilst global comparable companies can be accepted.
- URA is however not obliged to rely on an entity’s benchmarking studies and may conduct its own study and reach its own range of results.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advanced Pricing Agreements (APAs) are written agreements between a business and URA to govern the appropriate transfer pricing method for a forward-looking period. Applications for multi-lateral APAs are allowed.
- Transfer Pricing regulations Section 9 – Advance Pricing Agreements, states that a person may request that the Commissioner enter into an APA to establish an appropriate set of criteria for determining whether the taxpayer has complied with the arm’s length principle for certain future controlled transactions undertaken by the person over a fixed period of time.
- The URA may enter an APA with the entity either alone or together with competent authorities of the country or countries of the entity’s associate or associates.
- There are exemptions for local entities whose controlled transactions with associated entities do not exceed Ushs 500,000,000 (25,000 currency points).
- There have been no recent developments since the Ushs 50,000,000 penalty for not submitting information upon request was introduced in July 2017.