Introduction
On 12 September 2017, the Council of Ministers approved the Mozambican transfer pricing legislation, which was published in the Official Gazette on 6 December 2017. These provisions came into effect from 1 January 2018.
As per the new requirements, taxpayers with an annual net turnover and other income in the preceding financial year exceeding MZN 2.5 million (approx. USD 42 thousand) will have to maintain certain information and documentation in relation to their transfer pricing. The new legislation applies to domestic and cross-border transactions between related parties (and in certain instances, between third parties).
Application of the new transfer pricing legislation
Transfer pricing legislation applies to Mozambican taxpayers (including permanent establishments) of Corporate Income Tax and Personal Income Tax, which have entered into arrangements with their related parties. In addition, these regulations apply to those Mozambican taxpayers that carry out transactions with entities incorporated in a low tax jurisdiction.
The definition of a related party is broad, and includes a group of companies (parent companies, subsidiaries, sister companies and joint ventures with a joint control), associates and associated enterprises and, among others, companies whose key management (or close members of their family) has significant influence over the Mozambican taxpayer.
Main principles of transfer pricing legislation
The main principle of the new legislation is that the terms and conditions of a transaction involving a Mozambican taxpayer and its related party should not differ from those which would normally be agreed upon between independent entities. Should these terms and conditions differ from those agreed upon between independent entities, the Mozambican taxpayer must make an adjustment in its annual income tax return so that taxable income would be as if the Mozambican taxpayer entered into an agreement with an independent entity.
The new legislation accepts the five OECD-recognised methods as a basis for setting transfer pricing of a Mozambican taxpayer. These methods are the comparable uncontrolled price method, resale price method, cost plus method, profit split method and transactional net margin method.
The legislation establishes the concept of the interquartile range, this being the acceptable range of prices or profit margins that have been reached after the application of one of the recognized transfer pricing methods. If the relevant financial indicator falls outside the interquartile range, the price or profit margin used by independent parties shall be deemed to be the median minus/plus 5% (depending on whether the price or profit margin is below/above the first/third quartile).
The new legislation also includes separate sections for commodity transactions, cost sharing agreements and intra-group services.
Overview of the transfer pricing documentation regulations
The new legislation sets out specific information and documentation that should be maintained by Mozambican taxpayers whose annual net turnover and other income in the preceding financial year exceeded MZN 2.5 million (approx. USD 42 thousand).
The information includes, inter alia, from the overview of the taxpayer’s business operations, functions, assets and risks analysis to information on comparable data used as well as details of the analysis carried out.
The documentation must be available in Portuguese language, if requested by the tax administration.
The determination of penalties related with transfer pricing matters will be made on a case–by–case basis (e.g. lack of documentation, omissions and inaccuracies in the tax returns or relevant documentation), and may vary from MZN 3 thousand to MZN 2 million.
Although there is no requirement to file the transfer pricing documentation, it is in taxpayer’s best interest to keep relevant and appropriate documentation.
Next steps to be taken
Taxpayers that have transactions with related persons or which are planning on entering into an arrangement with related parties should ensure that they comply with the new regulations, which are applicable starting from 1 January 2018.
For more information, please contact one of the following:
Graphene Economics™ team
– Michael Hewson, Director, e-mail: mhewson@grapheneeconomics.com, cell: +27 82 345 1212
– Valdis Leikus, Associate Director, e-mail: vleikus@grapheneeconomics.com, cell: +27 76 867 1478
Local contact in Mozambique
– Ana Parente, Managing Partner, Advisory & Consulting, e-mail: ana.parente@aacmoz.com, cell: +258 84 270 69 55