Amadeus Global Travel Distribution Limited is a Tanzanian branch of a Kenya-resident entity that is a wholly owned subsidiary of Amadeus ITG, headquartered in Madrid, Spain. Amadeus Global Travel’s business is to commercialise the Amadeus GDS system in Tanzania.
For the year of income 2015, the Tanzania Revenue Authority (TRA) conducted a tax audit and found that Amadeus Global Travel had declared revenue of TZS 1,752,707,542, which was lower than the total audited revenue of TZS 1,806,780,791. The under-declaration of TZS 54,073,209 was attributed to finance costs of TZS 51,498,294 plus a 5% mark-up of TZS 2,574,914. The TRA concluded that the Transactional Net Margin Method (TNMM), which Amadeus Global Travel had applied in its transfer pricing policy, did not permit the exclusion of finance costs from the cost base when determining the arm’s length price. The TRA issued assessments for corporate tax, corporate tax on repatriated income, and VAT, plus interest and penalties.
Amadeus Global Travel objected, arguing that under the TNMM as applied in its 2015 transfer pricing policy, the profit level indicator was the operating margin, which by definition excludes finance costs. The objection was rejected. Amadeus Global Travel appealed successively to the Tax Revenue Appeals Board and the Tax Revenue Appeals Tribunal, both of which ruled in favour of the TRA. The Tribunal held that under paragraph 2.99 of the OECD Transfer Pricing Guidelines, the TNMM requires all costs attributable to the controlled activity to be included, and that Amadeus Global Travel had failed to prove the finance costs were non-attributable. Before the Court of Appeal, Amadeus Global Travel advanced three grounds: that the Tribunal decided the case on an unpleaded issue (whether finance costs were a service or functional cost), that the Tribunal failed to consider its 2015 transfer pricing policy and the 2015 OECD Guidelines (applying the 2017 version retroactively instead), and that the resulting tax computations were consequently erroneous.
Judgment
The Court of Appeal dismissed the appeal in its entirety.
On the second and third grounds concerning the OECD Guidelines, the Court held that Regulation 9(2) of the Income Tax (Transfer Pricing) Regulations, 2014 does not incorporate the OECD Guidelines as binding statutory law but merely grants the tax authority discretion to have regard to them as persuasive and interpretative tools. A misapplication or non-consideration of a specific OECD Guidelines paragraph does not, per se, constitute a point of law. The Court found that the Tribunal had in fact referenced and considered the appellant’s 2015 transfer pricing policy, and the complaint was in substance a challenge to the weight of evidence and to the Tribunal’s preference for the 2017 OECD Guidelines — a matter of fact that fell outside the Court’s jurisdiction, which under section 25(2) of the Tax Revenue Appeals Act is restricted to pure points of law. On the first ground, the Court agreed with the TRA that the inclusion of finance costs was the very heart of the dispute and the Tribunal’s attributability analysis under OECD paragraph 2.99 was a logical legal lens through which to resolve the pleaded issue, not a new unpleaded issue. No breach of natural justice occurred. The Court concluded that the TNMM, as properly understood under the OECD Guidelines, does not permit the arbitrary exclusion of finance costs.
Click here for other translation