The dormant 2015 Transfer Pricing ("TP") Directive was recently renumbered and reissued by the Ethiopian Ministry of Finance as "Directive to Provide Rules on Transfer Pricing Directive No. 981/2024." The reissued Directive deals with procedural requirements of laws issued after the 2015 TP Directive.
The Ministry of Finance has announced in 2023 that it would start implementing the TP rules from the beginning of this tax year, and this renaming is a clear signal that the Government is serious about the implementation of TP rules and regulations.
The renumbered Directive does not apply retrospectively but would become effective from the date of its registration by the Ministry of Justice and uploading on the website of the Ministry of Finance.
How does the renumbered TP Directive affect taxpayers?
The Directive imposes an obligation upon taxpayers to maintain up-to-date documentation justifying that their related party transactions are consistent with arm's length principles. The onus is also on taxpayers to show that the selected transfer pricing method is the "most appropriate pricing method," taking into account the taxpayers' relevant facts and circumstances.
Under the Directive, TP documentation should be in place at the statutory tax return filing date and made available to the Ethiopian Tax Authority (Ministry of Revenues ("MoR")) within 45 days of a written request by the MoR. Failure to comply carries a penalty of 20% of the tax payable or, where no tax is payable, ETB20 000. In addition, the MoR may disallow the deduction of all related party expenses for corporate income tax purposes.
Multinational enterprises already preparing TP documentation in other countries would be required to adapt such documentation by extending headquarters or group TP documentation to their subsidiaries or branches in Ethiopia.
Effectiveness of the renumbered TP Directive
TP analysis is a complex process, requiring a rigorous analysis of the characteristics of property exchanged and services rendered; the functions of various entities involved; the terms and conditions of contractual relationships; the economic and market conditions surrounding the transactions; and the business strategies pursued by the parties to the transactions.
A special unit has been established within the MoR to oversee and build the capacity of the TP documentation review and analysis, but according to Dr. Taddese Lencho, Managing Partner at TBeST Law LLP in Ethiopia, limited experience exists in the country with respect to reviewing and making judgements about complex relationships and transactions. A concern exists that the limited number of transfer pricing experts within the MoR would struggle to cope with the sheer volume of transfer pricing audits.
Dr. Lencho also highlights that, in the past, there has been a tendency within the MoR to view all related party transactions as suspicious and reverse all such transactions, irrespective of whether tax avoidance is involved. In the interest of maintaining an equitable tax system for all taxpayers, it is incumbent upon the MoR in its assessment of related party transactions to apply the transfer pricing provisions on a fair basis.
With appreciation for the contribution of TBeST Law LLP to this ENSight.
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