Ethiopia Revives Its 2015 Transfer Pricing Directive – Transfer Pricing

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.