Williamson Diamonds Limited operates one of Tanzania’s main diamond mines and had entered into various transactions with related parties abroad, including the sale of rough diamonds and procurement of technical and management services.
Following an audit, the tax authorities took the view that some of these intra-group transactions did not reflect arm’s length conditions, and that Williamson Diamonds’s transfer pricing practices had the effect of shifting profits out of Tanzania. Based on this, the tax authorities made significant adjustments to taxable income, disallowed certain deductions and imposed additional assessments.
Williamson Diamonds challenged the assessment before both the Tax Appeals Board and the Tax Appeals Tribunal, arguing that its transfer pricing arrangements were in line with the Mining Development Agreement and the Income Tax Act. It further contended that the transactions with related parties reflected commercial reality, and that the pricing of diamonds exported to related parties was consistent with market practice. It also maintained that service charges and management fees paid to related parties abroad represented genuine expenditure incurred in the ordinary course of business and should therefore be deductible.
The tax authorities responded that the company had failed to substantiate its pricing policy with adequate documentation or comparability analysis, as required under Tanzanian transfer pricing regulations. In particular, the tax authorities argued that diamonds had been undervalued in related-party sales, and excessive deductions had been claimed for inter-group service fees that were not supported by evidence of benefit, nor demonstrated to be at an arm’s length price.
Judgment
The Court of Appeal reviewed the case and concluded that the tax authorities had been right to reclassify and adjust the company’s transactions in order to reflect fair market value.
The Court stressed that the tax authorities is authorised to distribute, apportion or allocate income and deductions between related parties, if necessary, to prevent tax avoidance. The Court also agreed that Williamson Diamonds had failed to demonstrate that its transfer pricing complied with arm’s length standards. In particular, the Court noted that the pricing of diamonds exported to overseas affiliates was not supported by credible, independent benchmarks and that management and service fees paid to related entities were not substantiated by sufficient evidence of services actually rendered.
In its judgment, the Court reaffirmed that transfer pricing is a critical safeguard in Tanzania’s tax system, and that companies engaged in cross-border related-party transactions must maintain and present robust documentation justifying their pricing policies. As Williamson Diamonds had failed to do so, the Commissioner was justified in making the adjustments. The Court therefore dismissed the appeal and upheld the Tribunal’s decision in favour of the Commissioner General.