The Ethiopian Ministry of Finance (MoF) released Directive No. 981/2024 (referred to as “The Directive”), introducing new transfer pricing regulations, concerning the pricing of international and domestic transactions between related persons whose annual turnover exceeds ETB 500,000, which will be enforced starting January 2024. This Directive replaces Transfer Pricing Rules Directive No. 43/2015.

The issuance of The Directive conforms to the transfer pricing stipulations outlined in Section 79 of the Federal Income Tax Proclamation No. 979/2016 (ITP) and closely adheres to the OECD (Organisation for Economic Co-operation and Development) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

The Directive

Key highlights of the directive include:

• Transfer Pricing Documentation
  Taxpayers are required to maintain contemporaneous documentation verifying that the terms of their controlled transactions align with the arm’s length principle for the relevant tax year.

  This documentation should include an overview of the taxpayer’s business operations and organisational structure, details of the group structure if applicable, description of the controlled transactions, selection of transfer pricing methods, comparability analysis, industry and economic analysis, details of any advance pricing agreements, and any other relevant information impacting compliance with the arm’s length principle.

Documentation can be submitted in either Amharic or English, and must be in place by the statutory tax return filing date. Taxpayers must provide this documentation to the Tax Authority within 45 days of a written request. Additionally, the Tax Authority reserves the right to request additional information during audit procedures to fulfil its responsibilities effectively.

• Comparability Rules
  Rules regarding comparability state that an uncontrolled transaction can be deemed comparable to a controlled transaction under two conditions: either there are no substantial differences between them that would significantly impact the financial indicator analysed through the appropriate transfer pricing method. If there are disparities, a comparability adjustment can be applied to the relevant financial indicator of the uncontrolled transaction to neutralise these differences for a fair comparison.
• Approved Method
  The authorised transfer pricing methods comprise the five conventional OECD approaches, alongside the option to employ an alternative method if none of the endorsed methods can feasibly establish the arm’s length conditions for the controlled transactions. This alternative method must yield results consistent with the arm’s length principle.
• Advance Pricing Arrangements (APA)
  APA constitutes a formal pact between a taxpayer and the tax authority concerning the transfer pricing methodology and associated pricing modifications for transactions involving related parties. As per the Directive, taxpayers are empowered to petition the Tax Authority for an APA, aiming to establish a suitable framework for determining arm’s length conditions for specific forthcoming controlled transactions over a limited duration, not surpassing five years, contingent upon endorsement and periodic assessment.
• Arm’s Length Principle
  The implementation of the arm’s length principle is applicable when a taxpayer conducts a transaction with a related party. The taxpayer must calculate its taxable income in accordance with this principle.
• Arm’s Length Range
  The arm’s length range represents a spectrum of pertinent financial indicators, such as prices or profit shares, derived from applying the most suitable transfer pricing method to various uncontrolled transactions.

Failure to uphold necessary documentation or to furnish it upon request by the tax authority will result in penalties of up to 20% of the taxpayer’s tax liability under the applicable tax regulations for the relevant tax period.

In instances where no tax liability exists, the penalty shall amount to Birr 2,000 for each tax period wherein the taxpayer neglects to maintain the required documentation for income tax purposes.

• Corresponding Adjustments for Domestic Transactions
  Where an adjustment is made by the Tax Authority under article 79(1) of the Federal Income Tax Proclamation to the taxable income of a taxpayer in relation to a domestic transaction, the Tax Authority shall make an appropriate adjustment to the taxable income of the other party to the transaction.
• Corresponding Adjustments for International Transactions
  If an adjustment leads to the taxation of profits in another country that has already been taxed in Ethiopia for a party involved in a controlled transaction, the tax authority will review the consistency of the adjustment made by the tax authority of the other country that has a double taxation treaty with Ethiopia.

Subsequently, the tax authority in Ethiopia will make a corresponding adjustment for the taxpayer in Ethiopia.

• Administrative Penalties
  A taxpayer who fails to maintain documents listed under Article 15 of this Directive or fails to submit such documents when requested by the Tax Authority shall be liable to a penalty provided under Article 102 of the Tax Administration Proclamation No. 983/2016.