Ethiopia has issued a revised Transfer Pricing Directive No. 981/2024 (hereinafter the “Directive”) under Section 79 of the Income Tax Proclamation No. 979/2008. The new Directive repeals the Transfer Pricing Directive that was issued back in 2015.

What is New?

Although the new Transfer Pricing Directive largely maintains the provisions of the repealed Directive, there is now a hefty penalty in place for businesses failing to maintain contemporaneous transfer pricing documentation. Under the new Directive, a penalty equal to 20% of the taxpayer's annual tax payable will be imposed for not maintaining transfer pricing documentation. If no tax is payable for the relevant tax period, a flat penalty of ETB 20,000 will be imposed.

Other Notable Points

The Directive incorporates most of the provisions from the previous Transfer Pricing Directive and, in particular, it outlines that:

The Directive applies to all transactions, domestic and international, between related persons with an annual turnover exceeding ETB 500,000.

Taxpayers can select from a range of approved transfer pricing methods, including the Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Transactional Net Margin Method, and Transactional Profit Split Method.

If none of these methods can be effectively used to determine arm's length conditions for controlled transactions, taxpayers can choose an alternative method as long as it aligns with the arm's length principle.

The Directive sets out the scope of transfer pricing documentation which a taxpayer should maintain contemporaneously.

Despite the Directive granting taxpayers the right to request the Ministry of Revenues' to enter into an advance pricing arrangement (APA), its implementation has not yet started. It will commence when the Ministry of Finance issues a circular to kickstart the APA implementation in the future.

When it comes to interpreting the Directive, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations serves as an important reference.

Some Practical Considerations for Taxpayers

The tax authorities have not been strict in enforcing the Transfer Pricing Directive that was issued a decade ago. Only in certain cases, during tax audits, tax auditors would occasionally refer to the TP Directive and sometimes disallow certain deductions for expenses between related parties.

It appears that the revision of the TP Directive by Ministry of Finance serves as a wake-up call for taxpayers and the tax authority. Recently, the tax authorities have recently pledged to start enforcing the TP directive with greater rigor. Therefore, it is important for multinational corporations and other group companies operating in Ethiopia to have contemporaneous transfer pricing documentation in place to avoid facing heavy penalties. They should also make sure that they complete the TP declaration form and submit it to the tax authority annually.

How We Can Help

Our team can assist you with:

Advising on intercompany agreements for the supply of goods, provision of management and support services, granting licenses, offering loans, etc.

Transfer pricing documentation.

Tax ruling and audit defense.