THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS AND TAX MANAGEMENT
BACHELOR OF TAX MANAGEMENT (BTX III) & BACHELOR OF
ACCOUNTANCY (BAC III)

TMU_08606: INTERNATIONAL TAXATION

INDIVIDUAL ASSIGNMENT
THE ACADEMIC YEAR 2022/2023

Tuesday, 24th May 2023 TIME: 7 Days

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GENERAL INSTRUCTIONS:
1. There are TWO questions in this assignment.
2. Attempt all questions.
3. This assignment carries a weight of 10 Marks, five marks each.
4. Your answers should be typed and uploaded in e-learning in a Word format, NOT a
PDF format.
5. Font Times New Roman, Size 12
6. The deadline for the submission is the 8th of June 2023.
QUESTION ONE

Facts:

The Cotton Ltd tax director advises you that:

• The 2008 sales are as follows; T-ShirtCo ltd = 35%, VestsCo ltd = 25% and Megakit
ltd, unrelated Australian company = 25% of total annual sales. The remaining 15% of
sales are to various unrelated entities and relate to sales of fine-grade wool.
• Megakit Ltd, T-ShirtCo Ltd, and VestCo Ltd all purchase medium grade, ½ blood, 60
wool, FoB shipping, 30 days payment terms – generally by the container load.
• During 2008, MegaKit Ltd paid $1 per kg, whereby T-ShirtCo Ltd and VestCo Ltd paid
$0.9 per kg (same price, less a discount of 10%).
• There is no transfer pricing documentation of policy.

Question: Discuss the transfer pricing issues contained in the facts given.

2 years later…..

The Tanzania Revenue Authority (TRA) audits Cotton Pty Ltd and determines that the ALP
should have been $1 (applying the CUP) and adjusts Cotton Ltd’s taxable income upwards by
$10,000,000. In addition, penalties of 20% ($2,000,000) are applied.

In giving your advice:

1) What are the points in the likely response of the tax director of Cotton Ltd?
2) What are the points in the likely response of the tax director of T-ShirtCo Ltd?

QUESTION TWO

Facts;

Tomato Soup Inc is resident in South Africa (SA) and is the head company of the Soup Group,
a global canned soup manufacturer and retailer. Subsidiaries in China undertake
manufacturing, and there is a network of regional (Asia) distribution subsidiaries around the
globe.
It has a subsidiary in Tanzania, TanSoupCo, responsible for the import and distribution of
Canned Tomato Soup in Continental Europe,

The tax director of Soup Group has asked you to assess the Tanzanian transfer pricing risks…

• TanSoupCo imports 80% of its products (canned soup) from related party CanningCo,
residents in Thailand. The remaining 20% of the product is soup in plastic pouches
purchased from an unrelated party, PouchCo, a resident in Malaysia. TanSoupCo makes
a substantially higher gross profit on the pouches than the canned soup products.
• Both the canned soup and the pouch soup are branded “Soup Group.” The pouches are
manufactured under license by PouchCo, through an agreement with Canned Soup Inc,
which owns all the Soup Group trademarks.
• Over the past five years TanoupCo has marketed heavily and expanded rapidly and has
now become a defacto “European” regional hub. In this regard, it provides some
management services, IT services, and marketing services to UKSoup Ltd (UK) and
RussiaSoupCo (Russia). No service fee is received in relation thereto.

Based on the facts above, discuss whether there are any transfer pricing risks by looking at
associated enterprises, potential dealing not at arm’s length, as well as anything of importance
that you may observe that you would like to draw attention to concerning these transactions,
and why?

Based on the information provided, what transfer pricing methodology could Soup Group use
to price the sale of canned soup by CanningCo to TanSoup GGroup?

Note: Please be aware that TanSoupGroup also buys products from PouchCo, which is an
unrelated party.