Transfer pricing update across Africa

Africa sees more and more countries introducing specific legislation on transfer pricing. Even if countries do not have transfer pricing legislation taxpayers can’t ignore. Why? The General Anti Avoidance Rules covers transactions between related parties if not conducted at arm’s length.

What are the basics for transfer pricing regulations?

Generally, the transfer pricing legislation in most African countries follows the OECD Guidelines although no African country is an OECD member state. The OECD Guidelines are widely recognised as international set guidance on transfer pricing and acknowledged by most tax authorities globally.

Nigeria and Tanzania are the only countries in Africa that refer to the UN TP Manual in its transfer pricing legislation in addition to the OECD Guidelines. It does not stipulate any hierarchy between the OECD Guidelines and the UN Transfer Pricing Manual.

United Nations Transfer Pricing Manual

The United Nations Committee of Experts on International Corporation in Tax Matters developed a Practical Manual on Transfer Pricing for Developing Countries that was adopted in October 2012.

Consistent with the OECD Guidelines, the UN TP Manual acknowledges the arm’s length principle as an approximation of market based pricing. The UN TP Manual intends to offer developing countries a basis for an informed debate at a practical level about transfer pricing. The UN TP Manual follows the OECD Guidelines with respect to the transfer pricing methods to be considered when determining arm’s length pricing.

Member of the “BRICS” countries, i.e., Brazil, China, India, Russia and South Africa, provide insights regarding the practices in their countries. Among other topics, these countries provide their views on intangibles and the provision of services within multinational enterprises.

Intangibles

The contributions of the Chinese and Indian tax authorities show a similar trend regarding the local economic ownership of intangibles. The discussion on intangibles focuses on legal versus economic ownership. Whereas the legal ownership is not discussed the economic ownership is reviewed in detail.

The contribution by the Chinese tax authorities discusses the charging of the same royalty rate for intangibles, e.g. global brand name, technical know-how or business processes when the local operations started many years ago although the business is already established for a few years. It is stated that the local operations acquired the skill and experience from the local operations, and may even start contributing to the multinational enterprise’s original intangibles. A review is required whether and at what level a royalty charge is still appropriate.

The chapter contributed by the Indian tax authorities acknowledges the importance of marketing intangibles in light of the unique market specific characteristics such as location advantages, market accessibility, large customer base, market premium, spending power of local customers, etc. It further states that entities that are characterised by taxpayers as “no risk” or “limited risk” entities can actually incur and bear very large expenditures on the development of marketing intangibles, however there is no guidance on how “very large expenditures” is defined. It concludes that an entity that incurs and bears very large expenditure in relation to the creation of marketing intangibles should compensated for the return on their marketing activities or intangibles. The compensation would be in the form of

? Reimbursement of excess adverting, marketing and promotion expenditure along with a mark-up, or
? A share in the profit related to the marketing intangibles.
Similar to the contribution by the Indian tax authorities the Chinese tax authorities also discuss the size of and consumers available in the local market as a marketing intangible that needs an appropriate remuneration.

Services

Both the Indian and South African tax authorities acknowledge the challenge of identifying services that require remuneration under the arm’s length principle. The challenge particularly relates to the differentiation between shareholder services, duplicative services, incidental benefits from intra-group services and services with commercial and economic benefit for the local operations. The South African contribution to the UN TP Manual also discusses the necessary documentation required to demonstrate the benefit of the services rendered by overseas related parties to local related parties. It also acknowledges the challenges between documentation requirements and the additional burden for taxpayers when preparing transfer pricing documentation.

African Tax Administration Forum

The African Tax Administration Forum was established in 2008. It currently has 36 member countries, including Cameroon, Ghana, Kenya, Nigeria and South Africa .

ATAF has the mandate as follows :

? Improve the capacity of African tax administrations to achieve their revenue objectives;
? Advance the role of taxation in African governance and state building;
? Provide a voice for African tax administrations; and
? Develop and support partnerships between African countries and development partners.

A core part of ATAF’s capacity developing programme consists of technical workshops and international dialogues. The auditing of multinational enterprises and transfer pricing are among the priority areas for 2013. ATAF organised a few trainings on transfer pricing and transfer pricing audits to assist the local authorities in building up transfer pricing resources.

Exchange control

Taxpayers face the challenge in some countries (e.g. Nigeria and Ghana) that the transfer pricing legislation and the foreign control regulations are not aligned. The transfer pricing clearly stipulate the arm’s length principle consistent with the OECD Guidelines and UN TP Manual. However, the foreign exchange authorities (e.g., National Office for Technology Acquisition and Promotion (NOTAP) and Central Bank in Nigeria, and Ghana Investment Promotion Centre (GIPC) in Ghana) apply certain restrictions that relate cross-border flow of funds. The consequence is that these restrictions are not always aligned to the arm’s length principle. It bears a risk of double taxation of the related party transactions with an entity in such a country.

In contrast to countries with pre-defined restrictions there are other countries that either follow arm’s length principle (e.g., South Africa) or do not have any restrictions as such (e.g., Kenya).

BEPS

The OECD issued the Action Plan and Base Erosion and Profit Shifting (BEPS) in 2013 . Among others the BEPS actions plan deals with various items relevant for transfer pricing. These include:

? Action item 8 Transfer pricing for intangibles
? Action item 9 Transfer pricing for risk and capital
? Action item 10 Transfer pricing for other high risk transactions
? Action item 11 Transfer pricing documentation

In addition to that the OECD also issued “Part I of a Report to G20 Development Group on the Impact of BEPS in Low Income Countries” in July 2014 . Developing countries and international organisations identify the following key BEPS issues as being of most relevance.

? Base erosion caused by excessive payments to foreign affiliated companies in respect of interest, service charges, management and technical fees and royalties;
? Profit shifting through supply chain restructuring that contractually reallocates risks, and associated profit, to affiliated companies in low tax jurisdictions;
? Significant difficulties in obtaining the information needed to assess and address BEPS issues, and to apply their transfer pricing rules;
? The use of techniques to obtain treaty benefits in situations where such benefits were not intended;
? Tax loss caused by the techniques used to avoid tax paid when assets situated in developing countries are sold; and
? Developing countries often face acute pressure to attract investment though offering tax incentives, which may erode the country’s tax base with little demonstrable benefit.

Outlook

The transfer pricing world in Africa continues to change with the outcomes from the various BEPS actions. In addition to more detailed transfer pricing requirements there will be more transparency assisting tax authorities to identify taxpayers for review/audit. Taxpayers need to start preparing now that they are prepared to respond to the increasing need for transparency and controversy.