Transfer Pricing In Africa
01 February 2012
Posted by: Author: Michiel Els
Transfer Pricing In Africa
Africa is the world’s second largest and second most populous continent, after Asia.It is rich in minerals, and in desperate need of infrastructure.All this activity has led to the need for funding so global banks are focusing on opportunities in Africa.Furthermore,due to Africa’s population it makes it extremely attractive for the telecommunication industry.It is no wonder that transfer pricing has become a hot button issue in the African region.The tax authorities throughout Africa have realised that now, more than ever, they need to put an end to corporate business extrapolating excessive profits out of their countries.The tax authorities in the more established economies in Africa are also continuing to heighten their scrutiny, with new compliance initiatives introduced and a renewed focus on transfer pricing investigations and audits. While a number of jurisdictions have already implemented transfer pricing rules into their income tax legislation we expect the rest could follow suit within the next year or two.
Compared to countries in Europe and in the States, many African nations have emerged relatively unscathed from the global financial crisis. Instead, the economic downturn has resulted in head offices looking to extract maximum cash from companies still cash flush even in the downturn to help fund those companies located in countries heavily affected by the economic crises.For those companies not already doing business in Africa, we have seen a drastic rush into Africa, trying to grab a piece of the pie.
The expansion is further evident in the volumes of exports out of Africa.This is surpassed only by that of Asia, with economists predicting that we have merely reached the tip of the iceberg and expecting further growth at a pace that will outgrow Europe, the Middle East and North America.
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Most countries in Africa have shown an active interest in transfer pricing over the last decade. In combination with this sharp increase in the volume of cross border transactions, two trends from the tax authorities have led to the increased complex and challenging nature of the transfer pricing environment in the African sphere.The first trend is the increased specific transfer pricing rules or anti avoidance legislation introduced by a number of African countries.To date,33 countries in Africa have introduced some form of regulation that gives them the ability to adjust the pricing of related-party transactions.The table illustrates the status of Africa’s current transfer pricing rules or, if applicable, the anti-avoidance legislation that acts in accordance with transfer pricing legislation.
There are signs that even more countries will move towards the introduction of transfer pricing rules.Concurrently, the increase in regulations within Africa and the corresponding documentation required by revenue authorities has provided them with a wealth of additional information which may be utilised to assist them with selecting audit targets.Tax authorities in Africa are moving towards using the Orbis database to assess transfer pricing compliance/anti-avoidance legislation.Thanks to this database technology, tax authorities are able to use the information acquired through this process to find industries, groups or even companies with abnormal results and thus focus their search on transactions within these areas.
A further trend is tax authorities increasing compliance activities.The Nigerian Revenue Authority is in the process of drafting specific transfer pricing guidelines.Currently, it is empowered to adjust the tax liability of a company in the case where it considers any transaction of a company, which reduces or would reduce the amount of any tax payable, to be artificial or fictitious.Hopefully, the new legislation would provide greater clarity for taxpayers.In South Africa,the transfer pricing legislation has changed dramatically, shifting from the previous focus of looking at a specific transaction in isolation to that of focusing on the overall profit objective, economic substance and commercial objective of an arrangement with a related party.This will take effect on 1 October2011.Transfer pricing has further been mentioned in the 2011 Budget Speech as one of two key areas to focus on to generate tax revenue.A transfer pricing specialist from the UK has been engaged by SARS to spearhead this enormous task which evidences the seriousness of its intentions.The 10 most aggressive tax authorities on transfer pricing are currently not based in Africa: five are from the Asia Pacific region, three are from Europe and two are from North America.
Through transfer pricing enforcement,government deficits are reduced through the collection of transfer pricing adjustments and taxes; raising the much-needed funding,especially for the essential infrastructure spend.In Africa, it is no different and we expect multinational companies to be targeted by revenue authorities through aggressive tax and transfer pricing audits.Companies dealing in Africa need to be aware that they can no longer view transfer pricing issues as isolated, country-specific concerns.The issues are global and not specific to Europe, Asia or the Americas. Audits would be thorough and sophisticated, and the punishment severe.We could even expect that some countries in Africa might top the list for the most aggressive tax authorities in the foreseeable future.
We urge multinational corporations to take practical, co-ordinated steps to understand the transfer pricing documentation requirements in Africa.Risks must be identified and addressed.Disputes and audits in Africa must be avoided,administered and resolved.If not, multinational companies could expect the full force of the law and that would only be the start of it.
|Country|| TP Act|| Anti-avoidance|| Country|| TP Act|| Anti-avoidance|
|Algeria|| No|| Yes|| Mali||Limited || Yes|
|Angola|| Yes|| No|| Mauritius|| No|| Yes|
|Benin|| Yes|| Yes|| Morocco|| Yes|| No|
|Botswana|| No|| Yes|| Mozambique|| Yes|| Yes|
|Burkina Faso|| Yes|| No|| Namibia|| Yes|| Yes|
|Cameroon|| Yes|| Yes|| Nigeria|| Yes|| Yes|
|CAF|| Yes|| Yes|| Rwanda|| Yes|| No|
|Chad|| Yes|| Yes|| Senegal|| Yes|| No|
|DRC|| Yes|| No|| South Africa|| Yes|| Yes|
|Ethiopia|| Yes|| No|| Sudan|| No|| Yes|
|Gabon|| Yes|| No|| Swaziland|| No|| Yes|
|Ghana|| Yes|| Yes|| Tanzania|| Yes|| Yes|
|Kenya||Yes|| Yes|| Togo|| Yes|| No|
|Lesotho|| Yes|| Yes|| Tunisia|| Yes|| No|
|Liberia|| Limited|| Yes|| Uganda|| Yes|| Yes|
|Malawi|| Yes|| Yes|| Zambia|| Yes|| Yes|
| || || || Zimbabwe|| No|| Yes|
Ten most aggressive tax authorities for transfer pricing
|Country||Rank in 2010||Rank in 2007||Change|
Source: Asian countries top aggressive tax authority poll. TPWeek, 16 June 2010; "Top 10 toughest tax authorities for transfer pricing.” TPWeek, 6 December 2007
Source: By Michiel Els (TaxTalk)