Pitfalls of “Africa Tax”
01 November 2009
Posted by: Author: Grant Kaplan
Pitfalls of "Africa Tax”
The rules are clear: prices must be arms-length
With economies under pressure, the temptation for companies to shift profit and reduce tax liability is increased. However,simultaneously, revenue authorities are feeling the pinch of reduced tax income as industry slows, making them more vigilant and inclined to scrutinise transfer pricing practices more closely than ever before.
Transfer pricing is a catch-all term for the pricing of contributions(assets, tangible and intangible, services, and funds) between related parties—usually cross border; in South Africa and certain other countries in Africa, payments for intra-group services and intangible property are regulated by the revenue authority and/or the Reserve Bank.
However, in some African territories there is no specific legislation regulating the practice.This leaves the door open to broad interpretation and potential manipulation, but such practices should be conducted with due consideration to avoid unanticipated tax risk.
Transfer pricing queries and/or assessments are becoming a common and recurring theme, particularly intra-group services, a sit presents an easy target for revenue authorities to challenge. With the prevailing economic climate,many multinationals are looking at mechanisms to extract funds from their subsidiaries; by charging for services, they can get funds back to the parent company.
The obvious gauntlet is that revenue authorities, quite rightly,will seek to identify cases where transfers are made for which no benefit is received. This is a key pitfall: if subsidiaries are paying for services for which there is no apparent or material benefit, the authority will investigate and potentially audit.
In essence, this boils down to a simple statement of fact: revenue authorities are looking for the sudden implementation of service charges which were not stated in previous years, or significant increases in service charges as compared with the previous year.
CFOs need to be aware of how services should be charged between group companies and what type of markup, if any, should be applied.As a simple example, an accounting charge which suddenly appears from the head office where the local organisation already has an accounting department may set alarm bells ringing.
Turning his attention to multinationals doing business in Africa, in jurisdictions where specific legislation is absent there are typically rules to limit intra company service or management fees based on set criteria.This varies widely from country to country, which necessitates a sound understanding of the ever-shifting tax regimes, rules and laws for those companies with extensive trans-African operations.
Those countries within Africa which do not have specific legislation regarding transfer pricing typically make use of general anti-avoidance legislation, which tends to be wider than transfer pricing regulations—and therefore presents a potentially broader risk.
Source: By Grant Kaplan (Tax breaks)