By PWC Tax Synopsis
Nigeria and Ghana, the leading economies in West Africa, are on the brink of joining the band of countries that have developed formal transfer pricing (TP) rules across the African continent. The motivation for this appears to be the tireless drive by the respective governments to safeguard and increase their tax revenue bases as well as align with global practices.
A multinational company may incidentally or intentionally shift profits by the pricing of transactions with related entities especially where they exercise control. Wrong pricing (mispricing) occurs where goods or services are supplied at prices which are materially different from prices obtainable from an independent and unconnected party for similar supplies. Typical transactions include management and technical fees, royalties, intercompany loans, supply contracts etc.
Formal TP rules
Given the trend of the adoption of formal TP rules across the continent, companies with investments in certain African countries will have to reconsider transfer of goods, services or intangibles to their related parties in order to establish appropriate prices which are commercial and acceptable to the tax authorities. Consequently, multinational organisations and their members or related entities would now be required to prepare comprehensive documentation to demonstrate their application of the arm’s length principle and the procedures followed to determine their pricing of related party transactions. If this is not done, the tax authorities could adjust the transactions to reflect arm’s length and demand additional tax, including penalties.
Expectedly, there is increasing collaboration among tax administrators in Africa to foster cooperation and implement TP rules among other initiatives. Under the aegis of the Africa Tax Administrators Forum (ATAF) formed in 2009, the administrators aim to provide a platform to enhance collaboration, establish best practices and build capacity in Africa tax policy and administration through peer learning and knowledge development. Currently, the members of the ATAF comprise 34 (out of 54) tax administrations in Africa. In its attempt to preserve the tax bases and facilitate increased tax revenues of its members, the ATAF initiated ‘The TP Project’ in 2009 to assist in building capacity amongst its members, to identify and address areas of tax leakages from transfer mispricing.
Most of the countries in Africa already have general anti-avoidance rules which are a broad set of principles/rules aimed at counteracting the avoidance of tax. A few years ago, it was only a handful of countries, including South Africa, that had formal TP regulations. Some member countries of the ATAF e.g. Kenya and Uganda have now incorporated TP regulations into their tax laws while others such as Ghana, Nigeria and Tanzania are on the verge of introducing TP rules. It is only a matter of time before many others catch the buzz.
Lack of know-how
The implementation of TP regulations is not without its peculiar challenges, chief of which is lack of technical know-how, relevant technology and a skilled workforce. In advanced economies, numerous databases are used for establishing comparability of transactions and determining arm’s length prices. Such robust databases that provide industry and peer comparisons are not yet readily available in Africa; hence it is difficult to use these foreign databases for establishing comparables in Africa without incorporating some fundamental and often subjective assumptions. This very act creates huge uncertainties for both the African tax administrators and taxpayers.
TP here to stay
The burden of proof and onus of ensuring that the supplies of goods and services have not been mispriced rests largely with the taxpayer. Sufficient documentation that provides a valid basis for the pricing of goods or services supplied must therefore be put in place in order to anticipate and sufficiently cope with the impending scrutiny of the tax authorities. Assuredly, TP has come to stay in Africa but its effectiveness will depend largely on the capacity of the tax authorities to implement the rules and enforce compliance in a business friendly manner. How well the delicate balance will be achieved, only time will tell.