EY Africa Tax Conference - EY - United StatesFILE/EY-Transfer-pricing-updates-across-Africa.pdf · across Africa EY Africa Tax Conference September 2014 . Page 2 ... thin cap Rest

Transfer pricing updates across Africa

EY Africa Tax Conference

September 2014

Page 2

Panel

Jemimah Mugo

Associate Director, Transfer Pricing

EY Kenya

Panel Cornelia Wolff

Director – Africa Transfer

Pricing and Operating Model

Effectiveness Leader

EY South Africa

Tom Philibert

Partner, Tax Services

EY Senegal

Moderator

Patrick Oparah

Associate Director, Transfer Pricing

EY Nigeria

Amanda Layne

Manager, Transfer pricing

EY Ghana

Michael Hewson

Executive Director, Transfer Pricing

EY South Africa


Patrick Chege

Head of Audit, Transfer Pricing and

Large Taxpayers’ Office

Kenya Revenue Authority, Kenya

M.O. Gbonjubola

Deputy Director and Head of Transfer

Pricing Division

Federal Inland Revenue Service, Nigeria

Page 3

Agenda

► Introductions

► Transfer pricing landscape

► Update on Africa – African Tax Administration Forum (ATAF)

► Latest developments:

► East Africa

► Francophone sub-Saharan Africa (FSSA)

► West Africa

► Southern Africa

► TP trends – audit activity and audit triggers


Page 4

Transfer pricing landscape


Page 5


South Africa: TP legislation based on OECD,

documentation requirements, thin cap and active revenue authority

Egypt: TP legislation, documentation

requirements, thin cap, active revenue authority

and APA program

Uganda: TP legislation based on OECD,

documentation requirements, onerous penalty

provisions and thin cap

Algeria: TP legislation based on OECD,

documentation requirement and 25% penalty on

TP adjustment

Kenya: TP legislation based on OECD,

documentation requirements, thin cap and active

revenue authority

Tanzania: TP legislation based on OECD

Guidelines, UN TP Manual issued in 2014,

documentation requirements and thin cap

Namibia: TP legislation based on OECD and thin

cap

Nigeria: TP legislation based on OECD

Guidelines, UN TP Manual documentation

requirements, thin cap and APA program Malawi: TP legislation based on OECD,


Burkina Faso: TP legislation based on OECD and

documentation requirements

Angola: TP legislation based on OECD and

documentation requirements

Ghana: TP legislation based on OECD,


Cameroon: TP legislation based on OECD,

documentation requirements and thin cap Zimbabwe: TP legislation based on OECD and

thin cap

Rest of Africa:

TP regulated through general anti-avoidance or arm’s length principles

Zambia: TP legislation based on OECD, thin cap

Senegal: TP legislation , documentation

requirements and thin cap

Sierra Leone: Expansion of arm’s length principle

in tax act, transfer pricing agreements in advance

are available

Gabon: TP legislation based on OECD,



Page 6


► There is an increasing need for TP

documentation in Africa. However there are

differences:

► Sophistication levels of revenue authorities vary,

i.e. new legislation; new practice tend to focus on

low-hanging fruit e.g. documentation.

► 54 countries, each with different requirements

where customization is required, ONE transfer

pricing document for Africa is not necessarily

correct.

► There is limited availability of comparable data.

► TP documentation is required for exchange

control purposes.

► TP legislation and practice in Africa are typically

based on the OECD TP guidelines. Some

countries also consider the United Nations TP

manual.

Comprehensive local transfer pricing documentation

Annexure to master file is required

Annexure to master file is optional

Niger Mali

Morocco

Algeria

Sudan Chad

Ethiopia

South Africa

Gh

an

a

Nigeria

Tanzania

Zambia

Central African

Republic

Botswana

Angola

Democratic Republic of Congo

Kenya

Lesotho

Malawi

Mozambique

Swaziland

Uganda

Zimbabwe Mauritius

Mayotte Comoros

Tunisia

Cameroon

Gabon

Equatorial Guinea

Cote d’Ivoire Togo

Benin

Senegal Gambia

Guinea

Burkina Faso

South Sudan


Page 7

Update on Africa


Page 8

ATAF

► Promotes efficient, effective and economic tax administrations across the African region

► A platform to promote and facilitate mutual cooperation

► Established work program and appointed intermediary secretariat

► Established three committees, including:

► Indirect taxes

► Exchange of information

► Transfer pricing – effective management of transfer pricing risk


Page 9

TP issues identified by the transfer pricing committee

► Benchmarking – and the challenge of obtaining data on such independent enterprise

transactions in the African marketplace

► Capacity building and training – TP highly specialized area, low level of skills currently in most

countries

► Identification of transfer pricing risk in order to

► Address potential tax loss

► Maximize the use of scarce transfer pricing resource

► Keep taxpayers’ compliance costs to a minimum

► Use of the arm’s length principle in their transfer pricing legislation and how to legislate this

► Application of relevant legislation in practice in member countries, including guidance for

taxpayers and administrators


Page 10

ATAF member countries

ATAF member countries


EY office

No EY office, but support available

Page 11

Latest developments


Page 12

Latest developments East Africa – Kenya

► Establishment of the TP audit unit and increased capacity-building initiatives

► Increased cooperation among the revenue departments – customs and TP audit unit resulting

in increased transfer pricing queries

► Bias toward Asian (including Indian) and Eastern European comparable companies for

purposes of benchmarking

► Draft TP regulations:

► Mandatory contemporaneous TP documentation

► Guideline on benchmarking

► Substance-over-form rule

► Tested party results must lie at the median of the interquartile range, no downward adjustment

► Segmented financial information – where there are both controlled and uncontrolled transactions and

multiple product lines


Page 13

Latest developments East Africa – Tanzania (1)

► TP Regulations were published in February 2014

► TP guidelines refer to the OECD guidelines and UN TP manual

► Apply to controlled transactions:

► Domestic transactions

► Cross-border transactions

► Head offices and branches shall be as associates

► Recognizes the five OECD TP methods (hierarchy to be followed, traditional methods taking

precedence)

► Commissioner empowered to prescribe other methods

► Apply most appropriate method

► Intangible property – sale or licence: CUP or residual profit split

► In applying comparability of factors between results of controlled and uncontrolled

transactions, use of the same basis year for a year of income is required.


Page 14

Latest developments East Africa – Tanzania (2)

► Contemporaneous TP documentation

► Any person with controlled transaction to prepare contemporaneous TP documentation

► TP document must be put in place prior to the due date for filing the income tax return for that year

► TP document must be submitted to the Commissioner within 30 days upon request

► Failure to comply with these documentation requirements – imprisonment (up to six months or

minimum fine of US$30,000)

► Failure to comply with the arm’s length principle, documentation requirements and application

of the various comparability factors to attract a penalty of 100% of the underpaid tax

► The regulations are to be construed in line with:

► The arm’s length principle as per Article 9 of the OECD or UN Model Tax Convention on Income and

Capital

► The OECD TP guidelines as approved, supplemented and updated from time to time

► The UN TP practical manual for developing countries as supplemented and updated from time to time


Page 15

Latest developments East Africa – Uganda and other countries

► In line with section 164 of the Income Tax Act, Uganda issued transfer pricing regulations

effective from 1 July 2011, with practice notes being issued in 2012

► Contemporaneous TP documentation required – not to be submitted with the return, but to be in place

before filing return

► The arm’s length principle is, however, enshrined in the tax laws of the rest of the East African

countries

► Increased cooperation between the revenue authorities – KRA providing the training hub for

officials from other revenue authorities

► For instance, there have been discussions around joint audits of multinationals


Page 16

Latest developments FSSA – Gabon

► Finance Act 2014 introduced obligation to prepare TP documentation.

► TP documentation should detail the TP policy of the group and should include legal, economic,

tax and accounting details, and the methodology used to validate the TP policy. Furthermore it

should contain details on the relationship between group companies involved in the

intercompany transaction(s).

► Non-compliance is subject to penalties (5% of profits distributed abroad; minimum penalty of

XAF5m per year).

► Finance Act 2014 introduced possibility to conclude APA.

► Increase in TP tax audits can be expected.


Page 17

Latest developments FSSA – Guinea

► Finance Act 2014 introduced a documentation requirement for intercompany transactions.

► Companies are required to maintain documentation to justify the TP methods used. Taxable

profits will be adjusted with revenues indirectly transferred to companies outside Guinea.

► Legislation is still broad, without specific provisions on what exactly the documentation should

entail, but introduction of new provision clearly indicates increased focus on TP.


Page 18

Latest developments FSSA – Senegal

► Senegal introduced a TP documentation obligation in 2013 (with retroactive effect to 2012).

► Provision in Tax Code details what information should be included in TP documentation

(description fact pattern, industry overview, company overview, functional analysis (with

consideration of assets used and risk borne), description of TP method and comparable

search).

► Now that 2013 CIT returns are filed by Senegalese taxpayers, increased TP tax audit activities

from the revenue may be expected.


Page 19

Latest developments West Africa – Nigeria (1)

► TP Regulations introduced in September 2012

► Contemporaneous TP documentation requirements

► Effective for basis periods beginning after 2 August 2012

► Reference to OECD Guidelines and UN Practice Manual

► Very broad definition of connectedness, “series of transactions” included

► Includes APA program

► Mandatory TP returns due with tax return

► “Safe Harbor” where other regulatory agencies determine pricing

► TP without intangibles?

► National Office for Technology Acquisition and Protection (NOTAP) governs inbound technology

transfer agreements, including pricing

► “Excluded” from TP Regulations by the safe harbor, but stakeholder discussions continue


Page 20

Latest developments West Africa – Nigeria (2)

► Federal Inland Revenue Service (FIRS) activity

► Actively communicating with taxpayers and advisors, letters and stakeholder events

► No written guidance on technical aspects of implementation of the regulations

► Expectation of “local comparables”

► Specialist TP division of 16+ set up in October

► Request for TP policy began in January 2014

► Clarification that TP Policy must be submitted together with transfer pricing return

► Elements of the BEPS agenda in the FIRS approach


Page 21

Latest developments West Africa – Ghana

► 2012 TP regulations introduced contemporaneous TP documentation requirements for intercompany

transactions undertaken as of 14 September 2012.

► The regulations also introduced the mandatory annual filing of TP returns. The standard deadline for filing

is four months after the company financial year end.

► The Ghana Revenue Authority (GRA) released practice notes to the TP regulations in September 2013.

► The practice notes provide guidance as to the GRA interpretation of the regulations, including expected

content requirements for documentation.

► The GRA has recently set up a specialist Transfer Pricing Audit Unit. The GRA has indicated that TP

audits shall be undertaken by the new unit as of 2014.

► The Ghana Investment Promotion Centre Act, 2013 (GIPC Act, 2013) repealed the previous exemption

for petroleum and mining operations from the regulatory authority of the GIPC.

► Consequently, all intercompany agreements within the mining and petroleum industries for use of

intangibles and management or technical services provided by a nonresident must be approved by the

GIPC. Failure to gain such approval may lead to prohibition of remittances abroad.


Page 22

Latest developments West Africa – Sierra Leone

► Sierra Leone has not enacted any TP specific guidelines and, historically, the risk of a transfer

pricing audit has been low.

► However, the Finance Act 2013 has recently expanded the arm’s length provisions in the

current tax act to better address the issue of TP.

► The Finance Act, 2013 explicitly applies the arm’s length principle to dealings between a Sierra

Leone permanent establishment and its nonresident owner.

► The fact that the legislation is being revised – with emphasis on transfer pricing, among other

tax areas - could suggest that such provisions may be more strictly enforced in future.


Page 23

Latest developments Southern Africa – Angola

► General arm’s length principle foreseen in article 55 of the Industrial Code.

► Contemporaneous documentation rules foreseen in the Statute of Big Taxpayers (Presidential Decree

147/13 of 1 October).

► List of “big taxpayers” published in February 2014 (Decree 471/14 of 28/2) and updated in March 2014

(Decree 599/14 of 24/3).

► 486 companies considered “big taxpayers” plus all public companies considered to have a major

dimension, financial institutions and oil, diamond and telecommunication companies.

► Documentation obligation applicable to all companies considered “big taxpayers” with turnover in excess

of USD 70m.

► Deadline for presentation of the documentation at the “big taxpayers” office is 30 June.

► Questions to be answered: “do all big taxpayers require to have documentation”? Does the year of 2013

(deadline 30 June 2014) have to be documented? Questions to be clarified (hopefully soon) via

administrative ruling.


Page 24

Latest developments Southern Africa – South Africa

► Extensive TP-related reporting requirements in the annual tax return (ITR14) that allow the

South African Revenue Service a risk assessment of the local taxpayer. The information

request includes (inter alia). ► Availability of transfer pricing documentation to support the arm’s length nature of the intercompany

transactions in the respective fiscal year

► Transactions with related parties based in tax havens

► Guaranteed income

► Value of the transaction amounts

► There has been an increase in TP reviews and audits in the last 12 months.

► Exchange control application for management services fee remittance with the South African

Reserve Bank triggered review of potential permanent establishment of service provider in

South Africa.

► Service fees are subject to withholding tax equivalent to 15% of the service fee under the

domestic law subject to tax treaty relief. This new rule is to become effective 1 January 2016.


Page 25

TP trends Audit activity


Page 26

Current transfer pricing trends

► Audit activity

► FSSA

► Eastern region

► South and southern region

► West region


Page 27

FSSA region

► Increased focus on TP in FSSA, leading to introduction of TP documentation requirements in

certain countries (Senegal, Cameroon, Guinea and Gabon). Other countries continue to apply

general anti-abuse provisions, but more law changes to introduce documentation obligations

can be expected.

► Increased tax audit risks in countries with new TP documentation requirements.

► Audit will focus on all cross-border intercompany transactions.

► Continuous or incidental tax-loss situation or intercompany transactions with group companies

in tax havens or low-tax jurisdictions may trigger TP audit.


Page 28

Audit activity Eastern region

Country TP audit

activity

Targeted

transactions

Resolution APA program Transactions

covered

Focus on

binding ruling

Kenya Yes All Numerous

assessments

and litigation

No N/A Limited

Tanzania Yes Management

fees, royalties

and financing

None concluded Yes None concluded Limited

Uganda No All None Yes None concluded None as yet


Page 29

Eastern region

► Kenya focusing on all transactions in audits

► Numerous assessments and litigation

► Key focus around business restructuring

► Tanzania and Uganda undertaking TP audits as part of tax audit program

► Transfers of functions and risks looked at closely


Page 30

Audit activity South and southern region

Country TP audit

activity

Targeted

transactions


covered

Focus on BR

South Africa Yes Management

fees and

industry

segment

No litigation to

date resolved

through ADR

No N/A Limited

Namibia Yes Outbound fees

and raw

materials

No litigation No N/A None

Zambia N/K N/K N/K No N/A N/K

Zimbabwe None as yet N/K N/K No N/A N/K

Malawi Yes Loans,

management

fees and

royalties

None concluded

to date

No N/A None

Angola None N/A N/A No N/A No guidance

Mozambique None N/A N/A No N/A No guidance


Page 31

Southern region

► Increased audit activity with more experienced revenue personnel

► Focus heavily on both inbound management fees – benefit test and outbound – cost base

► Focus also on industries such as automotive

► Malawi focus largely on outbound payments

► Angola

► No audit activity registered for TP in Malawi, due to recent nature of legislation


Page 32

Audit activity West region

Country TP audit

activity

Targeted

transactions


covered

Focus on BR

Nigeria None N/A N/A No N/A No guidance

Ghana None N/K N/K No Based on

private rulings

N/K


Page 33

West region

► Ghana permits private binding rulings to determine the pricing of goods and services.

► Business restructurings are reviewed for potential tax consequences – anti-avoidance rules

exist.

► Audit activity is not yet prevalent in Nigeria.

► General tax rules are relied on to counter tax avoidance through business restructurings.


Page 34

Typical TP enquiry from revenue authorities

Initial risk assessment Review of filings and accounts possible initial queries.

In-office desk audit – documentation review Review of documentation, responses and other information. Possible comparable

analysis to test results and further queries

Field audit – interviews and site visit Interviews with operational and financial people at client. Testing facts against

documentation.

Review and collation stage Requests for more information and possible additional meetings

Outcome Letter of findings and letter of assessment


Page 35

Particular audit triggers

► Activities in or involving tax havens or low-tax countries (note that this could be where there

are incentives)

► Losses over a number of years or low contribution to the income tax base

► Large royalty and management fees – easy targets

► Charges for the use of IP and the economic owner of the IP

► Business restructuring


EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory

services. The insights and quality services we deliver help build trust and

confidence in the capital markets and in economies the world over. We

develop outstanding leaders who team to deliver on our promises to all

of our stakeholders. In so doing, we play a critical role in building a better

working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member

firms of Ernst & Young Global Limited, each of which is a separate legal

entity. Ernst & Young Global Limited, a UK company limited by guarantee,

does not provide services to clients. For more information about our

organization, please visit ey.com.

© 2014 EYGM Limited.

All Rights Reserved.

ED 0115

In line with EY’s commitment to minimize its impact on the environment, this

document has been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not

intended to be relied upon as accounting, tax, or other professional advice. Please refer

to your advisors for specific advice.

ey.com

EYG no: DL1068

Documents

EY Africa Tax Conference - EY - United StatesFILE/EY-Transfer-pricing-updates-across-Africa.pdf · across Africa EY Africa Tax Conference September 2014 . Page 2 ... thin cap Rest