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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
Transfer pricing updates across 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
Transfer pricing updates across Africa
Page 4
Transfer pricing landscape
Transfer pricing updates across Africa
Page 5
Transfer pricing landscape
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,
documentation requirements and thin cap
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,
documentation requirements and thin cap
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,
documentation requirements and thin cap
Transfer pricing updates across Africa
Page 6
Transfer pricing landscape
► 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
Transfer pricing updates across Africa
Page 7
Update on Africa
Transfer pricing updates across 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
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
Page 10
ATAF member countries
ATAF member countries
Transfer pricing updates across Africa
EY office
No EY office, but support available
Page 11
Latest developments
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
Page 25
TP trends Audit activity
Transfer pricing updates across Africa
Page 26
Current transfer pricing trends
► Audit activity
► FSSA
► Eastern region
► South and southern region
► West region
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
Page 30
Audit activity South and southern region
Country TP audit
activity
Targeted
transactions
Resolution APA program 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
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
Page 32
Audit activity West region
Country TP audit
activity
Targeted
transactions
Resolution APA program 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
Transfer pricing updates across Africa
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.
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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
Transfer pricing updates across Africa
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