Tanzania publicly released its Transfer Pricing Regulations (the Tanzanian Regulations) in May 2014, joining the growing number of African jurisdictions whose transfer pricing regimes have progressed beyond broad general anti-avoidance provisions based on the arm’s length principle.
A number of regional and international developments have contributed to the current emphasis on transfer pricing by African tax authorities.
The African Tax Administration Forum (ATAF) was launched in 2009 by 34 African tax commissioners to create a platform to promote and facilitate mutual cooperation among African Tax Administrations with the aim of improving the efficiency of their tax legislation and administration. Transfer pricing has been recognised as a critical issue and a Transfer Pricing Project has been approved in 2010 with the purpose of assisting in building capacity of ATAF members to identify and address transfer pricing and thin capitalisation risk areas.
Concerned that the Organisation for Economic Co-operation and Development’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) are designed primarily to protect the interests of OECD-member countries, the United Nations published its Practical Manual on Transfer Pricing for Developing Countries (UN Manual), endorsing the arm’s length standard, in May 2013.
The OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) was published in February 2013, identifying transfer pricing as one of the 15 actions to address the perceived flaws in international tax rules allowing for the shifting of profits to low tax jurisdictions. Specific focus is to be placed on the alignment of transfer prices with value creation (especially in relation to intangible assets) and the re-examination of transfer pricing documentation.
Although no African country is currently a member of the OECD (South Africa is one of its five key partners), the BEPS Action Plan is bound to provide further support for many African tax authorities’ long-standing contention that they are not receiving their fair share of profits earned by multi-national corporations from operations in their jurisdictions.
A 2012 PwC report (“Spotlight of Africa’s transfer pricing landscape”) identifies a number of challenges for transfer pricing regimes in Africa. Highlighted issues include a lack of local comparable transactions and a dearth of specialist knowledge and resources, including economists, auditors and lawyers experienced in transfer pricing as well as financial databases used in transfer pricing analyses. Another specific concern for resource-rich African countries is the fact that value attributable to intellectual property may skew more taxable income to developed countries at the expense of developing countries.
Central bank controls and onerous withholding taxes may further hamper the efficient implementation of arm’s length transfer pricing provisions.
In order to address these issues, it is suggested that developing countries should be encouraged to take a pragmatic approach to transfer pricing and become adept at negotiations with taxpayers. A number of simplifying measures such as safe harbours, fixed margins and advance pricing agreements (APAs) should further assist to provide certainty to affected multi-nationals.
Interestingly enough, EuropeAid’s June 2011 Report on Transfer Pricing and Developing Countries concludes that, despite the significant challenges associated with the implementation of transfer pricing regimes based on the arm’s length principle in developing countries, stable transfer pricing regimes have the potential to increase much needed foreign tax revenues and attract foreign direct investment on the basis that jurisdictions with comprehensive transfer pricing regulations present less tax risk and more certainty and legitimacy than countries without such regimes.
African tax authorities that have taken the step to introduce specific transfer pricing regulations, have done so with varying degrees of success.
Kenya maintains an established transfer pricing regime. Although specific transfer pricing rules were only introduced in 2006, the Kenya Revenue Authority (KRA) in 2003 already took Unilever to court for selling goods manufactured in Kenya at lower prices to Unilever Uganda than to Kenyan customers. In a highly publicised 2005 High Court case Unilever won on appeal. Transfer pricing is still a key focus area for KRA audits, especially in the case of continued losses or where group companies are located in low tax jurisdictions. There is currently no legal basis for taxpayers to agree and negotiate APAs with the KRA and concerns have been raised about the ability of the Local Committee responsible for dispute resolution to address relevant technical issues. The KRA has an established a transfer pricing task force which in 2013 has been expanded through the creation of a transfer pricing team at the Medium Taxpayers Office.
The Tanzanian Regulations allow for unilateral, bilateral and multilateral APAs, which are valid for a maximum period of five years, subject to annual compliance requirements. Guidance can be obtained from the OECD Guidelines and UN Model, but there is no direction regarding which one should be used in the case of inconsistency. The Regulations specially deals with intra-group services, intangible property and intragroup financing which focuses on the need to be able to demonstrate economic or commercial benefit to the business. A concern remains that the Tanzanian Regulations are too generic and so provide insufficient guidance in respect of contentious transfer pricing matters that may arise between taxpayers and the Tanzania Revenue Authority.
An Angolan transfer pricing regime was introduced by Presidential Decree no. 147/13 on 1 October 2013, applying to all domestic and cross-border commercial transactions entered into between qualifying taxpayers and related entities from 1 January 2013. Order no. 599/14 of 24 March 2014 sets out a list of “major taxpayers” and their requirements to prepare a transfer pricing report. The transfer pricing rules presents a number of challenges for affected taxpayers, including a requirement that transfer pricing documentation should be prepared in Portuguese.
Part II of our overview of current transfer pricing regulations on the African continent is to be published next month and will address relevant provisions in, amongst others, Ghana, Nigeria and Uganda.