Transfer pricing in Africa

There is never a dull moment in Africa, particularly in the world of tax. We know that African tax authorities love transfer pricing (“TP”), second only to withholding taxes. In this article, we cover key changes in transfer pricing across the continent.

Most countries in Africa now have some sort of TP legislation covering cross-border related company transactions, so more than likely if there is a transaction with foreign related parties, then at least one side of the transaction will need to be documented for TP purposes. Luckily, most countries are following the Organisation for Economic Co-operation and Development’s (“OECD”) Guidelines, so, there aren’t that many surprises appearing in new legislation.

Most countries in Africa now have some sort of TP legislation covering cross-border related company transactions, so more than likely if there is a transaction with foreign related parties, then at least one side of the transaction will need to be documented for TP purposes. Luckily, most countries are following the Organisation for Economic Co-operation and Development’s (“OECD”) Guidelines, so, there aren’t that many surprises appearing in new legislation.

Ghana transfer pricing developments

Ghana has implemented a number of OECD action plans in order to beef up its TP regime, as such the Ghanaian TP regulations were updated effective from 2 November 2020. To summarise, the legislation covers the following:

• The definition of a controlled relationship and the transactions that the regulations apply to;
• Services will meet the arm’s length principle when the benefits test is met, however, services will not be at arm’s length if they are duplicative;
• An analysis of which party performs the Development, Enhancement, Maintenance, Protection, and Exploitation of intellectual property (“IP”) is required in order to substantiate the arm’s length nature; and
• In order to confirm the arm’s length nature of a loan, the purpose of the loan, the credit profile of the borrower, and the economic conditions of both the borrower and lender need to be analysed.

The regulations also, however, allow the commissioner general to determine an appropriate interest rate where interest is not charged on a loan or trade payables extending beyond 12 months and where the interest charged is not considered to be at arm’s length. This is quite a lot of power given to the tax authorities and could mean that Ghanaian companies will not be able to provide or receive interest-free loans.

The documentation requirements are in line with the OECD Guidelines – i.e., a Master File, Local File, and Country-by-Country (“CbC”) Report. The CbC reporting threshold is a consolidated group revenue of 2,9 billion Ghana Cedi, which is relatively high. Companies are required to electronically file copies of their Master File and Local File within four months after the end of the tax year.

The regulations provide certain safe harbours to try and decrease the compliance burden, being:

• Taxpayers with controlled arrangements which do not exceed USD 200 000 are exempt from preparing TP documentation;
• Low value-adding intra-group services may be exempted from the TP requirements; and
• Transactions where the amount charged royalties, does not exceed 2% of net profit will be exempted from the TP requirements.

Botswana transfer pricing developments

Botswana introduced its TP regulations in July 2019. Botswana’s TP regulations apply to transactions between directly or indirectly connected persons and require such transactions to be consistent with the arm’s length principle. These regulations apply to transactions with non-residents and transactions with Botswana resident International Financial Service Centre accredited related companies. The specific terms are defined in local income tax legislation.

The recommended approach is in line with the OECD Guidelines. The Local File should be filed together with the tax return within four months of the end of the financial year. A Master File needs to be prepared when transactions exceed five million Botswana Pula. Failure to submit the required documentation will result in a penalty not exceeding 500 000 pula being charged.

With the publication of the TP regulations and it being the first year of such compliance, it is expected that the revenue authorities will increase their focus on TP audits. Due to this increased compliance burden, taxpayers will need to take the time to ensure that they are complying with the new requirements.

Other notable transfer pricing developments

Nigeria implemented new TP regulations effective from 12 March 2018. The new regulations specifically apply the OECD’s three-tiered approach to TP documentation, which includes CbC Reporting and requires a Master File and Local File to be prepared. There is also a separate TP return that needs to be submitted along with the corporate tax return. Certain safe harbours were removed and there are new rules on intergroup financing. Payments for the transfer of rights for an intangible are limited to 5% of earnings before interest, tax, depreciation, and amortisation.

Tanzania published new TP regulations on 1 July 2020. The Tanzanian regulations require companies to file contemporaneous TP documentation with their income tax returns. Penalties may be imposed of up to 100% for adjusted TP amounts and further penalties can be incurred for failing to maintain contemporaneous TP documentation. Any other taxpayer with related-party transactions to have transfer pricing documentation in place and provide this within 30 days from the date of request by the revenue authorities.

The Rwandan TP regulations were implemented in December 2020. It is a requirement to have TP documentation in place before the deadline for the income tax return. The TP documentation should only be submitted to the tax authority on request and within seven days from the date of receipt of the written request. The information contained in the documentation should be in line with the OECD Guidelines. Additionally, a schedule of the controlled transactions must be submitted in a prescribed form to the tax administration together with the income tax declaration and a CbC report is required to be submitted.

Uganda, Ethiopia, Kenya, and Mozambique also have TP legislation requiring contemporaneous TP documentation to be prepared and maintained. Additionally, more and more countries are implementing CbC Reporting.

What are the common trends?

No matter the country or revenue authority, the best approach is always for taxpayers to have clearly documented their connected party transactions. The compliance burden has definitely increased so taxpayers will need to be prepared to complete everything timeously.

The flip side of this is that tax authorities also need to be prepared. Specialised tax authority resources are required in order to assist revenue authorities with working through all of the compliance documentation. As such revenue authorities are increasing their technology and staff in order to cope with the additional analysis. It is likely that audits will be triggered based on certain trends based on certain industries or types of transactions.

Exchange of information between tax authorities is now the norm and tax authorities are working together more and more to identify problems or risky transactions on both sides. Many African countries are also taking steps to implement the OECD’s recommendations for countering harmful tax practices through coordinated international tax rules and enforcement efforts.

Conclusion

With all the additional filing and documentation requirements resulting in tax authorities seeing exactly what is happening, there is likely to be an increase in the number of TP audits, queries, and information requests. Detailed and robust documentation is more important than ever, and taxpayers need to be proactive to ensure that documentation is ready timeously due to the deadlines being implemented. Current TP policies should be looked at and analysed to ensure that the arm’s length principle is being adhered to prior to an audit. Proactiveness and consistent record keeping will save taxpayers down the line.

Whether you need to prepare TP policies in order to transact around Africa or prepare documentation to ensure compliance, contact us to assist

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.