Times are changing!

As of 2022, the vast majority of African countries have stringent annual TP documentation and compliance requirements in place. Off the back of the Base Erosion and Profit Shifting Project, the latest OECD releases, and in line with global best practices, Africa has responded by strengthening its TP rules, and bolstering its enforcement processes, including investing heavily in resources and data analytics.

It has been estimated that “Africa loses around USD 50 to 80 billion every year in tax evasion”. No idea how accurate this may be, but regardless there is a “perception” that a significant portion of profits is being extracted via inappropriate transfer pricing.  Whether right or wrong, this “perception” adds fuel to the Fiscus’s fire.  As a result, every prudent tax authority and taxpayer alike, has started to take Transfer Pricing as seriously as the legislation implies.

So Transfer pricing is continuously evolving in the face of the global movement toward increased tax transparency, and every tax authority is fighting for its fair share. Businesses, on the other hand, are trying to keep business going and growing, whilst navigating the TP minefield.  Below we have summarised a few of the key recent African TP developments.

What’s new in Africa?
Zambia of course already has stringent annual TP documentation rules in place (including painful penalties for non-compliance). The 2022 budget went a bit further however and proposes to introduce two new schedules for country-by-country reporting to align with international guidance. One of the new schedules would require listing constituent entities of a multinational group aggregated by tax jurisdiction. The other would require reporting additional information on the nature of activities of constituent entities.

In addition, changes to the regulations defining the group consolidated revenue threshold for country-by-country reporting would remove references to the threshold in Euros (i.e., EUR 750 million) and instead only define a single threshold denominated in Kwacha (ZMW 4.795 billion).

Kenya has taken its time (six years) to draft legislation and design appropriate infrastructure to adopt the 2015 BEPS Action 1 report on tax challenges arising from digitalisation. Now that it’s here, the “two-pillar” approach (which also looks at digital tax) has become a further significant development. According to the Kenyan authorities, the two-pillar approach promises to reallocate taxing rights of over USD 125 billion in profits under Pillar One, and generate additional global tax revenue of USD 150 billion under Pillar Two. Whether under BEPS or the two-pillar approach, what’s clear is that Kenya and other African countries are taking a progressive approach toward protecting their local tax base.

The Finance Act of 2021 introduced an expanded definition of the term “control”. The new definition widens the scope for transfer pricing by extending a “catch-all” approach to related entities. Transfer Pricing transactions will consequently be under further scrutiny and impact more entities than ever before.

The Federal Inland Revenue Service (FIRS) on 4 January 2022, lifted the suspension of local filing of Country-by-Country (CbC) reports by Nigerian branches and/or subsidiaries of Multinational Entity (MNE) Groups that are not headquartered in Nigeria.

With effect from January 2022, applicable Nigerian branches and/or subsidiaries of an MNE Group will be required to fully comply with Nigerian regulations governing the local filing of CbC reports.

FIRS also confirmed they have doubled their effort to audit taxpayers who had not been audited since TPs inception, so if you haven’t talked to FIRS about your TP yet, this may well be a space to watch for Nigerian taxpayers!

South Africa
We recently covered some of the key SA TP developments in our previous newsletters including the introduction of the APA’s, the new associated enterprise definition, and intra-group lending.

  • In simple terms, APAs are upfront agreements with a tax authority/tax authorities on your TP arrangements and pricing policies. A positive step by SARS in seeking to provide meaningful solutions for taxpayers on TP disputes and ensuring tax certainty.
  • The reach of transfer pricing has been expanded as the affected transaction definition has been widened to also include an associated enterprise. This includes an enterprise, that participates directly or indirectly in the management, control, or capital of another enterprise. So check again, if the new definition changes your TP compliance requirements!
  • The new interpretation note on intra-group financing makes it clear that the pricing of intra-group loans includes consideration of both the quantum and the cost of debt as the arm’s length principle will not be met if either one or both of these elements are found to be excessive. A key impact of this is the requirement to perform an economic analysis to support both the quantum of debt and interest charged if we want to keep deducing interest with relative ease and avoid unnecessary adjustments. Careful consideration of commercial terms is also necessary.

The Commissioner-General on 1 September 2021 issued a blanket ruling setting a threshold for the preparation and filing of transfer pricing documentation. The ruling exempts taxpayers from the obligation to prepare and file transfer pricing documentation when the “cumulative arm’s length value” of connected party transactions in a tax year does not exceed BWP 5 million. This means of course if transactions are above BWP 5 million, documentation is a must.

Next steps?
TP in Africa is further evolving and becoming even more important. Long story short, you can’t fall asleep at the TP wheel or rely solely on wider group policy/documentation to ensure local African TP compliance obligations are met and risks managed. Please contact us to discuss any aspect of TP Africa with our team of specialists.

Associated enterprises

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.