All this interest has led to the need for funding and global banks are focusing on opportunities in Africa. In addition, Africa’s large population makes it extremely attractive for the telecommunication industry. These are only two examples of the kind of opportunity on offer in Africa today. It is no wonder that transfer pricing has become a hot-button issue in the African region.
Tax authorities throughout Africa have realised that, now more than ever, they need to put an end to multinational businesses extracting excessive profits from their countries. In the more established economies in Africa, they are also continuing to heighten their scrutiny by introducing new compliance initiatives and renewing focus on transfer pricing investigations and audits. While a number of jurisdictions have already implemented transfer pricing rules into their income tax legislation, we expect the rest could follow suit within the next year or two.
Compared to the United States and countries in Europe, many African nations have emerged relatively unscathed from the global financial crisis. Head offices are looking to extract maximum cash from companies that are still cash flush despite the downturn, to help fund those companies in countries that have been more heavily affected. We have seen a frantic rush for companies not yet doing business in Africa to enter the fray, trying to grab a piece of the pie.
Business’s expansion into Africa is further evident in the volumes of exports out of Africa. Exports from Africa are only surpassed by those from Asia, with economists predicting that we have only scratched the tip of the iceberg. They expect further growth at a pace faster than in Europe, the Middle East and North America.
Source: World Trade Organization, International Trade Statistics, 2010
Most countries in Africa have shown an active interest in transfer pricing over the last decade. In combination with the sharp increase in the volume of cross-border transactions, two trends have increased the complex and challenging nature of Africa’s transfer pricing environment.
The first trend is the increase in specific transfer pricing rules or anti-avoidance legislation introduced by a number of African countries. To date, 33 countries in Africa have introduced some form of regulation that allows them to adjust the pricing of related-party transactions. Below is a table illustrating the status of various African countries’ transfer pricing rules or, if applicable, the anti-avoidance legislation that acts in accordance with transfer pricing legislation.
There are signs that even more countries will move towards the introduction of transfer pricing rules. Concurrently, the increase in transfer pricing regulations within Africa and the corresponding documentation required by revenue authorities has provided African countries with a wealth of additional information which can be used to assist in selecting audit targets.
Tax authorities in Africa are moving towards using the Orbis™ database to asses transfer pricing compliance/anti-avoidance legislation. The database allows tax authorities to find industries, groups or even companies with abnormal results and focus their search on transactions within these areas.
The second trend is for tax authorities to increase compliance activities. The Nigerian Revenue Authority is in the process of drafting specific transfer pricing guidelines. At the moment, it is empowered to adjust the tax liability of a company in cases where it considers any transaction which reduces or would reduce the amount of any tax payable, to be artificial or fictitious. Hopefully, the new legislation will provide greater clarity for taxpayers.
In South Africa, transfer pricing legislation has changed dramatically, shifting its focus from looking at a specific transaction in isolation, to looking at the overall profit objective, economic substance and commercial objective of an arrangement with a related party. This took effect on 1 October 2011. Transfer pricing has also come up in the 2011 Budget Speech as one of two focus areas to generate additional tax revenue. A transfer pricing specialist from the UK has been engaged by the South African Revenue Service (SARS) to spearhead this enormous task, which evidences the seriousness of its intentions.
The 10 most aggressive tax authorities on transfer pricing are not based in Africa. Five are from the Asia Pacific Region, three from Europe and two from North America, as shown in the table below.
Source: “Asian countries top aggressive tax authority poll.” TPWeek, 16 June 2010; “Top 10 toughest tax authorities for transfer pricing.” TPWeek, December 6, 2007
Government deficits are reduced through transfer pricing enforcement, which leads to the collection of transfer pricing adjustments and taxes. This allows governments to raise much-needed funding, especially for infrastructure development and improvement. In Africa it is no different. We expect multinational companies to be targeted by revenue authorities across the continent through aggressive tax and transfer pricing audits.
Companies doing business in Africa must be aware that they can no longer view transfer pricing issues as isolated, country-specific concerns. The issues are global. Audits will be thorough and sophisticated, and the punishment for non-compliance severe. We could even expect some countries in Africa to top the list for the most aggressive tax authorities in the near future.
We urge multinational corporations to take practical, co-ordinated steps to understand the transfer pricing documentation requirements in Africa. Risks must be identified and addressed. Disputes and audits in Africa must be avoided, or at the very least, administered and resolved. If not, multinationals should expect to confront the full force of the law.