Deemed Interest
The regulations give the TRA the right to impose a deemed interest expense on intragroup financing that is interest-free. Related persons involved in intragroup financing either directly or indirectly, with or without consideration, are required to determine the arm’s length rate for such assistance. This also raises the possibility of the imposition of real withholding tax on deemed interest expenses.
Lack in certainity
In the case of South Africa for example, although she uses the Practice Note, choosing the right method to apply in a given situation does not always give satisfactory results. This often causes uncertainties for taxpayers about the tax consequences of their business transactions and often disputes arise between SARS and the taxpayers concerned.
Penalties for non compliance with the arms length principle
Most guidelines recommend stiff penalties for taxpayers who fail to comply with the arm’s length principle of transfer pricing, which states that the amount charged by one related party to another for a given product must be the same as if the parties were not related.
However, Penalties differ from jurisdiction to jurisdiction. The Tanzania TP Regulations impose stringent penalties for noncompliance. Noncompliance with the arm’s length principle incurs a penalty equal to 100 percent of the tax underpayment. Additionally, a taxpayer that fails to prepare and maintain transfer pricing documentation commits an offense and is liable on conviction to imprisonment for a term not exceeding six months or a fine not less than TZS 50 million, (about $30,000)or both.
In Angola there are no specific transfer pricing penalties in place, this means that ordinary penalties apply. However, they are currently working on a new General Tax Code and it is expected that this new Code will have specific transfer pricing penalties. When the new Code will be enacted, however, remains unclear.
Likewise, in Nigeria, a taxable person who contravenes any of the provisions of the Regulations shall be liable to a penalty as prescribed in the relevant provision of the applicable tax law.
Resolving Transfer Pricing Disputes
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. A concern remains that the Tanzanian Regulations for instance 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.
Other issues identified by KPMG are as follows:
•Transfer pricing vs. Customs challenge;
• Ensuring consistency in the application of global corporate Transfer Pricing policies and adherence to local requirements;
• Addressing the issues in the interaction between secondment contracts, personal taxation, recharges and Personal Establishment;
• Avoiding double taxation impact of TP adjustment carried out in one country Only;
• Application of TP in a Joint Venture environment;
• TP and tax residency risks; and
• Managing indirect charges in a Transfer Pricing environment.
Conclusion
Multinational enterprises and tax practitioners are recognising that Africa cannot ignore transfer pricing any longer. Like any other area of tax compliance, understanding the legal requirements, aligning these with the business and maintaining current transfer pricing documentation is essential for multinationals to successfully manage this tax risk.
Transfer pricing is a really serious business issue. The way multinationals are going to operate in future is going to change because of these tax laws. I see shifts of company headquarters to other jurisdictions,” said Richard Ndung’u, partner and head of tax at KPMG East Africa.
Companies doing business in Africa must recognise that transfer pricing has become an important issue when dealing with other countries. In addition, it is also important for companies to comply with local transfer pricing rules in order to ensure that arm’s length pricing can be substantiated for the other party to a cross-border connected party transaction if transfer pricing rules are applicable in the other country. Therefore, a multinational company carrying on business in countries would be well advised to review and if necessary update its transfer pricing documentation.
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.
Dr Teju Somorin is the president Chartered Institute of Taxation of Nigeria (CITN); and president West African Union of Tax Institutes (WAUTI)
