Eyes on transfer pricing
Revenue authorities’ focus is on Africa
service arrangements as part of tax efficient supply chain structures. However, the tax authorities both in China and India have become more aggressive and increasingly have been attacking the low margins left in the Asian jurisdictions. Africa offers an alternative location to large multinationals due to its low labour cost and less mature transfer pricing systems and regulations.
Transfer pricing has been a focus of revenue authorities worldwide and we expect this focus will also move into Africa given the increasing number of groups setting up operations in the Africa region. It has been said that transfer pricing is the lowesthanging fruit, because it can be subjective and most companies do not have adequate documentation to back up their in-house policies.
Over the past two decades Africa has moved into the transfer pricing age and recently many African countries have adopted the OECD guidelines on which to base their transfer pricing regulations. Almost all European countries have transfer pricing regulations in place.
There are a number of opportunities in Africa for large multinationals to achieve a more cost efficient structure and reduce the risk of being attacked by more aggressive tax authorities like in India and Chi- na. However, most African jurisdictions are putting in place OECDcompliant transfer pricing regulations. Therefore, it is important to look at the transfer pricing arrangements when moving functions or risk to Africa. Documentation is key.
Transfer pricing regulations might not be as advanced and tax authorities do not have the same level of experience as in other European jurisdictions, but African tax authorities are trying to up their game. As in most cases where regulations are in an infant state, documentation and compliance become the major focus, so it is important to put in place, test and document transfer pricing policies in case of an inquiry.
Trends show a number of multi- nationals expanding into Africa, which offers a growing market and a low cost-base for operations. However, when planning efficient supply chain structures, groups should learn from previous mistakes. Many of the structures currently under fire are the result of companies taking advantage of transfer pricing regulations that are not as advanced.
It is important to plan new structures with the view that, eventually, most African transfer pricing regulations will align themselves with the rest of the world. It is also true that the arm’s length principle will not change. Therefore, transactions should always be priced based on functionality, risk and substance to reduce risk of future disputes.
DOCUMENTATION IS KEY