Eyes on trans­fer pric­ing

Rev­enue au­thor­i­ties’ fo­cus is on Africa

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - FABRIZIO LOLLIRI & MICHIEL ELS

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.



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