Tax authorities globally are increasingly concerned about the erosion of the tax base through price manipulation of the cost of a cross-border transaction involving a good or service between two connected companies in two different jurisdictions, especially when it comes to A multinational company (MNE) moves the profits from a high-tax country to a low-tax country.
Over the years, the documentation that a taxpayer must present in order for the tax authority to justify the transfer price has become more voluminous and complex. This has been compounded by the Covid-19 pandemic, which has disrupted the global supply chain, increasing costs and causing a change in consumer behavior, resulting, for example, in shortages of many commodities. .
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Cross-border transactions have also been affected by increased tax transparency, such as country-by-country reporting, and increased business complexity.
Africa Transfer Pricing Survey
Graphene Economics, a transfer pricing advisory firm, conducted a survey on transfer pricing in the African context.
There were 71 respondents from 15 countries, which included multinational companies, tax authorities, and tax consulting firms.
According to the multinational companies surveyed, the most important transfer pricing (TP) trends are more frequent and rigorous audits, global tax reform, and technology adoption.
Service-focused multinational companies expected different trends than goods-focused multinational companies. Service-focused multinational companies expected the imposition of taxes on digital transactions, increased information sharing between tax authorities, and a greater focus on administration and headquarters service transactions.
Read: The Complexity of Transfer Pricing of Digitized Supply Chains
Asset-focused multinational companies expected more frequent and rigorous audits, comprehensive tax reform, and increased compliance requirements.
- 90% of respondents believe that TP disputes and controversies will increase over the next year;
- 96% of the multinational companies that responded said that they maintain normal correspondence with the tax authorities (responding to requests for information and audit findings);
- 24% have used mediation or similar processes;
- 20% have gone to court;
- 8% have used mutual agreement procedures (MAP); Y
- 8% have used advanced pricing agreements (APA).
(Respondents can select multiple options, which is why the above does not add up to 100%.)
Increase in audits and controversy
Transfer pricing, particularly in very large transactions, faces the tax authority and the taxpayer on opposite sides of the table.
The most worrying thing is that if one country makes an upward adjustment in the transfer price that results in a higher taxable profit, and the other country does not make a corresponding downward adjustment, the taxpayer will be subject to double taxation.
Double taxation agreements (DTAs) can be based on the OECD (Organization for Economic Cooperation and Development) model tax treaty or the United States model national treaty. A DTA will provide a dispute mechanism, such as APA and MAP. The last resort is the judicial process.
If the two jurisdictions have entered into a double taxation agreement, the two countries may enter into a MAP, as provided in the DTA, to agree on the up and down adjustment to be made. A DTA may include a binding arbitration clause if agreement on a MAP cannot be reached.
An advanced pricing agreement will provide up-front certainty and avoid disputes as it is binding on both the company and the tax authority.
The African countries that have legislation addressing APAs are Botswana, Burkina Faso, Congo Brazzaville, Egypt, Gabon, Nigeria, Morocco, Senegal, Tanzania, Tunisia, and Uganda.
South Africa recently published a discussion paper on APA.
The burden of supporting transfer pricing policy
- Collect, classify and validate the data that is included in the TP documentation;
- Update the agreements between companies;
- Update studies and analysis of PT;
- Stay up-to-date with regulatory changes, legislation, and country-specific documentation; Y
- Handle transfer pricing disputes.
Companies use different technologies to manage and calculate TP, ranging from an Excel spreadsheet and internally developed technology to external technology such as SAP, Oracle, and Hyperian.
Transfer pricing risks of business restructurings
A business restructuring does not require a sale or an acquisition. According to Graphene Economics, “a transfer of a business unit (for example, a shared service center operation) from a South African company to a related party in Kenya, or the conversion of manufacturing operations from a full risk model to a limited risk model would constitute a corporate restructuring for transfer pricing purposes ”.
Graphene notes that most African countries do not have a specific definition or regulations on the transfer pricing aspects of business restructuring in their legislation.
The transfer pricing consequences of a corporate restructuring will be affected by the responsibilities assumed, the assets used and the risks assumed before and after the restructuring by the parties involved, and whether anything of value has been transferred, such as intellectual property .
Any re-characterization of the business will have an implication on transfer pricing.
If the employees have not been transferred, this will also have an implication. All of these may require compensation and must be justifiable to the tax authority.
Graphene Economics mentions a number of other important considerations, such as local factors, whether licenses or intellectual property can be transferred, the tax consequences of the movement of personnel, and any withholding taxes the African country may impose on payments made.
It cautions that transfer pricing is perceived as a means of shifting profits out of the Africa region, and therefore multinationals should consider transfer pricing and other local tax and regulatory consequences before embarking on business restructuring.
Focus on intragroup services
Intra-group services, such as shared IT or human resources services, are common in large multinational companies. Reasons may include cost savings, shared IT technology, and a lack of skills in the country that pays for these services.
The company may need to provide evidence to support these costs. If the subsidiary is required to pay a pro rata fee for the use of shared IT technology, it may be required to provide the IT provider’s invoice and the pro rata amount allocated to it.
Graphene cautions that many countries do not have clear guidance regarding the specific evidence required to substantiate intragroup charges. They advise that an immediate solution for multinational companies operating in Africa is to obtain adequate evidence to support the services provided and to ensure that the charges are justified.