Transfer pricing rules/regulations in the African continent

Ghana

The Finance Minister, in accordance with the provisions of Section 114(1)(d) of the Internal Revenue Act, 2000, enacted the transfer pricing regulations, 2012 (L.I 2188), to be operated by the Ghana Revenue Authority (GRA),  which are effective from 27 July 2012.

The transfer pricing rules follow the arm’s length principle and require the use of the “most appropriate” method to price related party transactions.

The rules apply to transactions between:

•Taxpayers in a controlled relationship

•A permanent establishment (PE) and its head office

•A PE and other related branches of the PE

•A taxpayer and another taxpayer who are in an employment relationship.

The rules follow the 2010 OECD Transfer Pricing Guidelines (OECD Guidelines).

The transfer pricing rules require the use of the “most appropriate” method to price related party transactions. Similar to the OECD Guidelines, the transfer pricing methods approved by the Commissioner-General are:

The CUP method, The Resale Price method, the Cost-Plus method,  the Transactional Profit Split method and TNMM.

Kenya

Kenya maintains an established transfer pricing regime.  Although specific transfer pricing rules were only introduced in 2006, the Kenya Revenue Authority (KRA) in 2003 already took Unilever to court for selling goods manufactured in Kenya at lower prices to Unilever Uganda ltd than to Kenyan customers.  In a highly publicised 2005 High Court case Unilever won on appeal while the Kenya Revenue Authority  lost the case.  Transfer pricing is still a key focus area for KRA audits, especially in the case of continued losses or where group companies are located in low tax jurisdictions.  There is currently no legal basis for taxpayers to agree and negotiate APAs with the KRA and concerns have been raised about the ability of the Local Committee responsible for dispute resolution to address relevant technical issues.  The KRA has an established a transfer pricing task force which in 2013 has been expanded through the creation of a transfer pricing team at the Medium Taxpayers Office.

Namibia

Namibia introduced transfer pricing legislation in 2005, aimed at enforcing the internationally accepted arm’s length principle in cross-border transactions carried out between connected persons. In addition to the legislation, the Directorate of Inland Revenue issued Practice Note 2 in 2006, as it is in South Africa which provides guidance on the application of the transfer pricing legislation.

In Namibia, Paragraph 8.5 of Practice Note 2 on transfer pricing, which was issued by the Director of Inland Revenue states that a taxpayer is required to be in possession of transfer pricing documentation, for example, to be able to demonstrate that prices charged by or to that taxpayer in terms of a cross-border transaction with connected persons, is arm’s length. Such taxpayer would also be expected to retain and implement transfer pricing documentation. Thus, when the Directorate of Inland Revenue performs transfer pricing audits, a taxpayer would be expected to be able to produce appropriate documentation (and have implemented the relevant pricing), even retrospectively. Therefore, a taxpayer entering into cross-border connected party transactions would be well advised to adhere to transfer pricing rules applicable in Namibia and to document this, to avoid transfer pricing adjustments and respective penalties payable etc, at a later stage.

Nigeria

The Nigerian transfer pricing (TP) rules, Income Tax (Transfer Pricing) Regulations No 1, 2012  were published with a commencement date of 2 August 2012. It is effective for basis periods beginning after the commencement date.

For example, a company ABC ltd  with an accounting year end of 31 December was required to have TP documentation available  for accounting periods commencing 1 January 2013 rather than 2012.

Prior to the publication of the Regulation, FIRS consulted widely in the period leading up to the release of the regulations to ensure that  companies especially the multinational enterprises were carried along to obtain their compliance.

The regulations give effect to the existing anti avoidance provisions contained in the Personal Income Tax Act, the Companies Income Tax Act, and the Petroleum Profits Tax Act. It aims, amongst others, to provide certainty in the tax treatment of related party transactions and  it is applicable to both domestic and cross border transactions.

Nigerian transfer pricing legislation  has a contemporaneous transfer pricing requirement which means that prior to filing in your annual tax returns,  a taxpayer should have prepared transfer pricing document analyzing related party transactions for that year. This  is a yearly requirement that must be updated whereas it is not the case in South Africa.

The Nigerian legislation provides for an Advance Pricing Agreement (APA) which allows companies to negotiate pricing methodology for a number of years with the FIRS.

Apart from increasing tax revenue for the FIRS, the transfer pricing legislation guarantees certainty and clarity for multinationals on the taxing system in Nigeria in compliance with global standards.

Paragraph 6(i) of  the Income Tax Regulations   prescribes that a connected taxable person shall record, in writing or on any other electronic device or medium, sufficient information or data with an analysis of such information and data to verify that the pricing of controlled transactions is consistent with the arm‘s length principle and the connected taxable person shall make such information available to the Service upon written request by the Service.

Paragraph 9(3) of the FIRS Regulation prescribes that an uncontrolled transaction is comparable to a controlled transaction within the meaning of this regulation –

• where there are no significant differences between the uncontrolled transaction and a controlled transaction under comparable circumstances which could materially affect the conditions being examined under the appropriate transfer pricing method; or

•where such differences exist, reasonably accurate adjustments are made in order to eliminate the effects of such differences, or reduce the effects of such differences, to the extent that all material differences are eliminated.

To be continued

Teju Somorin