Transfer Pricing (TP) has been a part of the tax regimes in various African countries for several years with countries like South Africa, Kenya, Ghana and Nigeria introducing TP regimes over a decade ago. During this period, these countries have witnessed some growth in the implementation of TP and the compliance level of taxpayers. TP principles have become important tools for tax authorities to continue to protect their tax base as the correct implementation will ensure that appropriate returns are earned and taxed where value is created.
Despite the significant progress made in the implementation and development of TP regimes in Africa, there are still some challenges being faced by tax payers and authorities. To ensure the continuous development of the TP regimes in Africa, it is important that these challenges are identified, discussed and addressed. Thus, this article highlights some of the challenges being faced and suggestions on managing them.
Challenges facing African TP Regimes
- Lack of adequate comparable data
The bedrock of TP is the concept of the arm's length principle which states that transactions between related parties should be conducted under similar terms as comparable independent party transactions. As such, comparability is key to TP and getting adequate information to conduct comparability analyses is important to ensure reliable results are gotten.
However, for African countries, the dearth of adequate and useful information means that proper comparability is more unlikely in practice. African taxpayers, in ensuring compliance, often have to cast a "wider net'' outside of their geographical region when searching for comparables, using foreign comparables, which may not reflect the economic circumstances in Africa. This may affect the reliability of results.
- Lack of knowledge and requisite skillsets
TP is a highly specialized field and is relatively new in many African countries, consequently it is not surprising that both tax payers and authorities may be inexperienced in dealing with the implementation of TP. TP requires the expertise of a wide range of professionals including auditors, economists, accountants, valuators etc. and in many developing countries where TP is still in the budding stage, the appropriate training in such a specialized area may not be readily available.
For tax payers, compliance with TP regulations includes the preparation of complex and detailed TP reports and conducting complex analyses. Some taxpayers do not have the requisite TP knowledge and this puts the tax payer at risk of contravening TP rules.
Also, the tax authorities of many developing countries are not well-equipped to examine the facts and circumstances of tax payers to properly apply TP principles especially considering industry peculiarities. Generally, equipping tax administrators to effectively and fairly address TP issues is tasking due to the varied interpretations and application of the arm's length principle and even more so for African countries.
In some African countries, the exodus of talent to more developed economies means that the previously small pool of TP talent has become even smaller and this has put a strain on the maturing of the TP regimes in these countries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
