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As companies expand their operations across African borders, they are uniquely positioned to benefit from the continent’s diverse and growing markets.
However, this expansion also brings about a set of complex challenges in navigating international tax obligations.
International tax compliance in Africa requires a comprehensive understanding of local tax laws, double taxation agreements (DTAs), permanent establishment thresholds, and exposure to transfer pricing rules.
International Tax Obligations: Local Laws and Double Taxation Agreements (DTAs):
One of the fundamental considerations for companies operating across African borders is to understand the local tax laws of each jurisdiction in which they operate.
These laws dictate the taxation of business income, as well as the rules governing passive income. Moreover, companies must be aware of the DTAs between the countries involved, as these agreements play a pivotal role in preventing double taxation and determining the country with the primary right to tax specific types of income.
Proposed Revisions to DTAs:
Several African countries have taken steps to counter base erosion and profit shifting (BEPS) by signing or committing to sign the multilateral instrument (MLI). The MLI aims to implement measures to address BEPS, such as eliminating treaty shopping, revising permanent establishment rules, and introducing limitation of benefit provisions.
As a result, companies need to stay informed about potential changes to DTAs and ensure compliance with the revised provisions.
Exposure to Permanent Establishment Thresholds:
The concept of permanent establishment (PE) has significant taxation implications. A PE generally refers to a fixed place of business through which a company carries out its business activities. Crossing the PE threshold in a particular country may subject a company to taxation in that jurisdiction.
As companies expand their physical presence across African borders, understanding and monitoring PE thresholds becomes essential to compliance.
Exposure to Transfer Pricing Rules:
The implementation of the African Continental Free Trade Area (AfCFTA) is expected to drive more businesses to establish value chains across Africa. With this comes the need to comply with transfer pricing rules.
These rules require that intercompany transactions be priced at arm’s length, ensuring that profits are allocated within the multinational group as if the transactions were between unrelated parties. Consequently, businesses need to establish robust transfer pricing policies to demonstrate adherence to the arm’s length standard.
Navigating the complex landscape of international tax obligations in Africa requires a thorough understanding of local tax laws, DTAs, and potential revisions to DTAs through the MLI, PE thresholds, and transfer pricing rules.
While this may present challenges, companies must navigate these complexities diligently to mitigate risks and maintain compliance.
Conclusion:
In conclusion, with the growing interconnectedness of African markets, companies expanding their operations across borders must prioritize compliance with international tax obligations.
By staying informed about local tax laws, DTAs, potential DTA revisions, PE thresholds, and transfer pricing rules, companies can effectively navigate the evolving international tax landscape in Africa and position themselves for sustainable growth and success.
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Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Prior to this, Olatunji worked as Director, Tax & Regulatory Services at Nolands Nigeria Professional Services, Senior Manager -Tax, Regulatory & Advisory Services at Saffron Professional Services.
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