By Abdulateef Olatunji ABDULRAZAQ, Founder, Taxmobile.Online and Principal Partner, AOA Professional Services
Transfer Pricing: Introduction
Transfer pricing is a term used to narrate intra-group pricing arrangements between members of multinational corporations.
With the increases in cross-border transactions between multinational corporations, corporations often tend to shift revenue / proﬁts from high tax jurisdictions to low tax jurisdictions thereby, reducing the overall tax burden of the Group.
Because of this, the Related Party Transaction (RPT) framework and transfer pricing principles are gaining increased attention globally.
Transfer Pricing developments in West and Central Africa can be dated to 2012 when the Organization for Economic Cooperation Development (OECD) and the African Tax Administration Forum (ATAF) jointly engaged in tax cooperation for Africa.
According to a memorandum signed during the Global Forum on Transparency and Exchange of Information in Cape Town, South Africa:
“ATAF will help African countries build strong, effective and efficient tax systems and counter erosion of their tax bases. We are delighted with this partnership and fully support ATAF’s agenda” said Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration.
“Our joint work with Africa over the past three years shows that by sharing knowledge and experience on taxation we can find common solutions to global challenges.”
In 2016, member countries of the Economic Community of West African States (ECOWAS) initiated talks on transfer pricing, ushering in a new age of reforms that would allow an increase in domestic tax revenue collection while improving the business climate and increasing West African investment attractiveness.
The first regional conference on transfer pricing was held in Abuja, Nigeria, on Oct. 11, 2016, and gathered 15 West African countries, under the patronage of the ECOWAS, EU, OECD, ATAF and the Forum of the West African Tax Authorities (FAFOA). This 2016 conference sparked the interest of West African countries in transfer pricing, an interest that has not diminished since.
In 2020, West African tax authorities met again, this time in Cape Town, South Africa, to be trained by the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) on transfer pricing applied to the mining sector.
The training focused on base erosion and profit shifting (BEPS) implementation applied to the mining sector, to create a specialization in the Large Entity divisions of the West and Central African tax authorities.
Transfer Pricing: Exchange of Information and Revenue Generation
Given the high levels of illicit ﬁnancial ﬂows from African countries and, recognising the potential for tax transparency and the exchange of information as resources for development, African members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) created an African focused programme: the Africa Initiative in 2014.
The objective of the initiative was to unlock the potential of tax transparency and exchange of information (EOI) for Africa by ensuring that African countries are equipped to exploit the improvements in global transparency to better tackle tax evasion.
According to the United Nations Economic Commission for Africa, Africa is losing approximately US$50 billion per year in illicit financial flows; transfer mispricing is one of the primary sources of those losses.
The number of EOI requests sent by African countries in 2020 increased by 21%. For the ﬁrst time, African countries turned the tide in 2020 and became net senders of EOI requests. However, most African countries are still behind their potential EOI targets.
African countries identiﬁed more than USD 43 million (EUR 34.8 million) in additional tax revenues due to EOI requests in 2020. Since 2009, EOI has enabled African countries to identify over EUR 1.2 billion in additional revenues (comprising tax, interest and penalties). The Africa Initiative is open to all African countries. Currently, the initiative is supported by 32 African member jurisdictions and by 11 partners and donors.
Development of Toolkit to boost Exchange of Tax Information in Africa
The African Tax Administration Forum has joined forces with the OECD to create a toolkit to help countries conduct automatic exchanges of taxpayer information.
The toolkit provides direction in setting up and controlling the effective exchange of information functions within tax authorities, helping them coordinate better to combat tax abuse. The toolkit gives tax administrators a step-by-step guide on how to review TP risks associated with related party transactions involving:
1. Marketing arrangements
Arrangements where a related party, for example, a marketing hub, buys mineral products from the mine and/or performs any functions that are associated with the negotiation, sale and delivery of minerals.
2. Intercompany debt
Arrangements where the local entity receives debt from an affiliate company to finance its operations and/or working capital. This also includes guarantees provided by an affiliated entity from third-party loans.
3. Procurement services
Arrangements where an entity purchases mining goods (including capital goods) and services on behalf of the local entity.
4. Management services
Arrangements where the local entity pays for a range of administrative, technical and advisory services to affiliate companies.
The toolkit acknowledged that as a result of limited audit resources of tax administration in developing countries, African Tax Administrators can rely on foreign comparables as long as they can be adjusted to suit local markets.
The exchange of information works in conjunction with audit, investigations and collection functions e.g. transfer pricing audits cannot function effectively without the exchange of information process. The globalization of large organizations and wealthy taxpayers will continue unabated if an exchange of information process is not in place.
Transfer pricing regulations application in Nigeria is becoming more rigorous because of the increase in the availability of data through an ongoing exchange of information between the FIRS and other competent authorities in other jurisdictions. It is expected that this would lead to a rise in transfer pricing audits and possibly a rise in transfer pricing.
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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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