Transfer pricing presents risks in Africa

Changes in transfer pricing (TP) policies by the Organisation of Economic Cooperation and Development (OECD) could have farreaching implications for companies doing business in Africa. “In a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein,” says the OECD in its preamble to a document outlining amendments to its guidelines. It has since warned that “aggressive tax planning is a major risk to the revenue base of many countries” saying that traditional audits need to be replaced by real-time information. “The Organisation has generated hundreds of pages of work on Article 7, but non-OECD member tax authorities – especially those in Africa – may not be familiar with the OECD work, and this brings uncertainty for taxpayers doing business in Africa,” says Jeannè Havinga, PwC South Africa’s transfer pricing specialist. One of the issues under discussion is “arms length” principle in TP. The arm’s-length principle states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. According to Havinga, the OECD has “reaffirmed that the arm’s length principle is the fairest and most reliable method, but has removed the hierarchy of methods which entities typically follow as a process of elimination in selecting their TP methodology.”