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North and French-Speaking Africa: Countries Aim at Reinforcing Transfer Pricing Rules
The following discussion provides a summary overview of transfer pricing developments in certain countries in Africa. An updated report of transfer pricing developments in Africa will be provided in a future edition of
TaxNewsFlash-Transfer Pricing.
Background
Over the last few years, countries in North and French-speaking Africa have introduced new tax laws aimed at strengthening their transfer pricing rules.
In many instances, these countries’ tax laws already contained long-standing provisions relating, either directly or indirectly, to transfer pricing. However, certain provisions (modeled after French law) were viewed by the various national tax authorities as being too general, and as not affording them sufficient measures to address in an efficient manner potential transfers of profits and/or certain practices observed in major projects.
For example, in certain projects, the assembly and service activities performed in Africa by foreign companies could be construed to be a permanent establishment (PE) in the country in question. It was thought that foreign companies could try to limit the amount of income that might be subject to tax in Africa through the PE. Under this scenario, these companies might be tempted to inflate the value of the goods sold to their local partner (given that the sale transaction would be taxed abroad and would not constitute a PE) and to deflate, accordingly, the price paid for the locally taxed services. Moreover, there were some who believed that these countries’ tax administrations were relatively unfamiliar with transfer pricing issues and the pricing practices of multinational groups.
With the rise in international trade and financial transactions, these countries have taken steps to adapt their laws in order to better regulate transfer pricing practices and, by so doing, to address the transfers of profits in the form of inflated local costs and/or deflated intragroup prices paid to local entities.
While the new transfer pricing rules introduced over the past few years vary from one country to another, they are all aimed at enabling the tax administrations to verify that such transactions are based on arm’s length prices and thus to prevent transfers of profits abroad.
Morocco
As previously reported—see
TaxNewsFlash-Africa 2009-01—the 2009 Finance Act includes a provision that authorizes the tax authorities to require Moroccan companies that deal with related non-Moroccan companies to provide certain transfer pricing information and documentation, including:
- The nature of the relationship between the two companies
- The type of service rendered
- The pricing method used
- The tax treatment applicable to the non-Moroccan company
Under this new provision, Moroccan companies involved in intragroup transactions must be able to produce, at the tax administration’s request, complete transfer pricing documentation within a 30-day period after the request. Failure to comply with the transfer pricing documentation production request allows the Moroccan tax administration to make a tax reassessment on the basis of transfer pricing grounds.
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Algeria
In Algeria, Articles 141 bis (enacted by the 2007 Finance Act) and 189 of the Direct Taxes Code contains general provisions concerning intragroup transactions and the means by which they may be audited by the tax authorities.
The 2008 Finance Act extended the scope of the transfer pricing audit guidelines to include associated Algerian enterprises. The tax administration’s authority to audit transfer prices in Algeria, therefore, is no longer limited to cross-border intragroup transactions.
Tunisia
Tunisia, for its part, does not have any specific transfer pricing rules in its general tax code. During the course of tax audits, the Tunisian tax administration relies on other grounds, such as the abnormal management act doctrine, to audit transfer prices.
Similar treatment can be observed in other French-speaking African countries.
Gabon
The new Gabonese tax code, adopted in January 2009, introduces the concepts of abnormal management acts and transfer pricing. See the discussion in
TaxNewsFlash-Africa 2009-07.
Cameroon
Article L19 bis of the tax procedure code (enacted by the 2006 Finance Act) provides that when the tax administration has in the course of a tax audit
gathered evidence supporting a presumption that the taxpayer-company transferred profits within the meaning of Article 19 of the code, the tax authorities may request the taxpayer to provide information and documents showing:
- The nature of the relationship between the companies in question
- The pricing method used for the transactions in question
- The activities performed by the associated companies
- The tax treatment applicable to the transactions carried out by companies located outside of Cameroon
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Côte d'Ivoire
In the Ivory Coast, Article 50 bis of the 2007 Finance Act strengthened the tax administration’s authority to require evidence/information under its transfer pricing policy.
Summary
As this discussion illustrates, African countries are gradually strengthening their capacity to audit transactions between affiliated companies. Observers anticipate, therefore, that African tax administrations in the future may increasingly demand documentation of the pricing methods applied in intragroup transactions.
It has been reported that certain African country tax administrations may already started conducting transfer pricing audits. Although, at present, no specific penalties apply in the absence of a transfer pricing documentation, possible tax assessments resulting from a transfer pricing investigation could involve penalty assessments—the amount of which would vary depending on the country involved.
In conclusion, companies need to consider whether they are able to prove that the prices applied to their transactions with related entities in Africa—whether involving goods, services, financial transactions (intragroup financing) and/or intellectual property rights (trademarks, patents, etc.)—meet the arm’s length principle. In this context, companies need to consider preparing an appropriate and detailed documentation, as is recommended by the OECD, including:
- A presentation of the companies involved in the intragroup transactions and of the transactions in question
- An functional analysis of these companies
- An economic analysis of the transactions, justifying the method applied and presenting a comparables search supporting the level of compensation
While the countries discussed above generally are not part of the OECD, complying with the OECD’s guidelines may afford taxpayers additional support when defending their transfer pricing policies before the local tax administrations. Also, while these guidelines are officially recognized and applied in many countries—including France, the United States, Japan and the United Kingdom, all of which have particularly strict transfer pricing rules and standards—observers will have to wait and see how the African countries’ standards evolve in this area.
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For more information, contact a tax professional with Fidal Direction Internationale* in Paris:
Yves Robert, Tax Partner : +33.1.55.68.15.76,
yrobert@fidalinternational.com
Mohamed Mahjoubi, Tax Manager: +33.1.55.68.16.53,
mmahjoubi@fidalinternational.com
*Fidal is a French law firm that is independent from KPMG and its member firms.
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