24 April 2023
Andersen in Nigeria
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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.
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