According to the United Nations Economic Commission for Africa, Africa is losing approximately US$50 billion per year in illicit financial flows; transfer mispricing being one of the primary sources of those losses. The African Development Bank has suggested that the extractive industries are largely behind the alleged tax leakages. There is therefore the need to put measures in place to prevent the loss of tax revenue.
As part of counteracting the alleged abuse in the extractive sector, The African Tax Administration Forum (“ATAF”) launched its “Toolkit for Transfer Pricing Risk Assessment in the African Mining Industry” to help strengthen tax authorities’ approach and capacity in identifying high risks intercompany transactions.
Transfer Pricing Risk Assessment Toolkit
The ATAF and the German Federal Ministry for Economic Cooperation and Development have developed a toolkit for African tax authorities seeking to assess transfer pricing risk in the mining industry. The purpose is to strengthen the competent authorities’ capacity to determine whether they should audit particular high-risk “related party transactions.”
The toolkit focuses on addressing transfer pricing (“TP”) issues that present a high risk to revenue mobilisation. A loss of even one percent (1%) of the value of these transactions is likely to be significant for tax revenues collection in developing countries. This is because in Africa, although a small number of multinational enterprises (MNEs) dominate the mining sector of the countries, they contribute most of government’s revenue in terms of royalties, withholding taxes, Pay As You Earn (“PAYE”) tax and corporate income taxes.
Although, the toolkit was developed for the identification and assessment of TP risks in the mining industry, it also focuses on transactions that are common to other sectors of the economy.
Specifically, the toolkit provides tax administrators a step-by-step guide on how to review TP risks associated with related party transactions involving:
- 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.
- Intercompany debt
Arrangements where the local entity receive debt from an affiliate company to finance its operations and/or working capital. This also includes guarantees provided by an affiliate entity from third party loans.
- Procurement services
Arrangements where an entity purchases mining goods (including capital goods) and services on behalf of the local entity.
- 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.
In addition to the above, the toolkit provides recommendations on how ATAF members may obtain information from foreign jurisdictions in order to identify and mitigate transfer mispricing in the mining sector. They include:
- Signing on to the OECD’s Mutual Administrative Assistance to participate in the automatic exchange of information between tax authorities;
- Joining the African Agreement on Mutual Assistance in Tax Matters, which creates a legal basis from which African tax administrations can assist one another in tax collection and other matters.
- Enacting a legislation to require taxpayers to maintain a Master File that contains standardised information relevant for all MNE group members, and a Local File that refers specifically to material transactions taking place in the local tax jurisdiction.
- Enacting a legislation to assign the burden of proof in transfer pricing cases to the taxpayer, not the tax authority; which is the case for other tax types in Ghana.
The Next Steps
ATAF continues to influence and play an active role in total tax administration in Africa. This includes TP initiatives that are currently being carried out by the Ghana Revenue Authority (“GRA”). Recent developments show that the GRA is currently implementing the transfer pricing regulations through conducting transfer pricing audit of some industries of which the extractive industry is included. As a member of the ATAF, it is expected that the GRA would tailor its approach to TP audits in the mining sector and intensify such audits. Ghana has agreed to participate in the OECD automatic exchange of information effective 2018 which means that the GRA would have unprecedented access to tax information made available by other 101 countries’ tax authorities.
Taxpayers should therefore be proactive and take advantage of the guidance provided in the toolkit to perform a review of their related party transactions and assess whether or not any mispricing risk exists and the extent of such risk.
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Business School – Upcoming session:
Topic Ghana’s Tax and General Regulatory Environment – Update Venue Takoradi Date 20 February 2018
Topic Staying Compliant with Income Taxes – Current and Deferred Taxes
Date 21 February 2018
Topic Taxing the Oil & Gas Sector
Date 23 February 2018
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George Kwatia is a Partner for PwC Africa and Tax Leader for PwC Ghana and Sierra Leone. He is also the West African Mining Leader within PwC.