Transfer Pricing in West and Central Africa 2021: Part 1

This two-part article highlights the urgent need for West and Central African countries to embrace a wider vision of transfer pricing and tax revenue management, considering the low performance of tax revenue collection in the region, its high dependency on the natural resources sector, and insufficient on-the-ground implementation of transfer pricing measures to levy more tax revenue.

In this first part, we will review a history of transfer pricing in the region and provide an overview of the tax revenues of West and Central African countries, in particular their corporate income tax (CIT) revenue.

In the second part we will try to identify a regional approach to transfer pricing, and discuss three markets that have strong potential for transfer pricing implementation: Senegal, Ivory Coast and Cameroon.

History of Transfer Pricing in West and Central Africa

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.”

With 15 African countries represented at this Global Forum, African tax authorities began to work from 2013 on a series of technical events for African tax officials, sharing knowledge and developing good practices. The key potential reforms and policies that came out of these workshops were around tax incentives for investment, exchange of information, taxpayer education, tax revenue collection statistics and transfer pricing.

African tax authorities have been varyingly successful in reinventing tax administration in a context of globalization, digitalization, and financial crisis. West and Central African countries were initially absent from these workshops and official discussions, allowing leadership to be taken by Kenya, South Africa, and Nigeria in these developments.

In 2016, the countries belonging to 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.

While tax reform could have had potential wide economic scope, encompassing primary (natural resources), secondary (manufacturing) and tertiary (services) sectors, ATAF refocused transfer pricing discussions on the mining sector in 2017. Yemi Osinbajo, Vice President of Nigeria, said during the conference that “the use of aggressive and suspicious tax planning and transfer mispricing by multinationals to minimize their tax payments” was a major constraint to domestic revenue mobilization in African countries.

The key output from this conference was that, on the one hand, many tax authorities still did not have enough knowledge of the mining sector, which hindered their ability to distinguish between abusive versus standard industry practice, and, on the other hand, risk assessment was critical for developing country tax authorities given the limited resources they have to audit taxpayers.

Since then, transfer pricing in the mining sector has remained a priority. The World Bank in January 2017 issued a Guidebook for Africa that may endure as transfer pricing policy incentive and guidance. In the Guidebook, Michael Jenkins, Chief Economist at the Australian Taxation Office, stated “Many jurisdictions in Africa have identified effective transfer pricing regimes as a frontline tool to ensure they receive their ‘fair share’ of global tax revenues on the profits associated with the extraction and sale of mineral commodities by multinational enterprises (MNEs).”

The tax authority focus on multinational enterprises (MNEs) will not stop increasing, with an alarming dependency on revenue from mining and MNEs for African countries’ budgets, indicating the difficulty for African tax authorities in rethinking transfer pricing or taxation outside of the mining sector.

Recent Developments

Some recent developments show that transfer pricing policy design and implementation for West and Central Africa is still challenging.

In 2019, ATAF got on board transfer pricing regulation with a “suggested approach to drafting transfer pricing legislation” for African countries. The proposed structure includes the very basic legal transfer pricing provisions, with optional provisions, such as intangibles tax deductibility limitations.

The proposition received a negative reception from the business community in Africa, where some voices such as Sebastine Odimma, Africa Head of Tax Controversy at A.P. Moller-Maersk, claimed that “it is important that the ATAF revisits the proposed rule to seek a better alternative that will help maximize revenue for African countries without the risk of double taxation.”

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, with the objective of creating a specialization in the Large Entity divisions of the West and Central African tax authorities.

Tax Revenue Profile of West and Central Africa

At some point, the timing of introducing transfer pricing into the domestic tax regulation is closely linked to local corporate groups’ and MNEs’ market entry and expansion. A key pending question follows for West and Central Africa—was it still too early (or too late) to pursue a transfer pricing policy considering their stage of development?

Setting a Benchmark in Tax Revenue Collection

ATAF provides online all the updated tax data in relation to African countries, including West and Central Africa. For this article, data for the years 2010 to 2019 has been studied and examined below.

As a region, West and Central African countries are not a compact group with the same GDP profile and tax revenue characteristics. Far in front, Ghana is overperforming with close to $25 billion in tax revenues, compared to the Top Tier-1 countries that are Ivory Coast, Cameroon and Senegal, which range between $10 and $15 billion.

All these countries are over-reliant on large taxpayers, which account for 50% to 60% of their tax revenue. These large taxpayers face the highest tax reporting and compliance pressure, while also being the key exporters, asset investors, and employers of a large portion of the country’s workforce.

CIT remains a main source of tax revenue, slightly affected by the Covid-19 pandemic, in West and Central Africa. However, in all West and Central African countries, the number of CIT payers has continuously decreased over time, which is a concerning trend. It may be suggested that the informal sector (businesses with no legal and tax registration) has increased, or that some key businesses simply shut down over time, with a potential reallocation of assets to more competitive areas, such as Asia.

Another indicator that could be used to benchmark West and Central African countries is the total revenue from natural resources. Countries such as Ghana and Cameroon still have a significant share of their economy based on agriculture and forestry, while Cameroon remains the main exporter of minerals, with a noticeable increase of mining revenues for Ghana, Togo, and Niger during recent years. Countries such as Cameroon and Ivory Coast rely on their national oil production as a source of key non-tax revenue, while others such as Chad and Democratic Republic of Congo have been over-reliant on oil and mining royalties.

In the West and Central African region, only Cameroon can really pretend to revenue from the secondary sector with an approximate $7 billion in 2019, and Ghana and Cameroon to revenue from the tertiary sector, with approximately $7 and $5 billion respectively.

This high exposure to tax and non-tax revenues from natural resources raises the question of the opportunity for designing and implementing transfer pricing policies in West and Central Africa, or at least of avoiding too-complex policies that will deter the existing MNEs from developing the domestic market, which will be discussed in Part 2 of this article.

This column does not necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Anthony Assassa is an Associate Member of the Chartered Institute for Securities & Investment (CISI) and a Quality Reviewer at BDO Global for Africa & Middle East; he is also an experienced adviser dealing with situations of high complexity for investors and shareholders involving reporting, compliance, and change issues.

The author may be contacted at: anthony.assassa@gmail.com