Transfer Pricing in West and Central Africa 2021: Part 2

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.

Part 1 of this article reviewed a history of transfer pricing in the region, and provided 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.

Why Transfer Pricing Matters (or Not) to West and Central Africa

As discussed in Part 1 of this article, transfer pricing in West and Central Africa, in particular the Francophone Region, relies mostly on international cooperation with foreign countries (the EU, Germany, France, etc.) and international organizations (projects funded by the World Bank, International Monetary Fund, African Development Bank, etc.). For these foreign countries or international organizations, priority is still given to reforms around democratic institutions and processes through taxation, capacity building for tax revenue collection, increasing monitoring of companies on their “fair share of tax,” and replacement of revenue from excise tariffs and customs duties.

This may explain why transfer pricing is perceived by local businesses in West and Central Africa more as a political plan, rather than a real technical framework and administrative system.

It may also explain the lack of “ownership” from the tax authorities’ side—the insufficient teaming and internal resource allocation in required systems and databases that would have made the introduction of transfer pricing a success in these countries.

Therefore, the obstacles to an effective implementation of transfer pricing in the West and Central Africa region never historically changed:

• lack of comparable transactions;
• lack of knowledge and resources;
• no dedicated regime dealing with intangible assets and intellectual property;
• lack of approach of location savings concept; and
• insufficient number of tax treaties.

Transfer Pricing Regional Approach

There are mainly three groups of countries that have adopted transfer pricing in their domestic regulations in West and Central Africa:

• countries with an existing transfer pricing concept (Ivory Coast, Guinea);
• countries with simplified transfer pricing regulation (Republic of Congo, Democratic Republic of Congo, Cameroon); and
• countries with comprehensive transfer pricing regulation (Senegal, Burkina Faso, Chad, Gabon).

Shared Characteristics, Rather Than a Common Approach

Working together since 2016 through ATAF, West and Central African countries have developed transfer pricing policies that somehow look similar, as most (but not all) of them implement the following characteristics or requirements:

• being inspired by or quoting the Organization for Economic Cooperation and Development (OECD) Guidelines in drafting transfer pricing regulations;
• the implementation of BEPS Action 13 Master File in their local regulations;
• setting a materiality threshold for the preparation of transfer pricing documentation;
• applying penalties for lack of transfer pricing documentation;
• setting a deadline for submitting the Local File;
• disclosure of the transfer pricing documentation along with the CIT annual return;
• granting a period of 20 to 30 days to report to the tax authority the transfer pricing documentation upon request;
• preparing the transfer pricing documentation in the French language;
• not implementing country-by-country reporting requirements.

These characteristics are not proper to the West and Central African region, as these fundamentals could be found in other regions such as Asia or Latin America, but are rather a common understanding of what should be an implementable transfer pricing policy for African economies, considering the limited taxpayer base and the need to compromise with multinational enterprises (MNEs) as being their main CIT payers.

Some of these countries take their freedom to move in an opposite direction when they find the opportunity to do so, based on their local markets and political regimes. Some examples of typical deviations that can be observed are:

• half of the West and Central African countries (Senegal, Burkina Faso, Chad, Gabon) require a Master File from taxpayers, while the others do not;
• half of the West and Central African countries (Ivory Coast, Cameroon, Gabon, Republic of Congo) do not accept the OECD BEPS format for the preparation and submission of transfer pricing documentation, while the others do accept it;
• most of the West and Central African countries have set a deadline for submission of the Master File (when applicable), while Senegal did not.

These countries are not copying and pasting their neighbors’ transfer pricing regulations, but nor are they really developing a common policy, that could be for example designed and agreed under the Economic Community of West African States (ECOWAS).

The detailed review of three countries, in the next section, will show how different their regulations are in practice.

Review of Ivory Coast, Cameroon, and Senegal

Ivory Coast is a very good example of the countries with an existing transfer pricing concept. Ivory Coast does not require specific OECD BEPS format transfer pricing documentation but requires companies to submit yearly a report of intragroup transactions, which is locally understood as a Local File, that will list all intragroup transactions of a specific taxpayer.

Ivory Coast caps intragroup transactions with a materiality threshold that is a percentage of the annual turnover (5%) and of the general expenses (20%). The non-reporting of intragroup transactions is punished by a 5 million CFA franc ($9,000) tax penalty.

This is not enough for Ivory Coast to state that it has proper transfer pricing regulations: However, in practice, the tax authority refers to transfer pricing, as a concept, when inspecting these intragroup transactions.

Cameroon belongs to the group of countries with simplified transfer pricing regulations. Transfer pricing documentation can be submitted in electronic format (such as Excel file) or in paper format. The requirement starts to apply to taxpayers with a total turnover that reaches 1 billion CFA francs, which only allows Cameroon to capture several small to medium-sized enterprises, but all MNEs at least. Non-submission of the transfer pricing documentation leads to a tax penalty of 5% of the related party transactions but capped at 50 million CFA francs.

Somehow, the country managed to introduce transfer pricing regulations while reducing the range of taxpayers and number of requirements, which could be a win-win for the government and the MNEs operating there in the agriculture, forestry, secondary and tertiary sectors.

Senegal belongs to the group of countries with comprehensive transfer pricing regulation. Senegal requires transfer pricing documentation and country-by-country reporting. The level of information required is very detailed about the companies involved and the transactions performed. However, the penalties are not higher than in other countries of the region: 10 million CFA francs for non-submission of the transfer pricing report and 25 million CFA francs for the non-submission of the country-by-country report.

Heavy or constraining regulation such as this may not contribute to the attractiveness of Senegal for foreign direct investment, indirectly explaining why secondary sector revenues would be progressing moderately and why tertiary revenues still remain low and flat. On the other hand, the Senegal government could claim that, overall, the reform has generated an increase in tax revenues and in particular CIT revenue, as can be verified on the ATAF databank.

Conclusion and Key Takeaways

There is no West and Central African approach to transfer pricing, and a country-by-country approach is strongly recommended.

• It is a tax risk area, with a significant likelihood of an important compliance cost, depending on the group of countries where a multinational entity belongs.
• Foreign investors and CFOs should always carefully consider transfer pricing in West and Central Africa, as local tax authorities are insufficiently trained and do not have the proper tools and methodologies to assess international and intragroup transactions.
• Special attention is recommended for companies operating in the mining sector, as it is kept under government scrutiny in all countries of the region. This sector is highly likely to attract, across the whole region, the permanent attention of the tax authorities on transfer pricing issues.

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