Transfer Pricing in Africa Needs Better Education, Data Access

The introduction of transfer pricing regulations to the tax codes of most sub-Saharan African countries more than a decade ago was supposed to improve fiscal revenue generation by reducing or eliminating tax evasion arising from mispricing. But transfer pricing is still being practiced at a basic level.

Both the tax administration and tax practitioners are still arguing about the fundamental matter concerning most appropriate methods, profit level indicators, and comparables to use to test transactions. Poor training and steep costs of acquiring important data are preventing proper development of transfer pricing in Africa. African nations must take action to incorporate transfer pricing education into academic curricula and increase access to financial databases.

Two factors are responsible for the current level of transfer pricing practice. One is practitioner skill. Transfer pricing is a complex area of taxation that requires deep knowledge of international economics, accounting, tax, and various industries. Economic development and global ties vary among jurisdictions. Most African governments don’t have the financial capacity, policies, and compensation structure to attract these skills.

The second is the cost of operation. Transfer pricing practice is anchored on comparison. The terms of connected transactions are compared with those between independent transactions operating under similar circumstances. The subscription rate for access to the comparables—controlled by financial database owners such as Moody’s Ratings—is expensive for most transfer pricing practitioners. This has been a barrier to entry of most potential practitioners, including in some tax administrations.

The gap in knowledge across the continent was summed up in a 2021 case involving Oracle Technology Systems in Kenya, when the judges referred a transfer pricing matter back to the Kenya Tax Authority ”to carry out a proper audit and in particular a functional analysis to determine what the exact functions of the appellant are and if these are fundamentally different from those of independent distributors.”

A court in Zambia observed a similar trend in 2020 when, in a case involving Mopani Copper Mines, it held that the Zambia Revenue Authority’s “assessment was based on inaccurate transfer pricing results emanating from use of an inappropriate transfer pricing method, disproportionate comparables.”

Educational and professional institutions in Africa should more centrally prioritize comprehensive transfer pricing study. Transfer pricing coursework is currently more of an adjunct of international tax in most of these institutions.

For instance, the Chartered Institute of Taxation of Nigeria, the statutory body regulating tax practice in Nigeria, only includes concepts of transfer pricing in the entire syllabus for professional examination for licensing tax practitioners. In Kenya, more comprehensive training on transfer pricing is only available as an optional module in the higher national diploma in tax administration organized by the Kenya Revenue Authority.

Education ministries and departments in charge of education and training in each country must find a way to incorporate transfer pricing as an important body of knowledge in the curricula for training tax and accounting specialists. The African Tax Administration Forum can facilitate this by engaging with governments to make this happen as quickly as possible. The ATAF can consider developing a comprehensive syllabus that can be adapted by various governments for this purpose.

A significant challenge is that countries in Africa have disproportionate sizes and economic endowments. But one common factor among them is continuous and constant depreciation of local currencies against international convertible ones. This makes it expensive for transfer pricing practitioners to bear the cost of subscription against cost of service derived in local currency.

Financial database owners have built a wall to limit transferability of accessibility among subscribers and countries. The ATAF could negotiate with the companies in determining in local currencies based on the cost of providing the services to local beneficiaries, including subsidiaries of multinational enterprises that could pay based on revenue capacity in their respective host jurisdiction.

Africa thrives in the primary sector involving extraction and production of raw materials. However, it hasn’t been able to develop the manufacturing sector, making it dependent on importation of processed items. Most multinational enterprises serve as an outpost to bridge this gap. Thus, there is a need for proper assessment of the connected transactions to ensure they remain at arm’s length.

Transfer pricing can be a sentinel that protects a country from exploitation. African governments must ensure they work with specialists to assess that terms of related party transactions among multinationals are at arm’s length. This makes it pertinent for Africa to develop robust transfer pricing capacity and competence. They should do everything possible to develop local expertise.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tayo Ogungbenro is partner and head of KPMG’s transfer pricing practice in West Africa, and is based in Lagos, Nigeria.

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