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20 December 2021

By Barbara Curson CA(SA)

Documentation has become more voluminous and complex.

Transfer pricing is perceived as a means of shifting profits out of the Africa region.

Tax authorities globally are increasingly concerned with the erosion of the tax base through the manipulation of the price of the cost of a cross-border transaction involving a good or service between two connected enterprises in two different jurisdictions – especially where a multinational enterprise (MNE) shifts profits from a high tax country to a low tax country.

James Wiseman, Source: James Wiseman/Unsplash

Over the years, the documentation a taxpayer must produce for the revenue authority to justify the transfer price has become more voluminous and complex. This has been exacerbated by the Covid-19 pandemic, which has disrupted the global supply chain, increasing costs, and causing a change in consumer behaviour, resulting, for example, in the scarcity of many commodities.
Cross-border transactions have also been impacted by increased tax transparency, such as country-by-country reporting, and the increase in business complexity.


Graphene Economics, a transfer pricing advisory firm, carried out a survey on transfer pricing in the African context. There were 71 respondents from 15 countries, comprising MNEs, revenue authorities and tax consulting firms.

According to the MNEs surveyed, the most significant transfer pricing (TP) trends are more frequent and rigorous audits, global tax reform, and the adoption of technology.

Service-focused MNEs expected different trends from the goods-focused MNEs. Service-focused MNEs expected the taxation of digital transactions, increased information sharing between revenue authorities, and increased focus on headquarter and management services transactions.

The goods-focused MNEs expected more frequent and rigorous audits, global tax reform, and increased compliance requirements.
• 90% of respondents believe TP disputes and controversies will increase over the next year;
• 96% of MNE respondents said they are engaged in normal correspondence with revenue authorities (responding to requests for information and audit findings);
• 24% have used mediation or similar processes;
• 20% have gone to court;
• 8% have used mutual agreement procedures (MAPs); and
• 8% have used advanced pricing agreements (APAs).
(Respondents could select multiple options, which is why the above doesn’t add up to 100%.)

Kelly Sikkema, Source: Kelly Sikkema/Unsplash


The transfer price, particularly on a very large transactions, pits the tax authority and the taxpayer on opposite sides of the table.
Of most concern is that if the one country makes an upward adjustment to the transfer price resulting in a greater profit to be taxed, and the other country does not make a corresponding downward adjustment, the taxpayer will be subjected to double taxation.

Double taxation agreements (DTAs) may be based on the OECD (Organisation for Economic Co-operation and Development) Model Tax Convention or the United National Model Convention. A DTA will provide for a dispute mechanism, such as APAs and MAPs. The last resort is the court process.

If the two jurisdictions have entered into a double taxation agreement, the two countries can enter into a MAP, as provided for in the DTA, to agree on the upward and downward adjustment to be made. A DTA may include a binding arbitration clause if agreement cannot be reached on a MAP.

An advanced pricing agreement will provide upfront certainty and avoid disputes, as it is binding on both the enterprise and the tax authority.

The countries in Africa that have legislation catering for APAs are Botswana, Burkina Faso, Congo Brazzaville, Egypt, Gabon, Nigeria, Morocco, Senegal, Tanzania, Tunisia, and Uganda.
South Africa recently published a discussion paper on APAs.


Enterprises are required to:

  • Collect, sort and validate the data that goes into the TP documentation;
  • Update intercompany agreements;
  • Update TP studies and analyses;
  • Stay up to date with regulatory changes, legislation, and country-specific documentation; and
  • Deal with transfer pricing disputes.

Enterprises use different technology to manage and calculate TP, ranging from an Excel spreadsheet and internally developed technology to external technology such as SAP, Oracle, and Hyperian.


A business restructuring does not require a sale or an acquisition. According to Graphene Economics, “a transfer of a business unit (e.g. a shared service centre operation) from a South African company to a related party in Kenya, or conversion of the manufacturing operations from a full-risk model to a limited-risk model would constitute a business restructuring for transfer pricing purposes”.

Graphene points out that most countries in Africa do not have a specific definition or regulations on the transfer pricing aspects of business restructurings in their legislation.

The transfer pricing consequences of a business restructuring will be impacted by responsibilities undertaken, assets used, and risks assumed before and after the restructuring by the parties involved, and whether something of value has been transferred, such as intellectual property.

Any recharacterisation of the business will have a transfer pricing implication.

If the employees have not been transferred, this will also have an implication. All of these may require compensation, and must be justifiable to the tax authority.

Graphene Economics mentions a number of other important considerations such as local factors, whether licences or intellectual property can be transferred, the tax consequences of movement of personnel, and any withholding taxes that may be imposed by the African country on outgoing payments.

It cautions that transfer pricing is perceived as a means of shifting profits out of the Africa region, and therefore multinationals should consider transfer pricing and other local tax and regulatory consequences before embarking on a business restructuring.


Intra-group services, such as shared IT or HR services, are common within large MNEs. The reasons can include cost saving, shared IT technology, and a lack of skills in the country paying for these services.

The enterprise may have to provide evidence to support these costs. If the subsidiary has to pay a proportional fee for the use of shared IT technology, it may be required to provide the invoice from the IT provider and the calculation of the proportional amount allocated to it.

Graphene warns that many countries have no clear guidance regarding the specific evidence required to substantiate intra-group charges. They advise that an immediate solution is for MNEs operating in Africa is to obtain appropriate evidence to substantiate services rendered and to ensure that the charges are warranted.

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