Nigeria: Transfer Pricing Africa (Part II)

In this second part of our overview of current transfer pricing regulations on the African continent, we focus on relevant provisions in, amongst others, Ghana, Nigeria and Uganda.

The Ghanaian Transfer Pricing Regulations, 2012 (L.I.2188) (the Ghanaian Regulations) were introduced by the Ghana Revenue Authority (GRA) on 27 July 2012, effective from 14 September 2012, to provide practical guidance regarding the implementation of the general anti-avoidance provisions contained in the Internal Revenue Act (IRA). In terms of the Practice Notes on transfer pricing, released in January 2013, the GRA will apply the principles contained in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), except when they are inconsistent with the provisions of the Ghanaian Regulations.

The Ghanaian Regulations do not provide for any materiality thresholds or advance pricing agreements (APAs). However, the Transfer Pricing Practice Notes confirm that transfer pricing compliance should not place an onerous burden on the taxpayer's resources and the GRA therefore only expects information and documentation in respect of "material" intercompany transactions. The Practice Notes do not stipulate a threshold for materiality, but as a common "rule of thumb" the proportion of total goods or services derived from related party transactions are being considered.

The GRA announced the establishment of a specialised transfer pricing unit in its large taxpayer centre in July 2013. Earlier in 2014 it was reported that studies conducted by the Africa Centre for Energy Policy and the Integrated Social Development Centre, as well as the Tax Justice Network-Africa and Christian Aid revealed that "Ghana is losing millions of dollars through transfer pricing". The report calls for stiffer sanctions for abuse of inter-firm pricing and legislation requiring intra-company transactions to be conducted strictly on an arm's length basis.

In September 2012, the Nigerian Federal Inland Revenue service (FIRS) published Transfer Pricing Regulations (the Nigerian Regulations) effective for all tax years commencing on or after 1 August 2012. Although the Nigerian Regulations are based on the OECD Guidelines and United Nations Practical Manual on Transfer Pricing for Developing Countries (the UN Manual), in the event of conflicting interpretation, the relevant tax laws will prevail.

The Nigerian Regulations provide for unilateral, bilateral or multilateral APAs, in terms of which the FIRS and the taxpayer agree to the method and manner in which related party transactions will be priced for a specified period. There is no application or processing fee for an APA, but a minimum annual transaction value of NGN250 million (approximately USD1.6 million) is required. Generally APAs between the FIRS and taxpayers will have a term of three years.

In terms of the Nigerian Regulations, a connected taxable person need not comply with the documentation and filing requirements under the Regulations if the controlled transactions are priced in accordance with the requirements of Nigerian statutory provisions or the prices of connected transactions have been approved by other Nigerian government regulatory agencies, such as the National Office for Technology Acquisition (NOTAP), the department of Petroleum Resources (DPR) or the Nigerian National Petroleum Corporation (NNPC). However, despite these safe harbour provisions, such prices remain subject to the satisfaction of the FIRS that they are in fact at an arm's length and it would be prudent for taxpayers to establish prices that are justifiable for transfer pricing purposes.

The FIRS early in 2014 launched its transfer pricing division as an office within the tax administration to specifically implement the Nigerian Regulations.

Zambia was one of the first African countries to introduce Transfer Pricing Regulations in 2000. In March 2005 a draft Practice Note was issued, providing details on how the Zambia Revenue Authority (ZRA) will apply the transfer pricing rules. The 2008 amendments to the transfer pricing provisions of the Income Tax Act introduced specific provisions applicable to the mining sector.

As per the draft Practice Note, the OECD Guidelines are the basis for determining an acceptable transfer pricing methodology, and the ZRA accepts the use of foreign comparables, but prefers comparable information to be in respect of Zambian companies. Neither the Regulations nor the draft Practice Note currently provides for APAs.

Uganda's Transfer Pricing Regulations came into effect on 1 July 2011. The Regulations make provision for APAs and recognises the OECD Guidelines. However, in the case of inconsistency between the OECD Guidelines and the Regulations, the Regulations will take precedence.

The Transfer Pricing Practice Note of 14 May 2012 stipulates the level and format of documentation required for transfer pricing purposes. The Uganda Revenue Authority (URA) indicated that they are benchmarking with the Kenya Revenue Authority other others in the East African Community to beef up their internal capacity in line with the OECD Guidelines.

Interestingly, the Transfer Pricing Regulations in Ghana, Nigeria, Zambia and Uganda are equally applicable, whether a controlled transaction is cross-border or domestic.

Countries such as Mozambique and the Democratic Republic of the Conco (DRC) do not currently have comprehensive transfer pricing regimes, but provisions in their tax code require transactions between related parties to be entered into at arm's length. Mozambique also requires proof that payments made to companies in low tax jurisdictions must be "genuine and reasonable".

A growing number of African tax administrations have responded to reports highlighting substantial revenue losses as a result of inappropriate transfer pricing by multi-nationals by introducing transfer pricing regulations and establishing specific transfer pricing units at their Revenue Authorities. Although challenges such as a lack of local comparables and limited specialist knowledge remain, significant progress has been made in Africa to develop transfer pricing regimes beyond broad anti-avoidance provisions. It is expected that this trend will continue throughout the African continent in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.