Michael Hewson | Founder | Director | Graphene Economics | mail me |
The fourth edition of our report on cross-border tax in Africa explores shifting trends in transfer pricing (TP) – many related to broader taxation themes – and considers what these may mean for multinational entities (MNEs) and revenue authorities.
In our 2023/2024 annual cross-border taxation report, we released key findings from our yearly TP Matters survey, as well as expert analysis, focusing on key themes such as global tax reform, the impact of new technologies, heightened attention from revenue authorities regarding cross-border taxation, and the increased emphasis on information sharing.
The global economic landscape
We look at cross-border transactions and TP through an economic lens. This survey took place within the context of African economies grappling with the aftermath of COVID-19, global uncertainties such as the Russia-Ukraine and Middle East conflicts, as well as ongoing climate challenges.
The global economic landscape, marked by inflation shocks and difficulty accessing external funding, is straining liquidity in domestic markets. Despite these challenges, many countries in Africa are showing increased resilience by diversifying products, integrating environmental, social, and governance (ESG) measures, and improving transparency. It’s important that African countries are not only abreast of these developments, but playing an active role in ensuring the continent’s interests are represented.
For MNEs operating in Africa, transfer pricing is becoming a priority with CFOs and board members, rather than the sole domain of the tax department. Cross-border tax is now being recognised as a potentially significant business risk at senior management level.
The survey yielded several interesting findings, including:
- Representatives from MNEs listed the most significant TP trend for 2023 as increased compliance requirements, which is due to a changing regulatory landscape, heightened scrutiny, and the need for more robust data and documentation. This trend highlights revenue authorities’ ongoing efforts to prevent tax avoidance, ensure fair income distribution across jurisdictions, and align with international reporting standards. It also underscores the importance of proactive compliance practices in today’s TP landscape.
- Other top trends in TP according to respondents include increased information sharing between revenue authorities, digital services taxation, increased adoption of technology and the implementation of flexible remote work policies.
- Sustainability and climate change are climbing the taxation agenda. Although specific regulations concerning ESG reporting and TP from an ESG perspective are in the early stages of development, tax authorities in more developed countries are increasingly requesting additional information on ESG activities.
Notable TP developments from around the continent
Survey respondents noted the level of substance in offshore entities as a top concern for the upcoming year. This is driven by a confluence of factors, from increasing transparency to greater access to taxpayer information by revenue authorities, and a general interest in understanding offshore operations. We believe this could have far-reaching implications, particularly in TP assessments.
Revenue authorities are likely to scrutinise offshore entities more closely and potentially reevaluate transactions based on the actual substance of these entities, which might lead to changes in how these transactions are categorised and taxed. We’ve seen this play out recently in the widely publicised court case between the South African Revenue Service (SARS) and fund management company Coronation.
The report includes commentary from several senior tax professionals and explores the value of specialist tax consulting services, the potential tax implications of a mobile workforce, shifts in dispute resolution, the challenges of addressing digital services tax, the impending global minimum tax, and notable TP developments from around the continent, as well as key recommendations for MNEs.
Looking ahead to 2024, it’s clear that the landscape of TP is in a state of continuous change, and organisations are taking proactive steps to adapt to these evolving dynamics.
TP and related matters are poised to remain high on the agenda of revenue authorities across the African continent. Simultaneously, the role of the tax function within organisations is gaining greater significance in the context of mitigating and managing business risks. This requires a forward-thinking and adaptable approach that includes effective management of cross-border taxes, data precision, and proactive identification of issues.