transfer pricing in botswana and southern africa€¦ · botswana and southern africa christian...

Transfer Pricing in Botswana and Southern Africa

Christian Wiesener

KPMG Global Transfer Pricing Services

26 June 2014

© 2014 KPMG Services (Pty) Ltd, a South African private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

1

Agenda

■ Introduction to Transfer Pricing

■ Transfer Pricing Example

■ Africa Transfer Pricing

■ Transfer pricing Regulations

■ Specific types of transactions/industries

■ The importance of transfer pricing compliance

■ Transfer Pricing Documentation

■ Comparables

■ Base Erosion and Profit Shifting

■ Summary

Introduction to Transfer Pricing


3

Overview of Transfer Pricing

What is Transfer Pricing?The transfer price is the price at which goods or services (including financial assistance and/or intellectual property) are transferred between related parties of a multinational across international borders.

Arm’s length Principle

The basis on which independent third parties would transact


4

Pricing principles

•The Hypermarket – P8

•The convenience store – P12

•Outside the FIFA WC stadium – P20

• Inside the FIFA WC stadium – P25


5

Transfer Pricing Growth

s

Czech Republic

FinlandFranceGermanyGreeceHong KongHungaryIndiaIndonesiaIreland (Republic of)IsraelItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSpainSri LankaSwedenSwitzerlandTaiwan (Republic

of China)ThailandTurkeyUkraineUnited KingdomUnited StatesVenezuelaVietnam

ArgentinaAustraliaAustriaBelgiumBrazilCanadaChileChina (People’s

Republic of)ColombiaCzech RepublicDenmarkEcuadorEgyptEstoniaFranceGermanyHungaryIndiaIndonesiaIsraelItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSpainSri LankaSwedenTaiwan (Republic

of China)ThailandUkraineUnited KingdomUnited StatesVenezuelaVietnam


Republic of)ColombiaCzech RepublicDenmarkEcuadorEgyptEstoniaFranceGermanyHungaryIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSwedenTaiwan (Republic

of China)ThailandUkraineUnited KingdomUnited StatesVenezuela


Republic of)ColombiaCzech RepublicDenmarkEstoniaFranceGermanyHungaryIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenTaiwan (Republic


ArgentinaAustraliaAustriaBrazilCanadaChileChina (People’s

Republic of)Czech RepublicDenmarkEstoniaFranceGermanyHungaryIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenThailandUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkEstoniaFranceGermanyIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLuxembourgMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenThailandUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkEstoniaFranceGermanyIndiaIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPeruPhilippinesPolandRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkEstoniaFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandRussiaSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandRussiaSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited KingdomUnited States


Republic of)Czech RepublicDenmarkFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited States

AustraliaAustriaBrazilChileCzech RepublicFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited States

AustraliaAustriaCzech RepublicFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUnited States

AustraliaCzech RepublicFranceGermanyIndonesiaItalyJapanLatviaOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUnited States

AustraliaCzech RepublicFranceGermanyIndonesiaItalyJapanPolandSingaporeSlovak RepublicSwedenUnited States

s

Czech Republic

ArgentinaAustraliaAustriaBelgiumBrazilCanadaChileChina (People’

Republic of)Colombia

DenmarkEcuadorEgyptEstonia

ArgentinaAustraliaAustriaBelgiumBrazilCanadaChileChina (People’

Republic of)Colombia

DenmarkEcuadorEgyptEstoniaFinlandFranceGermanyGreeceHong KongHungaryIndiaIndonesiaIreland (Republic of)IsraelItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSpainSri LankaSwedenSwitzerlandTaiwan (Republic



Republic of)ColombiaCzech RepublicDenmarkEcuadorEgyptEstoniaFranceGermanyHungaryIndiaIndonesiaIsraelItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSpainSri LankaSwedenTaiwan (Republic

of China)ThailandUkraineUnited KingdomUnited StatesVenezuelaVietnam


Republic of)ColombiaCzech RepublicDenmarkEcuadorEgyptEstoniaFranceGermanyHungaryIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSwedenTaiwan (Republic



Republic of)ColombiaCzech RepublicDenmarkEstoniaFranceGermanyHungaryIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLithuaniaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenTaiwan (Republic



Republic of)Czech RepublicDenmarkEstoniaFranceGermanyHungaryIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLuxembourgMalaysiaMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenThailandUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkEstoniaFranceGermanyIndiaIndonesiaItalyJapanKorea (Republic of)LatviaLuxembourgMexicoMontenegroNetherlandsNew ZealandOECDPeruPhilippinesPolandPortugalRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenThailandUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkEstoniaFranceGermanyIndiaIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPeruPhilippinesPolandRussiaSerbiaSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkEstoniaFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandRussiaSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited KingdomUnited StatesVenezuela


Republic of)Czech RepublicDenmarkFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandRussiaSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited KingdomUnited States


Czech RepublicDenmarkFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited States

AustraliaAustriaBrazilChileCzech RepublicFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaMexicoNew ZealandOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUkraineUnited States

AustraliaAustriaCzech RepublicFranceGermanyIndonesiaItalyJapanKorea (Republic of)LatviaOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUnited States

AustraliaCzech RepublicFranceGermanyIndonesiaItalyJapanLatviaOECDPhilippinesPolandSingaporeSlovak RepublicSouth AfricaSwedenUnited States

AustraliaCzech RepublicFranceGermanyIndonesiaItalyJapanPolandSingaporeSlovak RepublicSwedenUnited States

OECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSpainSri LankaSwedenSwitzerlandTaiwan (Republic


OECDPeruPhilippinesPolandPortugalRomaniaRussiaSerbiaSingaporeSlovak RepublicSloveniaSouth AfricaSpainSri LankaSwedenSwitzerlandTaiwan (Republic

of China)ThailandTurkeyUkraineUnited KingdomUnited StatesVenezuela

2007200620052004200320022001200019991998199719961995<1994 2008/2009

MexicoMontenegroNetherlandsNew Zealand

MexicoMontenegroNetherlandsNew Zealand

Kenya

Malawi

Korea (Republic of)LatviaLithuaniaLuxembourg

Korea (Republic of)LatviaLithuaniaLuxembourgMalaysia

Kazakhstan

Czech RepublicDenmarkEcuadorEgyptEstoniaFinlandFranceGermanyGreeceHong KongHungaryIndiaIndonesiaIreland (Republic of)IsraelItalyJapan

China (PeoplesRepublic of)

’

Colombia

Czech RepublicDenmarkEcuadorEgyptEstoniaFinlandFranceGermanyGreeceHong KongHungaryIndiaIndonesiaIreland (Republic of)IsraelItalyJapan

Croatia

AustraliaAustriaBelgiumBrazilCanadaChile

Argentina

AustraliaAustriaBelgiumBrazilCanadaChile

Aruba

Norway

Zambia

Kenya, Malawi, and Zambia in 2008/09Ghana and Nigeria in 2012

Angola in 2013


6

Importance of Transfer Pricing

Why is Transfer Pricing Important?

Globalisation and growth in trade

Economic downturn resulted in governments looking for tax revenue (BEPS)

Prices between related parties are typically not set by market forces, so related parties may be overcharging or undercharging for a particular good or service.


7

Transfer Pricing non-compliance can lead to large tax adjustments…

Kenya

■ Kenya Revenue Authority (KRA) challenged the Unilever Kenya pricing to Unilever Uganda. Unilever won case. KRA formalized transfer pricing regulations.

Canada

■ Canada Revenue Agency denies $136 million (CAD) in deductions for guarantee fees paid to U.S. parent

Denmark

■ Danish tax authorities increased multinationals’ taxable income in 2009 by 15.3 billion DKK ($2.8 billion)

Japan

■ Japan’s top pharmaceutical manufacturer contests $1.1 billion transfer pricing adjustment from its JV with Abbott Laboratories

United States

■ Internal Revenue Service (IRS) reaches largest-ever $3.4 billion tax settlement

■ U.S. pharmaceutical company to pay $2.3 billion in IRS dispute

United Kingdom

■ U.K. company agrees to pay £505 million ($780 million) to settle 15-year tax battle

Transfer Pricing: Example

© 2014 KPMG Services (Pty) Ltd, a South African private company and a member firm of the KPMG network of independent member firmsaffiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

A Simple ExampleA Simple Example

9

Sales 100Cost of Goods (70)Gross Profit 30Operating Expenses (25)Operating Profit 5

BotswanaCo

This is the profit and loss statement of a UK distribution company.

Does it have any transfer pricing issues?

Does it have any transfer pricing risk exposure?

In isolation, it is impossible to assess anything.


Simple Intra - Group TransactionSimple Intra - Group Transaction

10

Sales 100Cost of Goods (70)Gross Profit 30Operating Expenses (25)Operating Profit 5

Sales 70Total Costs (60)

Operating Profit 10

Transfer price= 70

P7 per unit

UKCo

BotswanaCo

Product transfer

Consolidated Operating Profit = 15


Effect of Higher Transfer PriceEffect of Higher Transfer Price

11

UKCo

BotswanaCo

Transfer price= 80

At P8 per unitSales 80Total Costs (60)

Operating Profit 20

Consolidated Operating Profit = 15

Product transfer

Sales 100Cost of Goods (80)Gross Profit 20Operating expenses 25 Operating loss -5

Africa Transfer Pricing


13

Global developments impacting on Africa

Practical considerations

OECD support of Africa Tax Administration Forum, particularly re Transfer Pricing

Global focus on transfer pricing compliance – Base Erosion and Profit Shifting

OECD Draft Handbook on Transfer Pricing Risk Assessment

Africa focus (Nigeria, Kenya, Uganda, Angola legislation and rules etc)


14

Transfer Pricing in AfricaCountry Transfer

pricing ActAnti-avoidance

Algeria Yes Yes

Angola Yes No

Benin Yes Yes

Botswana No Yes

Burkina FasoYes No

Cameroon Yes No

Chad Yes Yes

DRC Yes No

Ethiopia Yes No

Gabon Yes No

Ghana Yes Yes

Country Transfer pricing Act

Anti-avoidance

Kenya Yes Yes

Lesotho Yes Yes

Liberia Limited Yes

Malawi Yes Yes

Mali Limited Yes

Mauritius No Yes

Morocco Yes No

Mozambique Yes Yes

Namibia Yes Yes

Nigeria Yes Yes

Rwanda Yes No

Country Transfer pricing Act

Anti-avoidance

Senegal Yes No

South Africa Yes Yes

Sudan No Yes

Swaziland No Yes

Tanzania Yes Yes

Togo Yes No

Tunisia Yes No

Uganda Yes Yes

Zambia Yes Yes

Zimbabwe No Yes

Source: KPMG Global Transfer Pricing Services South Africa


15

Africa Hot Topic Issues

Potential skill, information and resource shortage at revenue authorities

Aggressive approach and harsh penalties for MNE not complying Very few professional services providers Lack of sufficient/suitable local comparable data Potential need to appropriately adjust foreign comparable data Increased complexity of transfer pricing rules and increased cost

of expertise From a foreign investment perspective, uncertainty regarding

transfer pricing regulations may have an adverse impact Africa Tax Administration Forum (ATAF) has formed a TP Group

(subscribed to by 34 of 56 countries). Provision of support and training to countries

Transfer Pricing Regulations


17

Transfer Pricing Regulations

Some countries have enacted regulatory provisions based on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the Organisation for Economic Co- Operation and Development (OECD Guidelines)

African countries with standing transfer pricing regulations: Angola, Kenya, Namibia, South Africa, Tanzania, Zambia (Up to 32 African countries have some form of regulation that allows governments to adjust pricing of related-party transactions)

Other Global jurisdictions: Many countries enacted their own regulatory provisions based primarily on OECD Guidelines

Some countries, such as Brazil, however, have provisions not entirely consistent with OECD Guidelines

Transfer pricing involving U.S. firms: Treasury Department regulations issued under §482 of the Internal Revenue Code (§482 Regulations)

Conclusion:

Documentation requirements and penalty provisions have been adopted by many countries to determine adherence to transfer pricing regulations


18

OECD Model Tax Convention, Article 9

Article 9 of OECD Model Tax Convention

■ Associated enterprises

“Where…conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”

Specific types of transactions/

industries


20

• Goods: Transfer in/out• Services core business and non-core business:

• Management fees (eg turnover based vs direct charge)• Shareholder type service (no charge)• Appropriate basis of allocation – direct/indirect costs

• Technical fees vs licence fee• Intellectual property: Royalties, licence fees (value linked to IP?)• Financial assistance: Loans, interest free loans, guarantees, cash

pooling

Specific types of transfer pricing transactions


21

Specific types of industries

• Contract manufacturers (performing a service by processing raw materials into semi-finished goods)

• Distributors (level of risk assumed, large marketing spend, cost of sales figures may be inflated)

• Pharmaceutical industry (intangibles, high cost of R&D)

• Financial services (treasury company, financial assistance, guarantee fees, cash pooling, management services)

The importance of transfer pricing

compliance


23

Typical Transfer Pricing risks

• Taxpayer not aware of transfer pricing issue

• No transfer pricing documentation to demonstrate arm’slength pricing

• Incorrect or outdated transfer pricing documentation

• No checking that arm’s length pricing is correctly implemented

• No or insufficient transfer pricing agreements

• Local transfer pricing documentation does not tie up with group documentation

• Profits achieved by local company differ from Group

• Consistent losses incurred


24

The potential result of non-compliance

• Income tax adjustment to reflect arm’s length price / return (primary adjustment) – DTA relief: Article 9 of OECD Model Tax Convention

• Secondary adjustment (eg deemed dividend) – No DTA relief

• Penalties

• Interest

• Further investigations by revenue authorities

• Negative publicity

Transfer Pricing Documentation


26

Why transfer pricing documentation?

• Substantiation what arm’s length pricing is (what do comparablescharge/pay?)

• Substantiation that transfer pricing is arm’s length (implementation)

• Transfer pricing planning

• Advanced Pricing Agreements (APAs)


27

Transfer pricing documentation guidelines:

• OECD Transfer Pricing Guidelines: Chapter V

• OECD Discussion Draft on Transfer Pricing Documentation and country by country reporting

• UN Practical Manual on Transfer Pricing: Chapter 7

• OECD Transfer Pricing Guidelines

• Pacific Association of Tax Administrators (PATA)

• European Union code of conduct on Transfer Pricing Documentation

• Local country rules


28

Points to consider regarding transfer pricing documentation

• Burden of proof

• Timing of preparation

• Updating

• Global/Group documentation

• Master file/local file


29

Example of contents of transfer pricing documentation:

• Cross-border connected party transactions should be set out

• A functional and risk analysis report should be compiled

• A Group analysis should be performed

• Industry analysis is required

• Correct transfer pricing method should be selected

• Transfer pricing method should be applied

• Finally the taxpayer should document and demonstrate how the relevant data has been used to determine an arm's length consideration


30

Transfer pricing methods

Traditional transaction methods • Comparable uncontrolled price method (CUP method)

• Resale price method

• Cost plus method

Transactional profit methods• Transactional net margin method (TNMM)

• Profit split method

Comparables


32

Finding comparables

• Comparable uncontrolled prices (CUPs)

• Lack of comparables in developing countries (OECD discussion draft)

• The use of foreign databases

• European comparables

• Adjustments (country risk, foreign exchange risk)

• Related party threshold


33

Calculation of the arm’s length price

•CUP, apply the price given

•Other methods:

-Look at financial information from final set

-Calculate profitability ratios based on profit level indicators

-Weighted average range of comparable prices approach

-Several years of comparable data

-Tested party should be around the median of the range, unless company profile suggests otherwise, eg limited risk distributor, toll/ contract manufacturer.

Base Erosion and Profit Shifting (BEPS)


35

BEPS: Background - context

Context

As a consequence, there is increased political focus on perceived tax avoidance by multinationals

Governments are under extreme fiscal pressure as a consequence of the global economic crisis

The G20 is concerned that current international tax rules and frameworks are inadequate

The G20 is applying political support/pressure to push for change

The OECD response to growing pressure was to release the Base Erosion and Profit Shifting report

There is a drive to develop a tax system that is fit for purpose for today’s multinationals and digital age


36

BEPS: The Action Plan - Fifteen Actions

Action Deadline

Addressing the tax challenges of the digital economy

Sept ’14

Neutralise the effects of hybrid mismatch arrangements

Sept ’14

Strengthen CFC rules Sept ’15

Limit base erosion via interest deductions/other financial payments

Sept/Dec ’15

Counter harmful tax practices more effectively taking into account transparency and substance

Sept ‘14 & Sept/Dec ’15

Prevent treaty abuse Sept ’14

Prevent the artificial avoidance of PE status

Sept ’15

Assure that TP outcomes are in line with value creation: intangibles

Sept ‘14 & Sept ’15

Action Deadline

Assure that TP outcomes are in line with value creation: risks/capital

Sept ’15

Assure that TP outcomes are in line with value creation: other high-risk transactions

Sept ’15

Establish methodologies to collect and analyse data on BEPS/actions to address it

Sept ’15

Require taxpayers to disclose their aggressive tax planning arrangements

Sept ’15

Re-examine TP documentation Sept ’14

Make dispute resolution mechanisms more effective

Sept ’15

Develop a multilateral instrument Sept ‘14 & Dec ‘15

Summary


38

Summary

• Transfer pricing is a focus area in Africa and abroad

• Revenue authorities: Up skilling and use of technology

• Non-compliance: Significant financial and reputational risk

• Tool to check/improve business performance

Questions

Christian Wiesener Associate Director [email protected] +27 (0)82 719 2012

© 2014 KPMG Services (Pty) Ltd, a South African Private Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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