Cross-border tax in Africa: Transfer pricing in the time of tax evolution – what 2023 may hold

The third edition of the Graphene Economics report on cross-border tax in Africa explores some of the significant cross-border taxation themes from the past year, as well as what the future holds for 2023 and beyond

In 2022 / 2023, the business world has moved on from predominantly being concerned with COVID-19 related matters to broader issues, ranging from global tax reform to new technologies and their implications. The 2022/2023 report by specialist African TP advisory firm, Graphene Economics, seeks to explore some of these themes, including information derived from its second annual Transfer Pricing Matters Survey.

Subjects covered include evolving tax regulation, notable cross-border developments on the continent over the past year, potential challenges and opportunities in 2023 and beyond, as well as perspectives on various topics from Graphene Economics, based on survey results and industry experience.

“There’s a lot going on in the global tax arena currently, from the OECD’s proposal to address the tax challenges of globalisation and digitalisation to an increase in transfer pricing court cases, and the UN looking to take up more of a leadership role in global tax matters,” says Michael Hewson, Founder and Director of Graphene Economics. “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 multinational entities (MNEs) operating in Africa, transfer pricing is becoming a priority with CFOs and board members, rather than the sole domain of the tax department. COVID-19 shifted risk models, and it cross-border tax is now being recognised as a potentially significant business risk at senior management level.”

Hewson says the survey yielded several interesting findings, including:

Representatives from MNEs listed the three most significant TP trends as 1) increased information sharing between revenue authorities in different countries, 2) more frequent and rigorous transfer pricing audits, and 3) taxation of digital transactions.

There has been a spike in the number of respondents who said their organisations’ transfer pricing transaction models have changed over the course of 2022 versus 2021. This could be for several reasons:

Businesses are starting to move forward again after pausing many aspects during the height of the COVID-19 pandemic.

Organisations are responding to the increase in transfer pricing audits from tax authorities.
Companies are re-evaluating their models and changing them as required to meet regulatory requirements and to avoid disputes down the line

There was a significant spike in M&A deals and activity in 2021, so changes to TP models may also have been in response to this trend.

There are more changes ahead. Sustainability and climate change are pressing issues of our times, and as businesses grapple with them, there are sure to be tax implications.

Macroeconomic and geopolitical factors will also continue to affect global economies and therefore MNEs and their tax strategies.

“We believe that TP and related issues are likely to remain priorities for revenue authorities on the African continent and that that the role of the tax function continues to increase in importance with regards to mitigating and managing business risk,” says Hewson. “We expect increased focus on data collection and management (to a more granular level), and changes to transaction models and information sharing processes, and a continuation of the increase in transfer pricing disputes and controversies we noted in 2021.”

He notes that these trends indicate that organisations where transfer pricing is escalated to the attention of the CFO or board of directors are likely to be better placed to proactively adapt to the changing landscape, and to navigate any unexpected events that arise. “Our advice to MNEs operating in Africa is to develop a strategy that will enable them to actively manage their cross-border taxes: determining how to achieve the various compliance requirements timeously, and proactively identifying potential issues, rather than after the event.” Access the full report here.