Advance pricing agreements (“APAs”) could provide taxpayers and revenue authorities with some certainty during the unprecedented times that we are living in. The African APA landscape is however underdeveloped, but some recent developments in South Africa (“SA”) indicate that this may be changing.
On 18 December 2020, the Organisation for Economic Co-operation and Development (“OECD”) issued a guidance document, providing much needed clarification and support on the application of transfer pricing rules in respect of periods impacted by the Covid-19 pandemic. The guidance includes recommendations in respect of APAs.
An APA is an agreement between a taxpayer and the revenue authority in terms of which the transfer pricing methodology for the pricing of a taxpayer’s cross-border related party transactions are determined in advance for future years. The OECD’s guidance states that an APA system would allow a taxpayer to raise Covid-19-related issues with a revenue authority in advance. Such a collaborative and transparent approach is specifically recommended by the OECD in order to address the impact of the pandemic on transfer pricing related matters.
Given the unprecedented and unique times that we are living in, and in light of the recommendations by the OECD in respect of APAs, this may be the perfect time for more countries to implement APA systems. The establishment of an APA system, as well as the actual negotiations and conclusion of APAs, are however known to be highly complex matters. It generally takes between one and four years for tax authorities that have already implemented these systems to negotiate an APA with a taxpayer. The time to resolution of an APA also varies significantly based on the nature of the related party transaction being considered; the complexity of the proposed transfer pricing method; and the specialisation of the revenue authority’s staff involved.
With the African continent being significantly impacted by the Covid-19 pandemic, the question arises whether African countries would be able to effectively implement and take advantage of the benefits of an APA system.
On 11 November 2020, the South African Revenue Service (“SARS”) released a discussion paper on APAs, indicating its intention to have such a system introduced in SA. The discussion paper notes that it appears as if SA has fallen behind its peers on the African continent when it comes to putting an APA system in place. The only other African countries which have promulgated APA legislation are however Nigeria, Tanzania, and Uganda. Although these countries have APA legislation in place, their APA programmes have been largely inactive, with the revenue authorities being hesitant to issue any APAs mainly due to a lack of transfer pricing capacity. Seven years have passed since Nigeria’s regulation in this regard was gazetted. To date, the Nigerian revenue authority has failed to implement an APA system or provide any guidance on how taxpayers should apply for an APA.
It should however be noted that SARS is also experiencing significant capacity constraints, specifically in respect of highly specialized areas such as transfer pricing. Although the discussion paper issued by SARS refers to the possibility that it could outsource some of these matters on a temporary basis to obtain the necessary skills, it also acknowledges that it will take three to four years to implement an APA system in SA. It follows that it is unlikely that SA would be able to address transfer pricing-related challenges resulting from the Covid-19 pandemic, by way of APAs anytime soon.
Another benefit of an APA system is that it creates an environment of tax certainty that investors look for before they invest. The indication by SA that it would like to implement an APA system in order to “maintain its status as a leader on the African continent and its position as a gateway for foreign investment into the rest of Africa” is consequently welcomed, in that it may lead to other African jurisdictions following suit.
Given the increased focus on the benefits of an APA system, and as Nigeria, Tanzania and Uganda already have APA legislation in place, one can be hopeful that these jurisdictions would soon be able to reap the benefits of their APA systems. As proposed by SA in respect of its own system, the revenue authorities in these jurisdictions may have to consider outsourcing APA matters on a temporary basis whilst obtaining the necessary skills.
It follows that although the African APA landscape remains underdeveloped and although it may still take a long time before more African jurisdictions implement APA systems, the metamorphosis of the African APA landscape seems to have started. The recent indication by SA, along with the OECD’s reference to the benefits of these systems in its COVID-19 guidance, illustrates that although Africa may not be ready at this stage, there has been no better time to start the process of looking into the first steps needed to implement APA systems.