ATAF’s suggested approach to drafting transfer pricing legislation – a look at the rule on intangibles



The African Tax Administration Forum (ATAF) is a platform for cooperation among African tax authorities. The ATAF is working toward increasing the level of voluntary compliance while combating tax evasion and avoidance. This is done through capacity building for member states.

Africa has been significantly affected by the erosion of tax bases through profit shifting. Many African tax administrations have reported difficulty in determining arm’s length prices for royalties and other considerations relating to intangibles and have faced significant risk to their tax base from excessive royalty and other intangible-related payments to foreign related parties. To this end, the ATAF has developed a ‘suggested approach to drafting transfer pricing legislation’ intended to provide African countries that are developing transfer pricing (TP) rules with a suggested structure and content for their legislation. It provides a framework underpinned by the arm’s length standard, based on the principle of Article 9 of the ATAF Model Tax Convention on Income and on Capital and the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) Model Double Taxation Conventions, but adapted to meet specific challenges faced by African countries.

The suggested approach includes both standard and optional provisions. The standard provisions are the basic legal provisions expected in TP legislation, while the optional provisions are provisions that member states have the prerogative to adopt or not adopt. Most of the standard provisions are widely accepted TP provisions; however some of the optional provisions are deviations to standard TP practices.

One of the options in the suggested approach relates to valuation of intangibles. According to the ATAF, in the suggested approach, where a person engages in a transaction with a connected person that involves the transfer of rights in an intangible, other than the alienation of an intangible, “the deduction allowable for tax purposes in that transaction shall not exceed X percent of the tax (tax EBITDA + plus royalties payable) derived from the commercial activity conducted by the person in which the rights transferred are exploited”.

Several Africa countries have already included this in their TP legislation. The cap on the tax-deductible amount does not exclude the requirement for proper documentation to show that the payments are at arm’s length, in addition to the benefit test.

Thus, in applying the proposed provision on intangibles, consideration should be given to factors relevant to the comparability of the controlled and uncontrolled transactions and include: (i) expected benefits from the royalty and intangible property; (ii) commercial alternatives available to the paying company; (iii) geographical limitations on the exercise of rights to the intangible property; (iv) exclusive or non-exclusive character of the rights transferred and; (v) whether the transferee has the right to participate in the further development of the intangible property by the transferee.

A review of the proposed approach raises some important issues for multinational enterprises (MNEs) operating in Africa.

Determination of the percentage cap on tax deductibility of intangibles

The ATAF proposal did not suggest any percentage, but left this for the member states to decide. It is expected that member states will include the percentage in their local legislation or a clause that the percentage may be published from time to time. The ATAF advises member states to select large corporate taxpayers, and calculate the impact on tax revenue of applying different percentage rates based on their last three years tax returns to assess appropriate percentage levels. This analysis may not be an appropriate reflection of the profit level for taxpayers in different industries. Further, the benefit and impact of intangibles varies across different industries. It would be preferable for countries adopting this approach to have different percentage levels for different industries to properly reflect the contributions across the industries.

Arm’s length nature of the proposal

The suggested approach by the ATAF for intangibles is a departure from the OECD’s arm’s length principle. This means that even though a taxpayer goes through the rigorous process of showing that the payment is within the arm’s length range, the deduction of the payment is not guaranteed. It should be noted that the suggested approach is not a safe harbour of sorts, but still requires detailed documentation to reflect that the transaction is at arm’s length. This places an additional burden on multinationals operating in Africa to keep documentation to show benefit and arm’s length but also project the amount to be disallowed. This will also increase the compliance burden for multinationals in Africa and uncertainty on tax payable in these countries.

Denial of corresponding adjustment by the foreign tax administration

A corresponding adjustment is an adjustment to the tax liability of the associated enterprise in a second tax jurisdiction made by the tax administration of that jurisdiction, corresponding to a primary adjustment made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent. Most tax administrations will only accept adjustments due to differences in the arm’s length price.

The limitation on the deductible amount is not an arm’s length adjustment, and therefore there are concerns that the second tax jurisdictions will not accept this adjustment to avoid double tax. It is important to note that most Africa tax jurisdictions already subject payments for intangibles to withholding tax. The rate is normally between 10 and 20 percent. As such, disallowing a portion of the arm’s length royalty payment creates an additional tax cost for MNEs.

The above rule on intangibles is likely to create the risk of double taxation for multinationals, as well as an increased compliance burden for those operating in the countries that have adopted them. The concerns raised by African tax administrations on competence and capacity, while valid, should not be solved by levying additional tax burdens on multinationals.

Intangibles play a central role in modern business; as such, this proposal will have a significant impact on operations in Africa. In addition, the withholding tax deduction on payment for intangibles already presents avenues for subjecting the income to tax. Therefore, limiting the deduction increases the effective tax rate for these companies in Africa.

It is important that the ATAF revisits the proposed rule to seek a better alternative that will help maximise revenue for African countries without the risk of double taxation.


Sebastine Odimma is the Africa head of tax controversy at MAERSK. He can be contacted on +2348 18793 9272 or by email:

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Sebastine Odimma


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