The myths of safe harbours in Africa’s transfer pricing landscape

October 2019  |  SPOTLIGHT  |  CORPORATE TAX

Financier Worldwide Magazine

October 2019 Issue

According to revised guidelines from the Organisation for Economic Co-operation and Development (OECD), safe harbour in a transfer pricing regime is a “provision in a country’s legislation that applies to a defined category of taxpayers or transactions”. Safe harbour exempts eligible taxpayers from certain obligations otherwise imposed by a country’s general transfer pricing rules. This includes exemption from burdensome compliance obligations, including some or all associated transfer pricing documentation requirements for eligible taxpayers.

The burden on taxpayers to comply with the varying transfer pricing rules of the many jurisdictions in which they operate is immense, ranging from documentation required as part of tax returns, to minimising tax penalty exposure, to cooperation with lengthy and deep tax examinations. The accounting firms which evaluate corporations’ tax provisions and the courts that operate as the last resort in contested cases are also kept busy. Thus, to strike a balance between the development of sophisticated guidance for complex transactions and the cost-effective use of taxpayers’ and tax administrations’ resources for improved compliance and enforcement processes, a well-designed safe harbour transfer pricing provision is a must.

Safe harbour is of great benefit to taxpayers as it allows them optimal use of resources with regard to transfer pricing compliance. However, tax administrations also benefit from safe harbour as they can shift resources for transfer pricing audits and examinations of less complex transactions to more complex, and higher risk, cases. Safe harbour also gives taxpayers certainty in pricing their eligible transactions, as well as reduced compliance burdens.

The other benefits of safe harbour include reductions in administrative obligations, predictability for both revenue authorities and taxpayers and the elimination of unnecessary litigation. Safe harbour, if properly implemented, will also promote voluntary compliance.

Tax administrations in Africa have struggled to properly implement transfer pricing in line with the OECD’s guidelines. These struggles stem from not only from the complexity of the rules, but also the availability of comparables for benchmarking purposes, Africa-tailored databases and the competency of the tax inspectors. This has resulted in cases of abuse of the process by taxpayers and tax authorities alike, leading to an increased cost of compliance and, in some cases, mispricing of related-party transactions by the taxpayer. To this end, the adoption of safe harbours, where necessary, will be important in providing certainty, voluntary compliance and increased tax revenue collection by the Africa tax authorities.

It may seem that the safe harbour included in the relevant transfer pricing legislation in Africa is designed to address some of the benefits envisaged in the OECD’s guidelines. However, some of these benefits may be just a myth.

The first myth is the idea that safe harbour provides certainty to taxpayers on the pricing of controlled transactions. One of the expected key benefits of safe harbour is the provision of certainty on the pricing of certain low risk transactions. Most African countries have failed to adopt the OECD’s recommended 5 percent on low value adding services. This means that such recharges are still faced with adjustments and taxpayers are unaware of the amount to be disallowed. In other African countries, the proposed safe harbour rule is at the discretion of the tax authorities. For example, in Nigeria, even with the approval of the National Office for Technology Acquisition and Promotion (NOTAP), the Federal Inland Revenue Service (FIRS) is required to confirm if the approved price is acceptable to them or not.

Furthermore, most French speaking African countries have a provision that royalty and related service payments to a related party are limited to 10 percent of taxable income before the deduction of such payments. The issue with this provision is that payments covered under the provision are not clearly defined. Thus, different inspectors in the same country tend to take different views. A specific example is a position that costs shared between related companies in the same country should be included in the determination of the tax-deductible limit. This denies the taxpayer the certainty envisaged in the safe harbour rules.

The second myth is that safe harbour will reduce the administrative burden and cost of documenting transfer pricing methodology. One other implied benefit of safe harbour rules in Africa is the reduction in man hours and costs required to prepare transfer pricing documentation to support controlled transactions. Compliance with transfer pricing rules can be a complex activity, which is both expensive and time consuming. Safe harbour rules are expected to address this and will reduce the administrative burden for taxpayers. This is based on the premise that the safe harbour rule will give taxpayers the option of a price range under which transfer pricing documentation will not be required. This is not always the case, however, as certain documentation is required. In Nigeria and Ghana, where the approval of the NOTAP and the Ghana Investment Promotion Centre (GIPC) is required for payment of management and royalty fees respectively, the process of obtaining regulatory approval involves a lot of documentation and considerable cost. Even when the approval is obtained, the tax authorities still retain the prerogative to decide if it is enough or if they require additional transfer pricing documentation. To this end, even where approvals are obtained, taxpayers are forced to prepare further documentation if this is challenged by the tax authorities. It should also be noted that the process of obtaining the approval is onerous. Given this development, the attendant safe harbour benefit of reduced administrative burden is a sham.

How, then, can we make the safe harbour work for African countries, as envisaged under the OECD framework? A starting point is to clearly define the different safe harbour provisions. Safe harbour provisions can be designed in way that allows the taxpayer to choose either to adopt the provisions outright, or produce detailed transfer pricing documentation.

There is always the fear, not unfounded, that taxpayers may abuse the provision. As such, when designing safe harbour provisions, relevant countries may include a threshold beyond which detailed transfer pricing documentation will be required. The threshold may be set as an absolute figure or percentage of turnover.

Given that the arm’s length principle remains at the heart of most transfer pricing regimes today, simplification rests on the development of safe harbour approaches that emulate arm’s length results. This will obviously work most readily for relatively routine or low-risk situations, allowing tax authorities to focus their resources on more complex and potentially abusive situations. The tax authorities’ experience with transfer pricing audits should also be factored into the design of safe harbour rules.


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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