African and OECD TP updates: October 2024

A round-up of transfer pricing and related updates from around the African continent and beyond.

(Sources: reports issued by organizations, government documents and legislation (where available) or other tax news platforms, such as Orbitax, MNETax, etc.)

1. ATAF: Technical Note on Amount B rule of Pillar 1 is issued

The African Tax Administration Forum (ATAF) has released a technical note discussing the Amount B rule of Pillar 1 and its potential advantages for African nations. This note is part of ATAF’s series addressing tax challenges from the digital economy.

Key points include:

• The technical note aims to help ATAF members assess whether to adopt this simplified approach, detailing its main provisions and emphasising aspects crucial for African countries.
• ATAF plans to release a revised guide for drafting transfer pricing legislation, which will include recommendations for implementing the simplified approach.
• Many ATAF members face significant disputes over transfer pricing in domestic distribution, straining their limited resources. The new approach, applicable from fiscal years starting 1 January 2025, could reduce disputes and enhance tax certainty for both tax administrations and businesses.
• The note outlines design features essential for maximising the benefits of Amount B, fostering increased tax certainty for African governments and multinational enterprises operating in the region.

2. Egypt: 15% minimum tax and top-up tax as part of tax policy strategy is considered

The Egyptian Ministry of Finance is in the final stages of developing its tax policy strategy for the years 2024 to 2030. This strategy involves drafting a new corporate tax law and is expected to include measures such as a 15% minimum tax for multinational companies and a Qualified Domestic Minimum Top-up Tax (QDMTT).

3. Egypt: increased threshold for transfer pricing study

On 11 September 2024, the Egyptian Ministry of Finance announced a package of measures to support businesses and simplify procedures. As part of these measures, the related-party transaction threshold was increased to EGP 30 million for the exemption from the requirement to submit a transfer pricing study. Further details on the implementation of these measures will be published once available.

4. Kenya: Finance Bill 2024 includes new significant economic presence tax and minimum top-up tax

Kenya’s National Assembly began reviewing the Finance Bill 2024 on May 13, 2024, inviting comments on proposed tax measures. Some of the measure include the following:

• Harmonisation of “related person” definition: The Finance Bill 2024 proposes to delete the three definitions as currently provided for in the Income Tax Act and include one definition. The new proposed definition for a related person is stated as follows:

“In the case of two persons, either person who participates directly or indirectly in the management, control or capital of the business of the other person, and
In the case of more than the two persons –

1. Any other person who participates directly or indirectly in the management, control or capital of the business of the two persons; or
2. An individual who –
3. Participates directly or indirectly in the management, control or capital of the business of the two persons; and
4. Is associated to the two persons by marriage, consanguinity or affinity and the two persons participate in the management, control or capital of the business of the individual.”

The new proposed definition will harmonise the definition of related parties throughout the Income Tax Act.

• Repeal of the Digital Service Tax. The Bill proposes the replacement of Digital Services Tax (DST) with the Significant Economic Presence (SEP) tax. SEP tax will be payable by a non-resident person who earns income from the provision of services through a digital marketplace.

It excludes the following persons:

1. Non-resident persons who offer the services through a permanent establishment
2. Income earned by non-resident persons from certain telecommunication services, as well as certain specific listed services

The taxable profit shall be deemed to be 20% of the gross turnover. The deemed taxable profit will be subject to income tax at the rate of 30%.

The tax is payable by the 20th day of the month following provision of the service.

The Bill grants the Cabinet Secretary of the National Treasury powers to make regulations to aid the implementation of SEP tax.

SEP is a concept that extends the traditional tax nexus rules to include a taxable presence based on significant digital engagement with a country’s economy. It establishes a corporate tax liability based on the level of economic engagement within a jurisdiction even in the absence of physical presence.

• Minimum Top-up Tax: The Finance Bill 2024 proposes the introduction of a minimum top up tax payable by a covered person where the combined effective tax rate (ETR) in respect of that person for a year of income is less than 15%. The combined ETR for a covered person shall be the sum of all the adjusted covered taxes divided by the sum of all net income or loss for the year of income, multiplied by 100.

The amount of tax payable shall be the difference between 15% of the net income or loss for the year of income for the covered person and the combined ETR for the year of income, multiplied by the excess profit of the covered persons.

Adjusted covered taxes in this regard refers to taxes recorded in the financial accounts of a constituent entity for the income, profits or share of the income or profits of a constituent entity where the constituent entity owns an interest and includes taxes on distributed profits, deemed profit distributions subject to such adjustments as maybe prescribed.

Covered person means a resident person or a person with a permanent establishment in Kenya who is a member of a multinational group, and the group has a consolidated annual turnover of EUR 750 million or more in the consolidated financial statements of the ultimate parent entity in at least two of the four years of income immediately preceding the tested year of income.

Net income or loss means the sum net income or loss for the year of income after deducting the sum of the losses of a covered person as determined under recognised accounting standards in Kenya.

Excess profit means the net income or loss of a covered person for the year of income less 10% of the employee costs and 8% of the net book value of tangible assets. Provided that the employee cost and book value of tangible assets maybe adjusted as prescribed in the Regulations to be issued with respect to the minimum top-up tax.

Minimum top-up tax shall not be payable by the following persons/entities:

• A public entity that is not engaged in business
• A person whose income is exempt from tax under the provisions of the First Schedule to the Kenya Income Tax Act
• A pension fund and the assets of that pension fund
• A real estate investment vehicle that is an ultimate parent entity
• A nonoperating investment holding company
• An investment fund that is an ultimate parent entity
• A sovereign wealth fund
• An intergovernmental or supranational organisation, including a wholly owned agency or organ of the intergovernmental or supranational organisation

• Advance Pricing Agreements: The Finance Bill 2024 proposes introducing an advance pricing agreement (APA) regime for taxpayers engaging in related party transactions. This will allow taxpayers and tax authorities to agree on the pricing to be applied to related party transactions covered under the agreement for a maximum of five years.

Most of the measures described above will come into 1 January 2025, except for “related person” definition, which came into effect on 1 July 2024.

5. Madagascar: Finance Law and Amending Finance Law for 2024 include revised transfer pricing rules

On June 11, 2024, Madagascar’s Ministry of Finance adopted the Amending Finance Law (Bill) 2024, which introduces significant changes to the 2024 Finance Law, particularly regarding transfer pricing.

Key updates related to transfer pricing and BEPS include:

• Arm’s length principle now applies to all domestic transactions.
• Documentation: Taxpayers must provide proof of compliance and submit detailed documentation for related-party transactions annually by June 30.
• Minimum Tax: Established based on annual turnover.

6. OECD: compilation of 2024 peer review reports for CbC Reporting released

The OECD has announced the release of the seventh annual peer review report for Country-by-Country reporting, including an overview of 138 jurisdictions that have provided legislation or information pertaining to the implementation of Country-by-Country reporting.

The seventh peer review of BEPS Action 13 considers the implementation of the Country-by-Country (CbC) Reporting minimum standard by jurisdictions as of April 2024. Highlights include:

• Over 115 jurisdictions have already introduced legislation to impose a filing obligation on MNE groups, covering almost all MNE Groups with consolidated group revenue at or above the threshold of EUR 750 million. Remaining Inclusive Framework members are working towards finalising their domestic legal frameworks with the support of the OECD.
• Where legislation is in place, the implementation of CbC Reporting has been found largely consistent with the Action 13 minimum standard.
• More than 3 300 bilateral relationships for the exchange of CbC reports are now in place.
• The BEPS Action 13 peer review is an annual process, and the next peer review report will be released in the third quarter of 2025.

7. OECD: consolidated commentary to the Global Anti-Base Erosion Model Rules and updated illustrative examples published

The OECD has released a Consolidated Commentary on the Global Anti-Base Erosion Model Rules (2023), which includes updates from the Agreed Administrative Guidance issued by the Inclusive Framework from March 2022 to December 2023. This commentary also features revised illustrative examples that demonstrate how the Model GloBE Rules apply to specific situations.

Summary of the Global Anti-Base Erosion (GloBE) Rules:

• Objective: The GloBE Rules are part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, addressing the tax challenges posed by the digitalisation of the economy. Initiated in October 2021, over 135 jurisdictions committed to updating the international tax system to better fit the realities of a globalised and digital economy.
• Key Features: The GloBE Rules require large multinational enterprises (MNEs) to pay a minimum level of tax on income earned in each jurisdiction where they operate. A coordinated system imposes a top-up tax on profits in jurisdictions where the effective tax rate falls below the minimum threshold.
• Purpose of the Commentary: The original Commentary was released in March 2022 to clarify the objectives of the GloBE Rules and provide guidance on specific terms and applications.
• The new Consolidated Commentary incorporates subsequent Administrative Guidance and aims to offer consistent interpretation and application of the GloBE Rules for tax administrations and taxpayers alike, fostering coordinated tax outcomes for MNEs across jurisdictions.

8. OECD: Draft User Guide for the GloBE Information Return XML Schema is consulted

The OECD has launched a public consultation on the Draft User Guide for the GloBE Information Return XML Schema. This follows the requirement for multinational enterprises (MNEs) to file an annual GloBE Information Return (GIR) detailing tax calculations under the GloBE Model Rules.

Key points include:

• The GloBE Model Rules mandate that MNEs submit a GIR each year.
• In July 2023, the OECD/G20 Inclusive Framework on BEPS established a standardised GIR template for consistent filing across jurisdictions.
• The draft XML schema and user guide aim to facilitate uniform data capture and information exchange between tax authorities.
• Key sections of the guide include message headers, identification details, and the GloBE body.

Stakeholders were invited to submit feedback on the draft until August 19, 2024, with all comments being publicly accessible on the OECD website.

9. OECD: guidance on Country-by-Country Reporting updated

On May 24, 2024, the OECD released updated guidance on the implementation of Country-by-Country (CbC) Reporting, revising previous guidance from September 2018. The new guidance specifically addresses how dividends should be treated in “Profit (Loss) before Income Tax” in Table 1 of CbC reports. It clarifies that payments received from other Constituent Entities treated as dividends in the payer’s tax jurisdiction should be excluded from both Revenue and Profit (Loss) before Income Tax. This aims to resolve inconsistencies that have arisen in various jurisdictions and among multinational enterprises (MNEs).

The guidance emphasises that payments should be treated consistently across both payer and recipient jurisdictions. It encourages Inclusive Framework members to adopt these guidelines promptly, with the requirement applying to reporting fiscal years beginning on or after January 1, 2025. Additionally, if accounting rules allow for including a profit share from another Constituent Entity in profit before tax, it should be treated similarly to dividends, excluding it from Revenue and Profit (Loss) before Income Tax, unless the profit is transparent for tax purposes.

10. OECD: Inclusive Framework on BEPS Releases Additional Guidance on Amount B of Pillar One and Applying the Pillar Two Global Minimum Tax

On 17 June 2024, the OECD announced the release of additional guidance, related to the report on Amount B of Pillar One and the implementation of the Pillar Two global minimum tax as part of the OECD/G20 Inclusive Framework on BEPS.

The new guidance on Pillar One includes definitions for qualifying and covered jurisdictions that will aid in tax adjustments for entities in those areas, ensuring adherence to the simplified approach.

Additional guidance on Pillar Two was issued to clarify the application of the global minimum tax and to outline a streamlined process for recognising jurisdictions that implement the Global Anti-Base Erosion (GloBE) Rules.

11. OECD: transfer pricing framework for Lithium released

The OECD has announced the release of a transfer pricing framework for lithium. The release note is provided below:

OECD and IGF have joined forces to support developing countries with practical guidance when addressing the transfer pricing challenges faced when pricing lithium—a critical mineral in the global energy transition. This practice note identifies the primary economic factors that can influence the pricing of lithium using transfer pricing principles, building on the transfer pricing framework in Determining the Price of Minerals: A transfer pricing framework. The practice note provides practical guidance for countries to accurately delineate the transaction and price lithium exports on an arm’s length basis. Interested parties were invited to provide comments on a preliminary version of the practice note during a public consultation process. The OECD and IGF appreciate all the feedback received.

 Background

For many resource-rich developing countries, mineral resources present a significant economic opportunity to increase government revenue. Tax base erosion and profit shifting (BEPS), combined with gaps in the capabilities of tax authorities in developing countries, threaten this prospect. Government revenue depends on mineral products being priced and measured accurately. However, pricing is not always straightforward. It may be complicated by the different stages of mineral beneficiation, the lack of publicly quoted prices for certain minerals, and adjustments based on the quality or grade of the product. Many governments worry they do not know the value of their exported minerals and are therefore losing much-needed revenue.

The OECD’s Centre for Tax Policy and Administration (CTPA) is collaborating with the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) to address some of the challenges developing countries face in raising revenue from their mining sectors. Under this partnership, a series of practice notes and tools are being developed for governments.

The IGF and OECD CTPA have formed a partnership, combining the IGF’s mining expertise with the OECD’s knowledge of taxation to design sector-specific guidance on some of the most pressing BEPS challenges facing resource-rich developing countries. This work is published under the responsibility of IISD (the IGF’s host organisation) and of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Member countries of the OECD and the IGF.

12. Seychelles: signing Multilateral Instrument for Pillar 2 Subject to Tax Rule approved

On 11 September 2024, the Seychelles Cabinet of Ministers approved the signing of the Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule (STTR MLI). The STTR MLI has been designed to help developing countries protect their tax base and allows for the implementation of the STTR in existing bilateral tax treaties without the need for bilateral negotiations. It includes provisions to allow source jurisdictions to “tax back” where defined categories of intra-group covered income are subject to nominal corporate income tax rates below the STTR minimum rate of 9% and domestic taxing rights over that income have been ceded under a tax treaty. For example, if a payor jurisdiction can impose a 5% withholding tax on a payment of covered income under a treaty and the recipient is subject to a 1% nominal tax rate, the payor jurisdiction retains the 5% withholding tax right and can impose an additional tax under the STTR equal to 3% of the covered income amount (9% – 5% – 1% = 3%). The STTR takes priority over the GloBE Rules (IIR and UTPR) and is creditable as a covered tax under those rules.

13. United Nations: transfer pricing guidance for agricultural products and pharmaceutical industry released by UN Tax Committee Releases

The UN Committee of Experts on International Cooperation in Tax Matters recently released advanced unedited versions of interstitial guidance on transfer pricing of agricultural products and transfer pricing in the pharmaceutical industry.

Executive summary of interstitial guidance on transfer pricing of agricultural products

This guidance was prepared in response to the need, often expressed by developing countries, for practical advice in applying the arm’s length principle to agricultural products. All tax administrations, but particularly those from developing countries, face resource and capacity constraints in a specialized area such as transfer pricing. These constraints make it important to ensure that the limited resources of tax administrations are targeted as efficiently and effectively as possible. In addition, agriculture is of great importance to all countries, both developed and developing, and has a huge impact on the global economy, with multinational enterprises (MNEs) active in agricultural production and along agricultural global value chains. Agriculture also intersects with many other industries including chemicals, logistics, and machinery. Given the relevance and size of the agricultural industry in the economy of many developing countries, the goal of this guidance is to provide practical advice for tax authorities and to multinational enterprises (MNEs) in agriculture.

This guidance commences by giving an overview of agricultural products and the industry in general, and then focuses on case studies of two specific agricultural industries: coffee and soybeans. The guidance provides an overview of the two industries, discussing their global value chains and key value drivers. Practical issues relating to transaction delineation, comparability analysis, and the application of transfer pricing methods in the agriculture industry are addressed, followed by example designed to illustrate these issues.

Four appendices provide additional context. Appendix 1 includes a list of abbreviations used in this guidance. Appendices 2 and 3 provide statistics on agricultural production, sales and international trade. Appendix 4 lists potential questions that can be asked in a tax audit setting for a functional analysis of agricultural producers.

 It should be noted that the analysis contained in this document may not reflect the particularities specific to all countries, but instead takes a systematic approach by describing the most pertinent features with regards to agricultural products and related transfer pricing issues. It is important to highlight that the United Nations Practical Manual on Transfer Pricing for Developing Countries (“the UN TP Manual”) in its most recent version is applicable to the agriculture industry and the guidance provided in this document is based on, and should be read in conjunction with, the most recent version of the UN TP Manual. References in this document are to the 2021 UN TP Manual.

Executive summary for interstitial guidance on transfer pricing in the pharmaceutical industry

This guidance was prepared in response to the need, often expressed by developing countries, for practical guidance in applying the arm’s length principle to the pharmaceutical industry. All tax administrations, but particularly those from developing countries, face resource and capacity constraints in a specialized area such as transfer pricing. These constraints make it important to ensure that the limited resources of tax administrations are targeted as efficiently and effectively as possible. In addition, given the importance of the pharmaceutical industry to all countries the goal of this guidance is to provide practical advice for tax authorities and to multinational enterprises (MNEs) in the pharmaceutical industry.

This guidance commences by describing the global value chain of the pharmaceutical industry, its value drivers and business models. The application of transfer pricing analysis to the pharmaceutical industry is the discussed. Practical issues relating to the delineation of the transaction and the comparability analysis are addressed. The document then provides several examples.

 Two appendices provide additional context. A list of the abbreviations used in this guidance is attached as Appendix 1 and a glossary of key terms is attached as Appendix 2. Appendix 3 (forthcoming) lists potential questions that can be asked in a tax audit setting for a functional analysis in the pharmaceutical industry.

It should be noted that the analysis contained in this document may not reflect particularities present in all countries, but instead takes a systematic approach of describing the most pertinent features of the pharmaceutical industry and related transfer pricing issues.

 It is important to highlight that the United Nations Practical Manual on Transfer Pricing for Developing Countries (“the UN TP Manual”) in its most recent version is applicable to the pharmaceutical industry and the guidance provided in this document is based on, and should be read in conjunction with, the UN TP Manual.