Global Transfer Pricing Conference · •Demand forecasting •Lead times •Stock-outs •Unpredictable P&L Fiscal drag: ... and Region-wide Level, 2012 Customs duties are irrecoverable

Global Transfer Pricing Conference

Around the block:

Developments in Africa/Middle East October 2014

www.pwc.com/tp

Fit for the future

PwC

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October 2014 Global Transfer Pricing Conference

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PwC

Today’s presenters


Mohamed Serokh, Dubai

Jan-Paul (JP) Borman, Johannesburg

Titus Mukoro, Nairobi

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PwC

Agenda


What do you want to talk about?

A current African case study

A current Middle East case study

TP Update: Africa

TP Update: Middle East

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PwC

Which supply chain strategy makes sense in Africa?


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PwC

1. Top of the list

2. In the top half

3. In the bottom half

4. At the bottom

How high is Africa on your group's agenda as a priority market?


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PwC

Africa: The race to capture growth is driving operating model change

Market entry:

• Import

• JVs and alliances

• Immature business and capability deficit

We know best:

• In-source distribution

• Marketing talent

• RHQ / swat team

Gearing up:

• Local / regional manufacturing

• Regional Distribution Centres

• Integrated Supply Chain management

• Holdcos and cash management

Fall outs:

• Demand forecasting

• Lead times

• Stock-outs

• Unpredictable P&L

Fiscal drag:

• Re-supply / duties

• Management fees/WHTs

• Stranded HQ costs

• TP complexity

Success model:

•Costs reduced

•Taxes managed

•Performance enhanced

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PwC

• ABC Co is a global market dominant beverage producer.

• It is considering entering various African markets and is currently thinking of having a presence in the following jurisdictions:

- Concentrate manufacturer in Kenya;

- Bottlers in South Africa, Nigeria and Kenya;

- Distribution warehouses for imported concentrate in South Africa, Nigeria and Kenya, and imported finished goods in Ghana and Mozambique;

- Sales centres in 10 different African countries; and

- A regional support centre in South Africa.

• All intellectual property (for both product and brand) will be owned and/or licensed from a group company in the Netherlands.

• Group treasury is based in Switzerland and acts as the group’s EMEA cash pool.

Supply Chain: An African case study

(Source: Economist, IMF, UN – Department of Economic and Social Affairs)

7 of the top 10 fastest growing economies between 2001 and 2010 were African countries and are forecast to be in

top 10 fastest growing

Ghana

Ave GDP growth p.a. 2011-2015

Population (m) 2010

7.0% 24.4

DRC


Population (m) 2010

7.0% 4.3

Nigeria


Population (m) 2010

6.8% 158.4

Tanzania


Population (m) 2010

7.2% 44.8

Zambia


Population (m) 2010

6.9% 12.9

Mozambique


Population (m) 2010

7.7% 23.4

Ethiopia


Population (m) 2010

8.1% 82.7

October 2014

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PwC

Key considerations: Site selection

http://www.pwc.com/gx/en/transportation-logistics/publications/africa-infrastructure-investment/index.jhtml#

Technology infrastructure

Legal and regulatory: Incentives and restrictions

Customers/ Markets

Hard infrastructure

Social and political climate

Soft infrastructure

Funding and liquidity

Trade Blocks

Corporate Tax

October 2014

Slide 9

http://www.pwc.com/gx/en/transportation-logistics/publications/africa-infrastructure-investment/index.jhtml







PwC

Customs Duties

Assume no trading blocks or FTAs in the region. Goods imported under the MFN tariff (most favourite nation tariff is a tariff a WTO member offers another WTO member. In the US called ‘permanent normal trade relations’ tariff. In effect, it’s a standard tariff offered to another country in the absence of a trade agreement).

Country X subsidiary: semi-finished goods located in country Y

Y

Z

S

Semi-finished goods supplier located in country S

Final market

T

Final product

X Country X subsidiary: assembly site located in country Z

Compound A Import value = $100 Duty = $5 Price post duty = $105

Semi-finished good Import value= $200 Duty = $17 Price post duty= $217

Compound B Import value = $100 Duty = $20 Price post duty = $120

Cool beverage Import value = $500 Duty = $35 Price post duty = $535

Example

Import value of the finished product = $535 Total duty paid = $77 Percentage of the DDP price = 15.4%

Source: Dr. Anna Jerzewska, The Role of Preferences in Japan’s FTA Policy Formation in Asia on a Bilateral, Minilateral, and Region-wide Level, 2012

Customs duties are irrecoverable costs to the bottom-line

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PwC

Nigeria - DTA versus Trading Blocks

Key

Trading Partners

*Cape Verde Islands not on map

Key

Double Tax Agreements in force

Double Tax Agreements Awaiting Conclusion/Ratification

*Mauritius not shown Source: PwC Africa Desk

15 DTAs out of Africa

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PwC

Transfer pricing: Comparability

• External • External

• Internal • Internal

Margin analysis

Transactional

Transactional Margin analysis

• Working Capital/ Country Risk Adjustments?

• Point in range?

• JVs/ historical internal comparables

• Global industry profitability

• Developing market profitability

• African profitability (28 stock exchanges; 1183 listings)


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PwC

Middle East: TexCo Case study


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PwC

1. Great advantage

2. Some what advantageous

3. Little advantage

4. No advantage

To what extent can tax planning be an advantage to your business operations in the Middle East, e.g. by potentially utilising UAE hub structures?


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PwC

Intra-group transactions

Egypt

Oman Kuwait KSA Qatar

UAE Shared service centre

HQ costs

Netherlands

Loan


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PwC

Transfer pricing considerations

• Due to the business environment, good infrastructure and tax free regime, the UAE is a preferred destination for many multinationals to setup a regional headquarters, IP holding companies and hubs

• The OECD’s BEPS project and in particular the report on substance and country-by-country reporting has placed the spotlight on companies with significant operations in low-tax jurisdictions

• Countries are increasingly focusing on substance issues across the value-chain during transfer pricing audits

• In order to comply with substance requirements in a post-BEPS world, it is recommended that companies review existing supply chains to identify any shortcomings

• In TexCo case study it is pertinent to review the nature of services performed in Egypt and the UAE to ensure that:

• The UAE is not merely a conduit between Egypt and other subsidiaries and is responsible for performing significant people functions for the group

• Charges are not made for duplicative services

• If there is substance in the UAE and head office services are being charged then a net tax benefit can be realised and the UAE treaty network can be used to minimise WHT leakage.

UAE

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PwC

• Egypt has the most detailed transfer pricing legislation and framework in the MENA region

• Although the legislation is largely based on the OECD Transfer Pricing Guidelines, there are differences in implementation methodologies e.g. the ‘four step approach’ when preparing transfer pricing documentation

• The Egyptian tax authorities (“ETA”) have recently acquired the rights to utilise the Orbis database (BvD) and have started a number of TP audits in Egypt

• The ETA have consulted with PwC on matters related to the appropriate use of TP methods depending on the economic characterisation of entities and the use of local comparables

• In light of TexCo case study:

• The taxpayer should conduct a detailed review of operations and decision making authority in Egypt to ensure that the group follows an appropriate charge out methodology and the margins earned in Egypt reflect the low end nature of services provided

• Typically an advance ruling is preferable in Egypt to take advantage of treaty benefits.


Egypt


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PwC


• Kuwait is unique in that it has implemented a transfer pricing system based on ceilings of intercompany charges that can be deducted

• Headquarter cost deductions in Kuwait are limited to 1.5% of the local revenue

• Similarly, cost of goods incurred outside of Kuwait are limited to 85% (head office) and 90% (other affiliates)

• Design costs incurred outside Kuwait are limited to 75% (head office) and 80% (other affiliates)

• Deductions for consultancy costs are limited to 70% (head office) and 75% (subsidiaries)

• For TexCo case study :

• In Kuwait, a review of head office and design costs should be conducted to ensure appropriate characterisation and compliance with the ceilings

• Oman has also imposed similar restrictions on deductibility of head office expenses. Limited to 3% of gross revenue for most companies. The limit is raised to 5% and 10% in case of financial institutions and high-tech industrial companies, respectively.

Kuwait and Oman


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PwC

• The KSA tax code states, transactions between related parties (Article 64) are to be conducted at arm’s length and documentation is to presented to the DZIT when requested for scrutiny (Article 61), to support the ‘precise determination of tax payable’ by the taxpayer (Article 58).

• If the DZIT is not satisfied with the documentation provided, it may:

• Reallocate revenues and adjust expenses if related party transactions have not been conducted at arm’s length (Article 63(c))

• Disregard transactions and / or reclassify transactions

• Estimate the appropriate tax base and impose penalties.

• In relation to Texco case study:

• For Qatar, the entity should undertake a thin capitalisation analysis to establish if safe harbour requirements are met. Debt : equity should be within 2:1 for non-financial institutions and 4:1 for financial institutions.


KSA and Qatar


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PwC

Transfer Pricing update: Africa


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PwC

1. Tax reporting and general tax compliance

2. VAT

3. Customs

4. Transfer Pricing

What is your group's biggest tax risk in Africa?


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PwC

TP regulatory framework

Notes:

•Arm’s length principle is defined as “ALP” and implies following the OECD TP guidelines.

•De minimis rules refers to a minimum threshold of profit or transaction value before TP rules are applicable.

•Thin capitalisation rules refers to limitations of the amount of debt that can be borrowed by a local taxpayer.

Country ALP law? TP Rules? Secondary

adjustments? De minimis

rules? Thin cap

rules? Statute of

limitations

BEPS in

focus?

APA Program

?

Angola Yes Yes No No No 5 No No

DRC (Congo) Yes No No No Yes 4 No No

Ghana Yes Yes No No Yes 6 No No

Ivory Coast Yes No No No No 3 No Limited

Kenya Yes Yes No No Yes 7 Yes No

Mozambique Yes No No No Yes tbc No No

Nigeria Yes Yes No No No 6 Yes Yes

South Africa Yes Yes Yes No Yes tbc Yes No

Tanzania Yes No No No Yes 3 Yes Yes

Uganda Yes Yes No Only domestic Yes 5 Yes Yes

Zambia Yes Yes No No Yes tbc Yes No


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PwC

TP compliance framework

Country Current

Priority? Documentation

required? Due date:

documentation

TP specific form (eg with tax

return) Due date: TP form

Acceptable language(s) for TP

documentation

Angola Yes Tax Return TBC TBC TBC TBC

DRC (Congo) Yes Upon request Within 20 days of tax assessment or

request No N/A French

Ghana Yes Upon request Upon request from

Tax Authorities Yes

4 months after company’s financial

year end English

Ivory Coast Yes No Within time period

stated in request No N/A French

Kenya Yes Yes Upon request No N/A English

Mozambique N/A N/A N/A N/A N/A N/A

Nigeria Yes Tax Return Upon request from

Tax Authorities Yes

6 months after company’s financial

year end English

South Africa Yes No N/A Yes End of Next FY English or any Official

Language

Tanzania Yes Yes Upon request N/A N/A English

Uganda Yes Yes, in principle By the date of

filing the annual tax return

No With tax return English

Zambia Yes Yes On request Yes (limited

disclosure with final tax return)

At point of filing final return (30 June)

TBC


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PwC

Transfer pricing – Middle East perspectives


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PwC

1. Extremely relevant

2. Very relevant

3. Somewhat relevant

4. Not relevant at all

To what extent is International Tax and Transfer Pricing relevant to your operations in the Middle East?


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PwC

Transfer pricing landscape in the Middle East

Egypt

KSA

Oman

Qatar

Kuwait

Libya

UAE

Syria

Iraq

Lebanon

Jordan

Bahrain

Jordan, Lebanon and Oman • New tax laws allow tax authorities to re-

characterise transactions based on the arm’s length principle

• Increased transfer pricing audits

KSA • First introduced transfer pricing laws in 2004 • The DZIT addresses transactions between related parties and “the arm’s length principle” in general • There is a generic provision that allows DZIT to re-characterise transactions or re-allocate income based on

arm’s length principle • Issuance of a draft transfer pricing manual (2014)

Egypt • In 2010, Egypt introduced detailed TP

guidelines retroactive to 2005 • Increased transfer pricing audits

Kuwait • Unique formulaic approach governing

intercompany payments

Qatar • Tax laws allow tax authorities to re-

characterise transactions based on the arm’s length principle and issued draft TP guidance

• Rigorous thin capitalisation regime for financial institutions

• Detailed transfer pricing guidelines for Qatar Financial Centre taxpayers

Iraq • While having no specific transfer pricing legislation Iraq has a

third party arm’s length provision contained within its tax legislation

Country has transfer pricing rules

Country has transfer pricing provisions in its laws

Country with no transfer pricing rules


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PwC

Transfer pricing has been gaining momentum with taxing authorities in the region

• PwC has been involved in discussions with several taxing authorities in the Middle East on development of formal transfer pricing guidelines

• BEPS, and now with the advent of CBC, this has led to a significant impact on how tax authorities in the region view transfer pricing:

- UAE – Dubai is often used as a ‘hub’ location by MNCs, but is starting to attract more tax authority scrutiny now

- KSA – the Department of Zakat and Income Tax is currently in the process of developing detailed TP guidelines, and has issued a draft transfer pricing manual

- Qatar – the QFC have issued executive regulations governing transfer pricing

- Egypt – has transfer pricing legislative requirements and is currently ramping-up transfer pricing audits

- Kuwait – has issued limitations for deduction of expenses including head office service costs, interest and leasing expenses

- Oman – we are currently dealing with transfer pricing audits for several multinationals.

Latest developments in the Middle East


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PwC

Country Guidance

in tax code Regulations Methods

Documentation requirements

Thin cap rules

Safe harbours

APA program

Bahrain No No No No No No No

Egypt Yes Yes Yes Yes Yes No No

Iraq Yes No No No No No No

Jordan Yes No No No Yes No No

KSA Yes No No No No No No

Kuwait Yes No No No Yes No No

Lebanon Yes No No No No No No

Libya No No No No No No No

Oman Yes No No No Yes No No

Qatar Yes* No Yes No No Yes** No***

Syria No No No No No No No

UAE No No No No No No No

Summary of TP Regimes in the Middle East

*Qatar Financial Centre (QFC) has recently issued a separate guidance for the transfer pricing and thin capitalisation application. **Safe harbours were introduced in the Guidance for QFC entities. ***Advance tax rulings are available for QFC entities.


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PwC

Benefits of transfer pricing

25%

20%

15%

15%

14%

12%

10%

0%

0%

0% 5% 10% 15% 20% 25% 30%

Egypt

KSA*

Kuwait

Lebanon

Jordan***

Oman

Qatar

UAE**

Bahrain

Corporate income tax rate (%)

*2.5% Zakat rate to the extent of GCC ownership. 20% CIT rate applies to profits attributable to non-GCC shareholders ** 20% rate applied to branches of foreign banks ***30% rate applied for banks

Potential benefits of setting-up tax efficient TP models in the Middle East

Increased profit repatriation

Tax efficient supply chain

Optimisation of WHT structures

Holding of group IP in a tax efficient location

Ensuring appropriate margins are earned in taxable jurisdictions

Compliance with local tax legislation

Compliant transfer pricing documentation


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PwC

1. Huge impact

2. A fairly big impact

3. Little impact

4. No impact

To what extent do you think OECD BEPS will have a big impact on the way you do business Middle East?


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PwC

Contacts


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PwC

Africa / Middle East Contacts

Mohamed Serokh

Office: +971 562586215

Mobile: + 971 (0) 50 900 2862

E-mail: [email protected]

Titus Mukoro

Office: +254 20 2855 395

Mobile: +254 736 998 460


Jan-Paul (JP) Borman

Office: +27 (0) 11 797 5291

Mobile: +27 (0) 83 458 0475


Johannesburg

Dubai Nairobi

October 2014

Slide 32

Thank you

This publication has been prepared for general guidance on matters of interest only, and does

not constitute professional advice. You should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty

(express or implied) is given as to the accuracy or completeness of the information contained

in this publication, and, to the extent permitted by law, PwC does not accept or assume any

liability, responsibility or duty of care for any consequences of you or anyone else acting, or

refraining to act, in reliance on the information contained in this publication or for any decision

based on it.

© 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its

member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for

further details.

http://www.pwc.com/structure

Documents

Global Transfer Pricing Conference · •Demand forecasting •Lead times •Stock-outs •Unpredictable P&L Fiscal drag: ... and Region-wide Level, 2012 Customs duties are irrecoverable