In the first of a two-part “GILTI Conscience” series, we detail transfer pricing across the African continent, as well as taxation in the region generally. Skadden partners Nate Carden and David Farhat and associates Mayté Quinn Salazar and Stefan Victor are joined by Lolade Ososami, head of tax at Nigeria-based Udo Udoma & Belo-Osagie, and Zach Pouga, an international tax partner at EY, to discuss the applications, challenges and importance of transfer pricing in African countries, as well as various other tax issues across the continent.
Conversations surrounding transfer pricing practices rarely span to include the myriad regulations throughout Africa. However, across the continent, there are vast distinctions between countries that are thriving under new international tax rules and others that are struggling to keep up.
Lolade Ososami, a partner and head of the tax team at Udo Udoma & Belo-Osagie, says that transfer pricing has grown and evolved in Africa over the last decade. When the OECD released
the BEPS action plans in 2018, it had a huge impact on tax practitioners, particularly in Nigeria.
Zach Pouga, a partner in the International Tax Group at Ernst & Young, encounters transfer pricing in nearly every aspect of his work. He frequently deals with BEPS 2.0, Pillar One and Pillar Two when advising his clients regarding their presence in Africa, as well as helping governments across Africa understand the complexity of new tax rules.
In this episode of the GILTI Conscience podcast, Lolade and Zach join our hosts to dive into the evolving world of international tax throughout Africa. From how U.S. multinationals operating in Africa approach transfer pricing to how Africa-based companies and regional governments are branching out, Lolade and Zach explore the complexities of transfer pricing and international tax.
Key Takeaways
- Transfer pricing has created new challenges. Transfer pricing didn’t become a subject of focus in the African markets until 2012 and underwent major changes with the OECD’s introduction of BEPS in 2018. Depending on the resources available to each country and government, transfer pricing and the international tax market can be increasingly difficult to navigate.
- Measuring success of new tax regulations. The success of the BEPs project in Africa may be difficult to quantify. New regulations have brought increased enforcement and audits, which in turn has sparked awareness of the new rules, however taxpayers are spending much more to dispute the new audits, and it remains to be seen how much is being paid due to the new audits and rules.
- Countries move at different speeds. Throughout Africa, different countries are taking to the OECD’s BEPS at their own pace, according to their resources and capabilities. Many countries, however, are wondering if implementing a qualified minimum tax would be beneficial.
Voiceover (00:02):
This is GILTI Conscience. Casual discussions on transfer pricing, tax treaties, and related topics. A podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts, and tax administration trends.
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We also dig into the innovative approaches companies are using to navigate the international tax environment, and address the obligation everyone loves to hate.
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Now your hosts, Skadden Partners, David Farhat and Nate Carden.
David Farhat (00:35):
Hello all, this is David Farhat, one of the hosts of GILTI Conscience. Welcome to International Tax in Africa, An In-depth Look, Part One. This is our first two-part series, so please be on the lookout for part two. Thank you.
Nate Carden (00:46):
Hey everybody. Welcome back to another episode of GILTI Conscience. As always, Nate Carden, here with David Farhat, Stefane Victor. Amman is still on leave and so again, we’re joined by Mayte Quinn Salazar as our guest host.
(01:05):
Today’s episode is going to be a very interesting discussion of an area of transfer we don’t always talk about very much, which is transfer pricing in Africa. We’re very pleased to be joined by Lolade Ososami of UUBO and Zach Pouga of EY. Welcome to you both. Thanks very much for joining us today.
(01:23):
And, Africa’s a big place. So talking about transfer pricing in Africa, a strange thing. But start out just introducing a little bit about your practice, but also how is your government and how are other governments thinking about transfer pricing challenges, both in the application of the arms length standard and in terms of the pillars?
Lolade Ososami (01:45):
Thank you, Nate. Thank you for having me here today. I’m Lolade, I’m with UUBO. That’s Udo Udoma & Belo-Osagie, a law firm in Nigeria, in Africa, where I lead the tax team, and I do a few other things as well.
(01:59):
So yes, transfer pricing has become the buzzword for some time now in international tax in Africa, and in Nigeria in particular. And a lot of the influence has been, of course, from the OECD BEPS initiative that’s been going on since about 2013.
(02:18):
And so for instance, I’ll speak concern in Nigeria where I practice from. In 2012 was the first time that we had our first transfer pricing regulations. Prior to that we didn’t really have a formal set of rules that governed transfer pricing. We just had a general anti-avoidance provision in our tax laws and that would typically cover issues relating to transfer pricing.
(02:44):
But transfer pricing became a subject of focus in 2012, but even more so in 2018 after, of course, the OECD had released its final reports on the various BEPS action plans. And transfer pricing, of course, was at the fore because of related party transactions. Being a source country, of course, it was very relevant to the jurisdiction.
(03:10):
So that’s just a quick intro as to how transfer pricing has come to become part of our daily lives now as tax practitioners in this side of the world.
David Farhat (03:22):
Thanks so much, Lolade, and if we can turn to Zack to give a quick intro and talk about what you do. We know you’re not a transfer pricer, per se, but transfer pricing has become like the borg and touches and concerns everything. So give us a bit of what you do and how transfer pricing has touched your practice, if you can.
Zach Pouga (03:40):
Well, thank you, David, and thanks, Nate, thanks for having me. It’s always great. I may not be a transfer pricer but we know transfer pricing is very close to my heart. I started practicing... I went back to school to write a dissertation, a doctorate dissertation in something very close to transfer pricing. So even though that’s not what I do on a daily basis, it’s very close to my heart.
(03:58):
So, Zach Pouga is my name. I’m a partner in the international tax group at Ernst & Young. I’m based in New York, but I do have a lot of clients and I work a lot on the continent in Africa.
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I am originally from Cameroon, so part of my practice really is working with US multinational companies that have a presence in Africa, and working with African multinational companies that are looking to expand into the US.
(04:25):
So I try to walk that bridge a little bit between the US and Africa. And more on the call ITS, ITS, International Tax Services, whether it is M&A, a little bit of transfer pricing, not as much, but this day is a lot of BEPS, a lot of BEPS 2.0, a lot of Globe, a lot of Pillar One, Pillar Two.
(04:46):
So that’s really my main focus is just because a lot of my clients in the private practice are worried about how this affects their presence in Africa. And a lot of African governments are worried about how this will affect them. And I do work more on the outside my current private practice.
(05:04):
I work with governments across Africa. I partner with the African Union, and I do travel across Africa regularly to work with governments in trying to help them shape their policies to respond to the ever-increasing complexity of international tax, international tax rules. So this is always a very welcome discussion for me.
David Farhat (05:25):
No, that’s perfect and I think you ended in a really good place for us. A lot of our episodes have been around, as you describe it, the ever more complex world of international tax.
(05:36):
And if we can level set a bit, both Lolade and Zack, and give us a view of that complexity from the Africa landscape. As Nate said in the beginning, Africa’s a very big place and there’s several different perspectives there.
(05:49):
But if you can give us a flavor of some of the issues that are germane to Nigeria or other areas you’ve worked with. And how, from the one side US multinationals operating in Africa are looking at it. And on the other side, companies in Africa that are branching out, as well as African governments. How are they handling all of these complexities?
Zach Pouga (06:09):
I will maybe classify in three different groups. You have some countries that are doing somewhat well. And maybe if I narrow it down just from a transfer pricing perspective, you have some countries that are doing well in trying to keep up with what is going on. You have countries that are trying to figure out, and you have countries that have no clue.
(06:27):
And when you talk about countries that are doing somewhat well, I would put Nigeria, I would put South Africa, and more so these days, I would put Kenya, who have done a great investment in trying to dig into the international tax rules and understand how and adapt their local policies.
(06:44):
And then you have smaller countries that are trying to figure out. That’s usually where the African Union tries to bring a little bit of expertise from around the world to try to help them shape their policies.
(06:54):
And then you have the even smaller countries that really have no clue and don’t seem to be investing anything to catch up with these different complexities, and how is it being seen and how is it being...
(07:07):
Really, the thing I hear a lot, and I keep hearing every time I go, every time I’m interacting with these governments or these private sector even, is that the government really, they don’t have the manpower to apply the rules they don’t understand, and the effectiveness of which they’re not sure of.
(07:28):
So it’s a very deliberate governmental decision to try to allocate resources to understand these complex policies that are coming out when they have no assurance of the effectiveness in actually raising funds for them.
David Farhat (07:41):
That’s interesting because that’s a complaint we’ve heard from a lot of jurisdictions, even those in the “developed world,” where they’re saying, “We’re resource constrained. We’ve just gone through this massive pandemic where we’ve used resources and we’ve got to allocate resources to this thing that we don’t fully understand.”
(07:58):
So hearing that from an African perspective, where that can be a bit more acute, is very interesting. But sorry, I jumped in there, Lolade, if you want to chime in.
Lolade Ososami (08:09):
Sure. Yeah, Zach has touched on a very important point there and I’ll talk about the repercussions of that because indeed, so from a Nigerian perspective, a lot of resources have gone into just trying to implement quite a number of the BEPS actions.
(08:28):
When the BEPS project kicked off the expectation was, oh, we’re going to be able to gain access into information that would boost our revenue collection. Now, how that is now beginning to play out is that the resources that are being directed into this implementation need to be recouped.
(08:47):
And so, what we’re experiencing is a very aggressive revenue drive on the side of the tax authorities as well. So for instance, with transfer pricing, we’ve seen an increase in transfer pricing audits and we’ve seen the tax authorities trying to even claw back as far back as 2013.
(09:09):
Like I said, the first set of regulations were promulgated in 2012. And if you compare the content of those regulations with the 2018 regulations, for instance, we didn’t even have any penalty provisions in the 2012 regulations. It was really sparse in terms of content and not very detailed. But the 2018 regulations is a lot more detailed, tailored after the OECD transfer pricing guidelines, and with huge penalty provisions as well.
(09:38):
So the penalty provisions we’ve seen is a low-hanging fruit for the tax authorities to at least collect some revenue. And so you have that vicious cycle where, as the more government is pumping into trying to implement these measures, the more aggressive the tax authorities are becoming and pushing the boundaries. Boundaries like limitation periods to raise additional assessments, and things like that. So it’s a real issue.
Zach Pouga (10:13):
We’ve definitely seen more activity on the transfer pricing part and controversy across Africa. I have a client where it’s mostly in the countries that are doing well in my first categorization earlier, whether it’s Nigeria, South Africa, or Kenya, we’ve seen a lot more activity, I would say.
David Farhat (10:29):
So let me ask a question from that. Could that be interpreted as a success then of the BEPS project or the guidelines, because they were supposed to enhance countries’ ability to raise revenue, enhance their ability to go after transfer pricing or enforce transfer pricing policy.
(10:46):
So if you have an area where you haven’t had this enforcement for a very long time, you have these new rules that have led to aggressive enforcement, maybe there’s a bit of overtime and degree changing. But could that be interpreted as a success that you see these audits happening in new places?
Mayte Quinn Salazar (11:04):
All of us are smiling.
David Farhat (11:07):
Yeah, exactly. It’s hard as tax practitioners to say more aggressive audits is a good thing. But I guess I’ve got my old IRS hat still on.
Nate Carden (11:15):
Take that hat off, David. It doesn’t fit well anymore. Another way of asking the same question is, where are the cases landing? Because you can imagine a world in which the audits are unprincipled and aggressive and are used to negotiate nuisance-type settlements. Or you can imagine a world where there is just better enforcement of the guidelines. And the tax authorities now have the resources to do it. Which is it, or is it a mixed bag?
Lolade Ososami (11:46): I would say it’s a mixed bag. And honestly I smell because success is relative, and David just confirmed that. It depends on which side of the fence you’re standing.
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So you have all these audits, you have all this controversy. The taxpayer is spending a lot more money trying to resolve disputes. So is tax really being collected even? So I don’t know if that looks like success.
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And when you talk about the success of the BEPS project generally, there are other big issues in Nigeria, for instance. I don’t know whether this conversation would go there today.
(12:23):
But for instance, one of the challenges that BEPS was meant to tackle was the whole issue of rewriting the rules around permanent establishments and creating taxable presence for digitalized businesses.
(12:37):
And so what has metabolized... Sorry that word is difficult for me. But what has been salted in to BEPS 2.0, as you know, the Pillar One, Pillar Two, Nigeria is out of that. Nigeria has still not signed up to that, because when we’re talking about success really, the whole expectation was that having implemented all the BEPS actions, or at least the minimum standards, the government will make more revenue.
(13:08):
But it looks like, it’s looking like a potential impoverishment of the government when we talk about implementing some of these measures. So success for me has a lot of question marks around it.
Zach Pouga (13:20):
There is a level of awareness that these policies have brought up. I don’t know if it’s the policies themselves or just the awareness that they have brought up. Whether it’s BEPS or whether it’s the TP Regs, there’s a level of understanding from a government perspective that there’s a pot of money out there.
(13:36):
And some of these audits are really just comical. But they know the fact that they will hit the page might put some pressure on the company and they might get a settlement.
(13:45):
So I attribute it more to the level of awareness of the pressure that the companies, the private sector is under, than on the effectiveness of the actual rules.
(13:55):
I’m not sure, because we fight them pretty hard and most of the times the governments end up losing. But because it looks bad, the governments are becoming more aware of that, they will go ahead and hope for a settlement.
Nate Carden (14:07):
Does it vary much by the posture of the company whether the country is just a market country and you have basically sales and distribution, versus something where you have more homegrown champions?
(14:20):
Nigeria has a fabulously dynamic fintech sector. And I wonder is the approach that’s being taken similar across the board or is there a profile that tends to be more aggressively audited?
Lolade Ososami (14:34):
Great question, Nate. So it’s the same rule across the board, but that’s starting to change slowly, slowly. Recently, the fintech sector, there has had to be some engagement with the tax authorities just to even help them understand the business model. Because with fintechs especially, they make the news all the time. Once there’s news, oh, Nigeria just produced another unicorn. And the tax authorities start to see dollar signs there.
(15:04):
And without actually realizing that some of these businesses were just talking about the amount of money capital they’ve been able to raise. We’re not even talking about whether they’ve broken even or they’ve made enough profit to be able to pay taxes.
(15:18):
And also considering that it can be a very harsh terrain to do business from an infrastructure perspective, a lot of these fintechs, for instance, are even expecting some incentives to be extended to them to enable them to grow and generate jobs.
(15:36):
So that engagement is starting slowly and we’re hoping that perhaps they can even look at it and try to even consider a special tax regime for this category of businesses.
Zach Pouga (15:50):
I agree with that. And the fintech in Nigeria is just a symbol of the fintech in Africa in general. I think it’s a very strong sector that’s growing really, really fast.
(15:58):
But I don’t think it, particular, at least I haven’t noticed a particular attention to it because there’s some different sectors clients in totally different opposite sectors that are feeling the same kind of pressure. So it feels like it is across the board.
(16:10):
But I was going to piggyback on the comment that Lolade made earlier on Nigeria not signing on to Pillar Two. And that’s something we have been spending a little bit of time working with government to make them understand whether you sign on or you do not sign on to Pillar Two, it’s going to affect.
(16:29):
And I know there’s a lot of work being done in Nigeria to see, the fact that they haven’t signed on to it, how it might see the effect of it. But a lot of African countries are trying to make that call.
David Farhat (16:39):
So to unpack that a little more. I think Lolade made a good point about Nigeria, in particular, and other countries looking at the rules and saying, “Well, these rules don’t work to our benefit.”
(16:48):
Are there options places like Nigeria or Cameroon or South Africa are putting on the table for Pillar Two, or other options they’re discussing as to what they’re going to adopt, whether it’s some kind of unilateral measure or otherwise to make sure that their interests are met? Or, to your earlier point, Zach, they’re probably different categories of this. Are there folks that just haven’t thought about that yet?
Stefane Victor (17:14):
And if I can add on to that question, what is the impact of countries moving at different times? So how they’re thinking about this differently, and would it be at all beneficial or practical for them to have more of a unified approach?
Zach Pouga (17:30):
A lot of countries are looking at BEPS as unfortunate. We saw how the country-by-country reporting became a little bit of a game changer for some jurisdictions and they were able to use that information to go... And probably that could have been the basis for some of the more stronger audits that are happening on the continent.
(17:48):
So a lot of African companies as countries are seeing the BEPS 2.0 as unfortunate. Let’s just put Pillar One on the shelf for a minute. Going back to Pillar Two, I know a lot of African countries pushed for really a lot more interest and a lot more priority to the subject to tax rule. And we know how that ended up.
(18:09):
Right now, the subject to tax rule hasn’t gone anywhere, has been put in the back burner. And even when it would be implemented, the OECD has decided that the subject to tax rule would be implemented on bilateral treaties. So these countries will have to convince their treaty partners to sit down and renegotiate the treaties. And we know how that will end up.
(18:32):
So a lot of countries are somewhat frustrated in the way that ordering has happened and how the subject to tax rule has not gained the interest that they wanted it to have. And I believe that’s one of the major positions from Nigeria, for example.
(18:45):
And then they’re also looking at the BEPS rule as an opportunity. And the discussion I’m having over and over again is regarding the qualified minimum tax. So a lot of these countries are looking at the qualified minimum tax and saying, can we just implement a qualified minimum tax and make sure that the 15% is right here and we don’t have to worry about anything else? And that’s a discussion that’s happening a lot.
(19:06):
And some countries are going even further than that and saying, okay, instead of doing the OECD’s suggested qualified minimum tax, can we just do a minimum tax for everyone? That means for companies that will be in the scope of the Pillar Two rules, but also for everyone else, just do a minimum tax for everyone.
(19:22):
So those are things that will likely start to be implemented very soon. And some countries are restraining it to the OECD suggested qualified minimum tax, which will only apply to companies that are within the scope of the OECD Pillar Two rules. But then other countries are looking just at a general minimum tax that will be applicable to everyone, whether you are in the OECD’s group or not.
Nate Carden (19:43):
Here’s a hint for all these countries, the broader tax, that’s not a qualified minimum tax, is a better tax. So they’re probably going to see that and end up there.
Zach Pouga (19:53):
I think they would like that too. In concept, it raises more funds, but...
Nate Carden (19:58):
How do they balance that against the desire to maybe attract inbound investment? We’ve had conversations in the past about some countries, Rwanda, I think was thinking about this for a time, trying to use their tax system to incent more inbound investment. Is that still a trend or are folks moved past that?
Zach Pouga (20:23):
It is still a worry, and I think this has been in the paper. So some of the discussions or work we’ve done with the government of Kenya, for example, and that’s the question that was posed to them.
(20:33):
How do you balance it with your need? And Kenya has been trying to be open and attract this very booming private sector. But the feeling of the response to that has been, well, the money’s going to go somewhere. The 15% seems to be the new zero. So if the money’s going to go somewhere, what will be done to let it go elsewhere?
Voiceover (20:56):
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