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Transfer pricing rules What it the relevance?

With the rise of global trade and particularly subsequent to the economic downturn, transfer pricing has remained arguably the most important focus area in international tax for multinational enterprises and revenue authorities.
Namibia introduced transfer pricing legislation in 2005, aimed at enforcing the internationally accepted arm’s length principle in cross-border transactions carried out between connected persons. In addition to this, the Directorate of Inland Revenue issued Practice Note 2 in 2006, which provides guidance on the application of the transfer pricing legislation.
The impact of transfer pricing rules on Namibia and other countries may be gravely underestimated.
Local transfer pricing documentation
Paragraph 8.5 of Practice Note 2 on transfer pricing, which was issued by the Director of Inland Revenue states that a taxpayer is required to be in possession of transfer pricing documentation, for example, to be able to demonstrate that prices charged by or to that taxpayer in terms of a cross-border transaction with connected persons, is arm’s length. Such taxpayer would also be expected to retain and implement transfer pricing documentation. Thus, when the Directorate of Inland Revenue performs transfer pricing audits, a taxpayer would be expected to be able to produce appropriate documentation (and have implemented the relevant pricing), even retrospectively. Therefore, a taxpayer entering into cross-border connected party transactions would be well advised to adhere to transfer pricing rules applicable in Namibia and to document this, to avoid transfer pricing adjustments and respective penalties payable etc, at a later stage.
Global transfer pricing developments
As stated above, globally, transfer pricing has become an important issue for governments and taxpayers alike. While individual countries have amended and often broadened local transfer pricing legislation and increased taxpayer scrutiny, international organisations have also extensively amended international guidelines to adapt to changing business environments and trends. For example the Organisation for Economic Co-operation and Development’s (OECD) transfer pricing guidelines were significantly amended in 2010 and a new chapter dealing with business restructurings was incorporated. Also, in 2011, the draft of a proposed update to the United Nations Transfer Pricing Guidelines was published.
Furthermore, revenue authorities around the globe have increased their focus on transfer pricing to enforce transfer pricing compliance, with the aim to increase tax revenues. Taxpayers, however, have further developed and implemented sophisticated structures to achieve effective transfer pricing, for example by moving functions and / or risks to low tax jurisdictions, which resulted in often significant tax savings.
The increased focus on transfer pricing in many countries during the past years resulted in the need, particularly for many developing countries, to keep up with global developments in order for these countries not to lose out on tax revenues. The effect of more and more countries introducing transfer pricing rules has been that, particularly European, countries seem to be not only reviewing the transfer prices achieved by their own tax residents, but also reviewing the pricing, ie the results achieved, by the foreign party to a cross-border connected party transaction. For example, where a German company sells goods to its subsidiary in Namibia, the German revenue authorities may now also scrutinise the pricing model and the prices achieved by the Namibian entity and, if the German company achieves prices at arm’s length, but the Namibian entity achieves super profits, the German revenue authorities in this example are now likely to question the German profits based on the Namibian results.
This would be another reason for a Namibian taxpayer with cross-border connected party transactions, to ensure that current transfer pricing documentation is prepared and maintained.
Transfer pricing developments in Africa
Many other African countries such as South Africa, Botswana, Kenya, Mozambique, Nigeria, Uganda, Zambia and Zimbabwe, also have specific transfer pricing legislation or are in the process of introducing similar legislation, and to date, 33 countries in Africa have introduced some form of regulation that allows them to adjust the pricing of related-party transactions. More countries are expected to introduce transfer pricing legislation or at least general anti-avoidance rules combating the abuse of transfer pricing.
Following the global trend, transfer pricing has become a focus area for revenue authorities in many African countries. For example, in Kenya it is reported that the Revenue Authority’s dedicated transfer pricing team includes 12 specialists (expected to be increased to 25) who have been aggressively pursuing transfer pricing audits. In South Africa, the South African Revenue Service is looking to fill 30 vacancies for specialists in international tax and transfer pricing. It has been further reported that, following international tax training arranged by the United Nations, some multinationals are undergoing transfer pricing audits simultaneously in several African countries. The increase in specialised staff enables revenue authorities to police and enforce transfer pricing compliance better.
Multinational enterprises and tax practitioners alike are recognising that Africa, including Namibia, cannot ignore transfer pricing any longer. Like any other area of tax compliance, understanding the legal requirements, aligning these with the business and maintaining current transfer pricing documentation is essential for multinationals to successfully manage this tax risk.
Thus, preparation of transfer pricing documentation to substantiate the arm’s length nature of prices charged by or to a group company in Namibia or other African countries is just as important as preparing documentation for companies in Europe, Asia or the Americas.


Transfer pricing is a global issue and taxpayers concerned must recognise and address this issue to avoid the related risks such as financial and, today more importantly, reputational damage.
Namibian companies doing business in Africa must recognise that transfer pricing has become an important issue when dealing with other countries. In addition, it is also important for a Namibian company to comply with local transfer pricing rules in order to ensure that arm’s length pricing can be substantiated for the other party to a cross-border connected party transaction if transfer pricing rules are applicable in the other country. Therefore, a multinational company carrying on business in Namibia would be well advised to review and if necessary update its transfer pricing documentation.

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