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The use of the profit split method in Africa

Several African countries consider transfer pricing to be one of the most significant risks to their tax base. Most of these countries use the arm's length principle for transfer pricing purposes and broadly follow the guidance set out in the OECD Transfer Pricing Guidelines (“OECD Guidelines). The OECD Guidelines prescribes five methods for determining the arm's length price, which includes the profit split method.
Some of the African countries have stated that they find it difficult to apply the guidance on profit splits and that this, in their view, often leads to the African taxpayers only being allocated a routine return in its taxable profits and all of the residual profit (largest profit portion) is allocated to the other party to the transaction which is located in a foreign, often low tax, jurisdiction.

More guidance on this issue will assist African tax administrations to ensure that in appropriate circumstances the profit split method is applied to transactions and the appropriate amount of the residual profit is included in the taxable income of the African taxpayer.

22 April 2020