There has been an unprecedented amount of activity at the Organisation for Economic Cooperation and Development (OECD) and beyond in the field of transfer pricing. The United Nations released its draft manual on transfer pricing electronically in 2012 and formally in May this year, which largely shows alignment to the OECD approach but also provides for some divergence if Chapter 10 (country views) is considered.

The new concept of location specific advantages raised in the manual has been a key topic for developing countries such as China and India. This to some degree adds a different perspective to the traditional view of the arm’s length principle advocated by the developed countries of the OECD.

African tax administrations are influenced by the emergence of the developing country view and look more and more towards guidance from countries such as China and India, as well as South Africa. They accept that effective transfer pricing rules are key to ensuring that multinationals report and pay tax on the correct proportion of profits they make in Africa. However, they also acknowledge the challenges with effective implementation of such rules. Resource constraints and implementing fledgling legislation is one such challenge. Policy disparity between implementing an effective transfer pricing regime and the existing regulatory environment is another such challenge.

In particular, the existence of archaic central bank controls can make the implementation of effective transfer pricing problematic for both the revenue administrations and multinationals. The arm’s length principle, the bedrock foundation of transfer pricing legislation, assumes an economy free of such regulations. Exchange control restrictions and burdensome withholding taxes, both prevalent in many developing and African countries, can make implementation of the principle to some degree unrealistic.

The revenue administrations in Africa can find themselves between two worlds as a result of which bringing in a set of rules that play to a developing economic environment creates many challenges. Layer onto that the inevitable disputes, which are likely to arise through implementation of the transfer pricing rules and the result is an increased burden on what are already very constrained government resources.

Many countries are seeking to bring in compulsory documentation, Advanced Pricing Agreements (APA) regimes and additional filing requirements in an attempt to enforce transfer pricing compliance. However good the intentions, the risk facing Africa is that these additional compliance burdens, coupled with the level of withholding taxes and the regulatory restrictions, will have a negative effect on the continent’s ability to attract direct foreign investment.

We have seen bodies such as the OECD, IMF and a number of developed country revenue administrations reach out to Africa to offer support and training. This goes a long way to assist in developing resources to deal with the challenges expressed above. However, if South Africa, which has had transfer pricing legislation in place for 18 years, serves as an example, it is evident that getting to grips with effective implementation will take a long time for the rest of Africa as a whole.

Changes to the legislation in South Africa have created implementation burdens, which everyone is struggling to grasp. The move to an arm’s length test for thin capitalisation and the implementation of a secondary imputed loan adjustment have created a level of complexity in South African tax rules which surpasses not only most of the developing countries but some of the developed countries too.

As the African continent moves into the transfer pricing age, it needs to balance certain issues. Complexity will affect effective implementation, regulatory issues affect the viability of implementing the arm’s length principle and a high level of compliance documentation may impact ongoing foreign direct investment.

Karen Miller is the director for transfer pricing for Africa at EY.