02 Mar Ghana’s New Transfer Pricing Regulations: A Brave New World.
The Transfer Pricing Regulations, 2020 (L.I. 2412) has been passed, bringing into force exciting measures to manage transfer pricing relations between parties in a controlled relationship. L.I. 2412, in keeping with the times, introduces rules on documentation, measures affecting technology transfer agreements, safe harbour rules, as well as specific considerations in relation to cost contribution arrangements, financing arrangements, and business restructuring arrangements. In this blogpost we highlight the novel rules in the transfer pricing regime of Ghana that the taxpayer needs to look out for.
New Documentation Requirements
The most prominent change introduced by L.I. 2412 relates to documentation. A taxpayer is required to keep and file various documentation which inform the Regulator in the assessment of transactions. It also embraces a paperless approach towards the filing process.
- Contemporaneous Operational Documentation
Taxpayers are to maintain contemporaneous documentation, including a Master File and a Local File which are to be filed electronically. The Master File should contain relevant operational information on the Company at the group level while the Local File focuses on the entity in Ghana and its activities. An exception to this record-keeping obligation is where the monetary value of the specific arrangement does not exceed the Ghana Cedi equivalent of Two Hundred Thousand United States Dollars ($200,000.00). The Regulator has the authority to aggregate two or more arrangements where the Commissioner is satisfied that the transaction is designed for tax avoidance purposes.
- Country-by-Country Reports
An Ultimate Parent Entity (UPE) or a Constituent Entity (CE) of a Multinational Enterprise Group (MEG), that is resident in Ghana for tax purposes, is expected to file a Country-by-Country (CbC) Report. The CbC Report must contain tax information of the MEG gleaned from every jurisdiction it operates in. Detailed information such as the amount of revenue, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, among others, must be provided in relation to each jurisdiction.
This requirement is aimed at helping the Regulator assess high-level transfer pricing risks and other base erosion and profit shifting related risks in Ghana, including assessing the risk of non-compliance by members of the multinational enterprise group with applicable transfer pricing rules. Where appropriate, it may be used for economic and statistical analysis. The Commissioner-General has a duty to preserve the confidentiality of the information contained in the CbC Report.
- Optional Exemption for Technology Transfer Agreements
In respect of a Technology Transfer Agreement (TTA) with parties in a controlled relationship, a party may elect to be exempted from maintaining contemporaneous documentation. This is done by notifying the Commissioner-General in writing. To qualify, the TTA should be registered with the Ghana Investment Promotion Centre (GIPC) and the amount charged for the technology transferred in respect of royalties, know-how, and management or technical fees should not exceed two percent (2%) of earnings after interest, tax, depreciation and amortisation but excluding the charge for the technology transfer.
Safe Harbour Rules
Low value adding intra-group services are services performed by members of a group of entities on behalf of other members within the group which:
- are of a supportive nature,
- are not part of the core business of the group which do not create the profit-earning activities or contribute to economically significant activities of the group, and do not require the use of unique and valuable intangibles, lead to the creation of unique and valuable intangibles, involve the assumption or control of significant risk by the service provider, and give rise to the creation of significant risk for the service provider.
Although a charge for services rendered is only deemed as being at arms-length if an independent person in a comparable circumstance would pay the same sum, low value-adding intra-group services may be considered an arms-length transaction in specific cases without applying the general rule.
The above applies where the cost-plus method is applied and the amount reflects the actual cost incurred by a group member. In this case, the mark up on the cost incurred by a group member should not exceed three percent (3%).
It is also applicable where the cost-plus method is applied and the amount is based on an allocation amongst group members using an appropriate allocation method. In this instance, the mark up on the total group cost should not exceed three percent (3%)
Rules for Specific Arrangements
Cost Contribution Arrangements
A cost contribution arrangement is an arrangement among persons to share costs or risks associated with the development, production or obtaining of intangibles, tangible assets or services, in proportion to the benefits that each participant is expected to derive under the arrangement.
In determining whether a cost contribution arrangement meets the arm’s length standard, the Regulations prescribe consideration of the following:
- the contractual arrangement among the participants;
- the assets contributed by each participant;
- the risks assumed by each participant;
- the management and control of those risks; and
- the financial capacity to assume the risk.
L.I.2412 specifically addresses financing arrangements. It provides that the Commissioner General can prescribe or adjust interest or loan fees in a financing arrangement where:
- interest or loan fees is not charged on the loan,
- interest is not charged on trade payables or any other credit facility which remains unpaid for twelve (12) months, or
- interest or loan fees charged is not consistent with the arm’s length standard.
In considering whether a financing arrangement is made at arm’s length, the characteristics of the loan must be considered, including the nature or purpose of the loan; the principal amount and duration of the loan; the currency in which the loan is denominated; the schedule of repayment of the loan; the security offered for the loan; the level of seniority of the loan; and whether the interest rate is fixed or floating.
Further to this, the Regulator must review the credit risk profile of the borrower; the economic conditions in the geographical location of the parties including the prevailing interest rate in the tax residence of the lender, creditor and the borrower for a comparable loan or credit facility to an unrelated person.
Business Restructuring Arrangement
The general rule of comparable pricing applies when a company undergoes restructuring. However, the Regulator is required to specifically:
- identify the scope, type and economic nature of the arrangements between the parties involved;
- identify the assets transferred, as well as the amount received;
- certify or perform a functional analysis of the pre- and post-business restructuring activities of parties involved including the risks assumed and functions performed; and
- examine the consistency of the contractual terms with the outcome of the functional analysis to determine the true nature of the arrangements.
In conclusion, LI 2412 brings to the fore stringent rules that expand the ability of the Regulator to adequately assess the compliance of a taxpayer in relation to transfer pricing rules. To an extent, it also limits the discretionary powers the Regulator once had by providing a limited consideration scope in respect of particular arrangements. This reduces the unpredictability a taxpayer may have previously suffered in tax assessment. The new Transfer Pricing rules present an opportunity for both the taxpayer and the Regulator to operate in a more efficient framework, thereby laying the foundation for a brave new tax world.
 Regulation 12, Transfer Pricing Regulations, 2020 (L.I. 2412).
 Ibid, Regulation 14(1)
 Ibid, Regulation 14(2)
 Ibid, Regulation 13.
 Ibid, Regulation 13(9) & (10).
 Ibid, Regulation 14(8) & Second Schedule.
 Ibid, Regulation 17.
 Ibid, Regulation 12 (3)
 Ibid, Regulation 17.
 Ibid, Regulation 8 (2).
 Ibid, Regulations 9.
 Ibid, Regulations 10.