Global Tax Alert (News from Transfer Pricing) | 20 December 2013

Angola requires transfer pricing documentation for 2013 transactions

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Executive summary

For the first time in Angola, qualifying taxpayers will have to document their transfer pricing policy with respect to 2013 transactions. This Tax Alert addresses the more frequent questions and answers regarding this recent legal requirement.

Important note: Given the status of the ongoing tax reform in Angola, any new legislation may be subject to administrative clarifications at any point. Such clarifications, which at this date cannot be anticipated, may result in substantial changes to all or part of the contents of these new rules.

Detailed discussion

Background

Angola’s new transfer pricing documentation rules are included in Presidential Decree 147/13 of 1 October 2013 (Statute of Large Taxpayers), which entered into force five days after its publication. The first year for which transfer pricing documentation will have to be prepared is 2013. The deadline for preparation of such documentation is 30 June 2014.

Transfer pricing documentation process and requirements

The documentation will have to be submitted proactively by the affected taxpayers at the corresponding tax office. No warning notifications are expected to be issued by the Angolan tax administration in this respect.

The requirement to prepare and submit the transfer pricing documentation will be applicable to all taxpayers reporting 2013 revenue - total of sales and services rendered - in excess of 7,000,000,000 Kwanzas (approximately US$ 70 million). Companies that benefit from an Industrial Tax exemption are not released from this obligation.

The Angolan law requires that all documents submitted to the tax authorities must be written or translated into the Portuguese language.

Both article 55 of the Industrial Code (which establishes the general framework for application of the arm’s length principle) and article 11 of the Statute of Large Taxpayers clearly define all cases of legal and juridical dependency that will create a situation of related parties for transfer pricing purposes.

With respect to transactions that must be documented, all commercial transactions, such as those involving goods, rights or services and financial operations are included.

Moreover, all related party transactions, irrespective of their value, will have to be documented.

The Comparable Uncontrolled Price Method, The Resale Price Method, and The Cost Plus Method are the specified methods in the Statute of Large Taxpayers. Only these three methods are recognized, meaning that it will not be acceptable to apply methods such as the Transaction Net Margin or Profit Split methods.

In addition, OECD guidelines have not been adopted as Angola is not an OECD member. It is uncertain whether the OECD Guidelines will be adopted at a later date or followed in practice.

Penalties

The most important implication of the rules is the placing of the burden of proof of the arm’s-length nature of pricing on the taxpayer – which may imply that the tax authorities will seek to adjust the prices and conditions applied in a related party transaction based on whatever relevant evidence they have available, without reference necessarily to the taxpayer’s position.

According to Presidential Decree 66/11 of 18 April 2013 (Exceptional Measures for the Control of Taxpayers in Circumstances of Continued Lack of Compliance), non- compliance with the transfer pricing documentation obligations will result in such taxpayers being forbidden from performing capital operations, current invisibles (payments for services and intangibles) or trading operations that according to the exchange control regulations presently in place require the intervention of the National Bank of Angola. In practice, it may completely block the day-to-day activity of any taxpayer whose identity is transmitted by the Angolan Tax Administration to the National Bank of Angola with the specification of non-compliance with tax obligations.

For the taxpayers referred in the list of Large Taxpayers (not yet published), lack of compliance with the transfer pricing documentation requirements will most likely prevent the application of rights foreseen in the corresponding Statute, namely the possibility to pay the Industrial Tax at the Big Taxpayers Office, to have a closer relationship with the tax administration via the appointment of two inspectors who will deal with the taxpayer’s day-to-day questions and to pay tax debts in instalments.

If a transfer pricing adjustment is made, a penalty equivalent to 50% of the additional tax will be applied. Delay interest at the non-compounded rate of 2.5% per month (or 30% per year) will be levied.

The tax authorities are allowed to make transfer pricing adjustments regarding the last five years of activity.

With respect to correlative adjustments, they are only foreseen in the Industrial Tax Code for adjustments performed in relation to transactions involving Angolan taxpayers, as the country has not yet signed any Double Tax Treaty. The current transfer pricing legislation does not provide for correlative adjustments.

Accordingly, if the tax authorities deem a certain amount charged in a related party context to an Angolan taxpayer not consistent with the arm’s length principle, the authorities will adjust the price and assess additional tax, penalties and compensatory interest.

Example:

BIGco, a foreign company and the parent of ANGco, invoices in 2013 the latter several service costs in the amount of USD 50,000,000. In 2016, upon a transfer pricing inspection, the tax authorities disagree with the amount at stake, and only accept a charge of USD 43,000,000.

The impact would be:

Amount adjusted: US$ 7,000,000

Industrial Tax @35%: US$ 2,450,000

50% penalty: US$ 1,225,000

Delay interest 30% * 3 years: US$ 2,205,000

Total Cost: US$ 5,880,000

The Angolan law foresees the possibility of administrative and judicial appeal. However, as stated in Presidential Decree 55/11 of 15 March 2013 (General Guidelines of the Executive for the Tax Reform), the judicial system “does not respond to the needs of specialization and rapidity in the resolution of litigation between taxpayers and the tax administration. During the last years it has been noticeable the crescent organic disarticulation and the lack of legislative adjustment (…).” In other words, the judicial system handling disputes between taxpayers and the tax administration is not designed to react in business friendly timeframes. Past experience has been that delays have been increasing and satisfactory outcomes are rare.

For additional information with respect to this Alert, please contact the following:

Ernst & Young, S.A., Lisbon, Angolan Tax Desk
  • Paulo Mendonça
    +351 217 912 045
    Paulo.mendonca@pt.ey.com
Ernst & Young Angola, Limitada, Luanda
  • Luís Marques
    +244 222 371 461
    luis.marques@pt.ey.com

EY Transfer Pricing

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EYG no. CM4049