TRANSFER PRICING PANEL DISCUSSION:

1. The IFA MAURITIUS 13th ASIA/AFRICA CONFERENCE 2019 TRANSFER PRICING PANEL DISCUSSION: Chaired by DR. DANIEL ERASMUS

2. PANELISTS: GARY GOWREA, IQEQ – HEAD OF STRUCTURING AND ADVISORY JOEL COOPER, DLA PIPER, PARTNER – INTERNATIONAL TAX Joel is partner at DLA Piper and co heads the firm’s internarional transfer pricing practice. Prior to joining DLA Piper he was a transfer pricing and international tax specialist at the World Bank, advising numerous governments in Africa, Eastern Europe and elsewhere on transfer pricing and tax policy and administration. He also spent time with the IBFD and EY,  and has been an examiner for CIOT ADIT and is lecturer at several universities in Europe. PROF (DR) MICHAEL KOBESTKY, ADJUNCT PROFESSOR - ANU RENIER VAN RENSBURG, ATTGROUP – CHIEF FINANCIAL OFFICER Renier van Rensburg has worked in various Corporate, Family owned and Medium Sized businesses in the Healthcare and Real Estate industries as CFO and COO. He has been responsible for various financial and other departments with varying line functions. He has a special interest in International tax and how Corporates manage their tax risk within the latest OECD guidelines and BEPS initiatives. He lectures on two Advanced Diploma courses, one in Transfer Pricing and International Tax.  He is currently CFO for AttAfrica Limited, a Mauritius based property investment company focused on investing, developing and acquiring A-grade shopping centres in key SSA Markets (outside RSA).

3. Transfer Pricing in Africa: various court cases • Some recent decisions: • Malawi Eastern Produce: • OECD TPG cannot apply over domestic tax provisions • Malawi commodities case with Switzerland (to be heard) • General Anti-Avoidance provisions relied upon • Impute fictitious income • DTA Article 9 equivalent used as charging section • Sale agreement deferred pricing to OECD TPG principles – opens door to applying OECD TPG where not legislated? • TNMM agreed, but MRA made adjustments to calc to include country risk adjustments • Zimbabwe management fees case (heard - awaiting judgment) • General Anti-Avoidance provisions relied upon • Impute fictitious income • Costs recovered but shareholder services not excluded • Regulatory restrictions • ZRA used overall gross profit margin in Group to determine mark-up

4. Safe Harbours/Government Restrictions vs ALP • Thin Capitalization: 2 : 1 / 3 : 1 vs OECD TPG and ALP • Africa experience not so simple • Ghana regulatory investment body • Nigeria NOTAP TP Policy & FBE Exemptions in SA • SA Section 9D(9)(b) of ITA for CFC, income of FBE not included in CFC if transactions at arm’s length? • TP Policy required or not ? • If company payment to Mauritius entity, not at arm’s length, then no FBE exemption, then impute CFC into SA unless other exemption rules applied

5. The Role of Legal Agreements: • The role of legal agreements in establishing and defending transfer prices, post BEPS: • substance v form: has the pendulum swung too far? • A  performs all DEMPE functions • B  owner of IP - licences to • C  pays royalties – Revenue Agencies seek TP adjustments here • value chain analysis in practice: how to reconcile transactions with value creation  • importance of delineating transactions in a controversy ripe environment  • selection of points within a range  • impact and role of agreements as regards future business changes (restructuring etc). 

6. TP: Marketing Hubs in the Mining Sector Professor Michael Kobetsky Australian National University

7. TP: Marketing hubs • Marketing hubs typically provide marketing and sales functions for goods or commodities that are produced in Australia and sold offshore • Australian mining companies are using marketing hubs in Singapore to sell minerals and ores • Mauritius could be a substitute for Singapore

8. The Australian Taxation Office (ATO) claimed that excessive profits were being shifted to Singapore through marketing hubs • In 2017 the ATO issued a risk assessment for marketing hubs

9. In 2018 the ATO reached a settlement with BHP on its transfer pricing adjustments • BHP announced that the adjustment was AUD 0.5 billion • The ATO announced that BHP will return all its profits from its Singporean marketing hub to Australia • Green zone for risk rating

10. Application of Arm’s Length Test in Mauritius Presented by Gary Gowreawww.IQEQ.com

11. Transfer Pricing in the Mauritius Context: • CBCR reporting from a Mauritius angle as well as taking into considerations the practicalities such as importance of the FAR analysis. Note that the Mauritius audience are now getting acquainted with the principles of transfer pricing. • Transfer pricing in the Mauritius context (legal provision, precedents and ongoing issues with the MRA (interest free loans and to a limited amount on the intangibles) • Arm’s length and FAR analysis • Transfer pricing documentation • Returns and related party disclosures • Documentation – role of agreements • Intangibles (DEMPE) • Practical aspects of transfer pricing • CBCR practical implications • Dispute resolutions

12. Arm’s Length – Sec.75(1)(a) ITA 1995 Non-Resident Non-Resident or a company which shareholding >50% OR Any business or other income earning activity carried in Mauritius & controlled by a non-resident Any business or other income earning activity carried in Mauritius & controlled by a non-resident May 2019 IQ-EQ | Arm’s Length Test 2

13. Arm’s Length – Sec.75(1)(b) ITA 1995 Non-Resident Business or activity is not at arm’s length in the opinion of the Director-General (“DG”) Any business or other income earning activity carried in Mauritius & controlled by a non-resident May 2019 IQ-EQ | Arm’s Length Test 2

14. Arm’s Length – Sec.75(1)(c) ITA 1995 no net income or less than the amount of net income which in the opinion of the DG might be expected to be derived from that business or activity Any business or other income earning activity carried in Mauritius May 2019 IQ-EQ | Arm’s Length Test 2

15. Section 90 – Transactions designed to avoid liability to Income Tax • (f) Whether the transactions has created rights or obligations which would not normally be created between persons dealing with each other at arms length under a transaction of the kind in question; and the DG may conclude that the person, or one of the persons, who entered into or carried out the transaction, did so for the sole or dominant purpose of enabling the relevant person , either alone or in conjunction with other persons, to obtain a tax benefit (2) Where subsection (1) applies DG shall assess the liability to tax to the relevant persons • As is the transaction or any part thereof had not been entered into or carried out; or • In such other manner as the DG considers appropriate to counteract the tax benefit which would otherwise be obtainned

16. Tax ruling 85 • GBL entity has acquired USD 200m bonds with maturity of 24 monthsand bearing interest 10%. The company was funded by USD 5m equity and USD195m debt at 9.5%from shareholders • Points at issue deductibility of the interest expense against income received and whether the .5% will be considered as compliant with the arm’s length principle. • Any expenditure incurred on interest in respect of capital employed exclusively incurred in the production of income will be allowed as deduction in accordance with section 19 of the Act • Regarding the arm’s length, the MRA will not solely rely on the interest margin to decide whether the arms length principle is being adhered to. Other factors as laid down in section 75 of the Act will also be considered in the application of the arms length test to arrive at a reasonable amount of net income that would normally be expected from this type of activity

17. Rulings ( Cont) • Similarly all the other rulings mentions arms length principle without going in the merit as to how it would be determined • Ruling 66 is the only one where the MRA indicates that it will use a cost plus basis to determine the arms length price. • MRA has been quite aggressive on interest free loans between related parties • As far as tax cases , we have seen quite a few cases that MRA uses section 18 and 90, but then the taxpayer justify that the arms length deduction under section 75.