Senegal: Arm’s length principle in Transfer Pricing

Senegalese tax legislation references the arm's length principle since the 2018 Finance Act, particularly in Article 17, paragraph 1 of the General Tax Code (CGI), and provides for related party notion (article 17.4 of the CGI).

However, the instruction specifying the suitable transfer pricing method in Senegal is under process (Cf. Senegal - Transfer pricing country sheet, February 2022). Meanwhile, doctrinal opinion No. 4907/MEFP/CAB/CT/JK of July 17th, 2019 by the General Directorate of Taxes and Domains (DGID) and published in October 2022, suggests that Senegalese tax authorities prefer a method based on local comparable for determining transfer prices.

This opinion emerged post a general accounting audit for the 2013 fiscal year concerning crude groundnut oil sales prices charged with a related entity.

The taxpayer opposed the tax authorities' accusations of non-adherence to the arm's length principle, as the price was based on "quoted" prices in Cost-Assurance-Freight (CIF) Rotterdam values using the "MUNDI" index, instead of the "Free On Board (FOB)" value used by auditors.

Responding to the appeal, tax authorities noted the OECD's 2015 recommendation of "quoted" price for commodities like crude groundnut oil, but believed such comparable are only viable in absence of a relevant local comparable, which they considered better reflects company profitability. In the said opinion, tax auditors' preference for relevant local comparable over the quoted price in detecting indirect profit transfer was deemed correct.

From this, two conclusions arise:

• Transfer pricing is an international and a local issue. Tax authorities remain sovereign in applying OECD principles as long as they have not been incorporated into domestic law.

• Though the arm's length principle is recognized in Senegalese law, application conditions aren’t yet clear in Senegal's tax system, posing tax security issues for multinationals here. Open, pragmatic, and educative interactions with Senegalese tax authorities are crucial to evade tax reassessments.

A primary defense against tax reassessment risk is establishing thorough transfer pricing documentation to justify the group's pricing policy. Beyond documentation, forging advance pricing agreements with tax authorities is essential to mitigate the mentioned tax risk.

In our view, the first line of defense against the risk of tax reassessment of the company's pricing policy is to put in place relevant transfer pricing documentation that is sufficiently detailed to justify the group's pricing policy. Over and above this documentation, the use of advance pricing agreements with the tax authorities is now necessary to reduce the level of exposure to the above-mentioned tax risk.

If you wish to discuss these topics, please contact:

 FACE Africa Tax & Legal