Crowe Horwath
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African Footprint
Technical Newsletter of the Crowe Horwath International African firms
About Mauritius
Mauritius, an island covering 1,860 square kilometres (720 square miles), is
situated some 2,000 kilometres (1242 miles) off the south East coast of
Africa. More than 150 kilometres (93 miles) of white sandy beaches and
transparent lagoon are protected from the open sea by the world's third
largest coral reef, which surrounds the island.
The population is estimated at 1, 3 million. It forms a mosaic of different
races, cultures and religions since Mauritians are descendants of immigrants
from the Indian sub-continent, Africa, Europe and China. The cultural diversity
and racial harmony of the island make of Mauritius a unique place. Most
Mauritians are multilingual, being fluent in French, English and Creole.
English is the official language. Bhojpuri, Hindi, Urdu, Tamil, Marathi, Telugu
and Mandarin are also spoken.
Mauritius is a democracy modeled on the British system of parliamentary
democracy, which guarantees the separation of legislative, executive and
judicial powers. After general elections in 1967, Mauritius adopted a new
Constitution and independence was proclaimed on 12 March 1968 under the
leadership of Sir Seewoosagur Ramgoolam, the first Prime Minister of
Mauritius. The island achieved the status of Republic 24 years later on
12 March 1992 The President is the Head of State and Commander-in-chief
while the Prime Minister has full executive powers and is the Head of
Government. Sixty-two members of the National Assembly are elected every
five years by universal adult suffrage. Democracy is well entrenched in
Mauritius and all major political parties are represented in Parliament.
Issue 9 - October 2013
Inside This Issue:
About Mauritius
1
Reflections on the Roles of Board
Members, Annual General Meeting,
Staff and Other Key Stakeholders
on Organisations
4
Who are the Outermost Regions
(Ors) of the European Clan?
7
The Mauritian Affair
9
Save the Date
9
Evolution and Practice of
Transfer Pricing Rules in Kenya
10
Tourism in Africa: Harnessing
Tourism for Growth and Improved
Livelihoods
12
Feedback from our
Readers!
Should you wish a specific topic to
be covered in our next issue,
please let us know by emailing
your request to our editor
kent.karro@crowehorwath.co.za
Audit Tax Advisory
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Economy
2010
2011
*
2012
*
Contribution
to GDP (%)
Growth
Rate
(%)
Contribution
to GDP (%)
Growth
Rate
(%)
Contribution
to GDP (%)
Growth
Rate
(%)
Financial and
Insurance
Activities
10.1
4.5
10.2
5.6
10.3
5.5
Monetary
Intermediation
6.0
4.4
6.0
6.3
6.2
6.3
Financial
Leasing and
Other Credit
Granting
0.6
5.6
0.6
6.0
0.6
6.0
Insurance,
Reinsurance
and Pension
2.9
4.5
3.0
4.5
3.0
4.6
Other
0.6
4.0
0.6
3.7
0.5
5.0
Source: Statistics Mauritius National Accounts - June 2013 issue
Note: * Revised
The country has a mixed legal system enabling local practitioners to be at ease with
the laws in force in most major foreign jurisdictions. The use of both the English and
French languages in the country provides Mauritius with easy access to the
international business community.
The island's economic stability continues to attract foreign investments which are
actively encouraged.
The preferential market access can be summarized as:
?
Access to the European Union under the Cotonou Agreement. This agreement
provides African Caribbean & Pacific (ACP) countries unilateral preference in terms
of duty and quota free access to the important EU market for goods manufactured
in the ACP countries.
?
Access to the US market under the Africa Growth & Opportunity Act (AGOA). Under this Act, the US Administration
provides duty and quota free access to the US for goods manufactured in Sub-Saharan African countries. The Act
makes special provision for exports of apparel products. In addition, GSP preferences provided to more 6,000
products allow these goods duty free entry to the US.
?
Access to the Common Market for Eastern & Southern Africa (COMESA). The COMESA comprises 19 member states
of the Southern & Eastern Africa region. Goods that have undergone transformation and re-exported from the
Mauritius Freeport to the COMESA member states have to satisfy the COMESA rules of origin in order to benefit from
the reduced tariffs. Nine countries of the COMESA have implemented the Free Trade Area that allows duty free entry
of goods among these member states.
?
Access to the Southern African Development Community (SADC). The SADC comprises 15 member states. The
SADC Trade Protocol makes provision for the phased elimination of customs duties over a 12-year period starting
from September 2000 on goods that satisfy the Trade Protocol rules of origin criteria.
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So far Mauritius has concluded 37 tax treaties and is party to a series of treaties under negotiation.
9 treaties await ratification: Congo, Egypt, Gabon, Kenya, Monaco, Nigeria, Russia, Rwanda, and South Africa
1 treaty awaits signature with: Ghana
17 treaties are being negotiated with: Algeria, Burkina Faso, Canada, Czech Republic, Greece, Hong Kong, Lesotho,
Portugal, Republic of Iran, Malawi, Saudi Arabia, St. Kitts & Nevis, Vietnam, Yemen, Tanzania, Morocco and Montenegro
(Source MRA)
Why Mauritius?
?
Availability of well trained and competitive labour force The yearly number of university graduates per 1,000 inhabitants is one of the highest in Africa. The cost of labour is
among the lowest in this region. The average monthly wage of a skilled worker in Mauritius is US$ 200, one tenth that
of industrialized countries.
?
World standard export productionMost foreign businesses invest in Mauritius for export production purposes. Many local producers and service
providers have already achieved ISO 9000 status. Infrastructure meets international norms such as ISO and HACCP.
?
A rapid growth of e-business and development of knowledge economy Mauritius has already established a sound legal framework for the development of the ICT sector, with the following
legislation in place:
The Copyright Act 1997;
The Telecommunications Act 1998;
The Electronic Transactions Act 2000;
The Information and Telecommunication Technologies Act 2001
The Computer Misuse and Cybercrime Act 2003.
Government policy helps to boost e-commerce and a digital “business to business” environment. One of the strategic
priorities of the Mauritian government is the development of a knowledge economy.
?
As a business and financial hub, Mauritius offers the following advantages:
Favourable time zone (GMT +4)
Attractive fiscal policies
No exchange controls
An efficient banking system
A stock exchange open to foreign investors
Reliable and modern infrastructure
New open Air Access policies
Efficient telecommunications system (connected to SAFE fibre optic network)
Availability of qualified labour force
Occupation/residence permits granted in three days
Scheme available for foreigners to acquire property in Mauritius
Suresh Sewraz
Crowe Horwath (Mur) Co.
Port-Louis, Mauritius
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Reflections on the Roles of Board Members, Annual General Meeting,
Staff and Other Key Stakeholders on Organisations
The Case of the Non-Governmental Organisation
General
In the early 1980's there was a swing by many donors in different parts of the world, and especially so in Africa to shift
their funding from government to non-governmental organisations (NGOs). This shift was born out of a general sense of
mistrust by the donors arising from the poor or corrupt utilisation of these resources, and to a lesser extent the poor
human rights records of some of these governments. At that time NGOs were still to a great extent finding their feet in
terms of governance and general management.
Much has taken place since those early years in terms of growth of most NGOs. A large proportion of the founders
having relinquished their hold over the organisations - in some cases willingly and in others not so willingly. But in the
main, proper systems and structures of good governance have been instituted and are operational.¹
This paper however attempts to tackle certain issues relating to governance that appear to confront most NGOs during
their life cycle regardless of the type of NGO that they maybe.
Changes in the Board Rooms of NGOs
A number of structural changes have been occurring within many NGOs. First there has been the change at the CEO or
Executive Director position (as it is often referred to within NGOs). This move has normally been at the behest of a
number of the influential funding partners with a view to encouraging fresh ideas and leadership. It must be pointed out
that these dynamics are not restricted to NGOs only but have been witnessed as well in commercial profit making
corporations.
Changes at the top or CEO positions in many instances have provided the organisation with the opportunity to bring on
board someone new - often with fresh ideas - who has managed to steer the organisation to even greater heights.
However having the former CEO still operating within the organisation and at the board level has also created its own
challenges. Brian Borzykowski² in his article “What to do when the CEO steps down but sticks around” provides very
useful insights into some of the challenges that might arise and how they might be resolved. Although Borzykowski
examined a commercial company – Bright Farms Inc., the points he raises also apply to NGOs.
Borzykowski suggests that the two (CEO and Chairperson) need to work
“What to do when the CEO
together on three T's - Tone, Time and Talent. The critical tone of their
steps down but sticks around”
relationship, communication and respect are critical elements. And both
must learn to make time for regular communication and interaction with each
other, and respect each other's different talents. Much is likely to depend on the
CEO taking the initiative; nevertheless in the end both must act. In the case Borzykowski chose to review, the CEO
comments that - I am the horse that the Chair has chosen to ride, so we must move together. Without these clear efforts
to ensure the cohabitation is smooth, it is likely that the former CEO (and now Chairperson) may feel that the
organisation is perhaps not being run the way it ought to be (read here the way he/she ran it). In turn the new CEO may
feel threatened by every comment or reaction from the Chair even when there is actually no substance behind this fear.
¹The writer of this paper recognises that there are very many different types of NGOs each of which is at different stages of its life cycle and therefore
different stages in the journey to maturity of its systems and structures. It is also acknowledged that International NGOs (INGOs) may face different
kinds of challenges from the local or national NGOs.
²Brian Borzykowski, “What to do when a CEO steps down but sticks around”, www.bbc.com/capital/story accessed on 16 July 2013.
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The history of changes within NGO boards can often be traced back to the first board which in most cases was
handpicked by the founder who by then was likely to be the CEO. Under this regime, although the board is meant to have
the final say on policy and key issues, management led by the CEO have more often than not been the key and final
deciders.
Over time however, most organisations have recognised the usefulness of having a competent board in place and have
taken slow but clear measures to strengthen them. Such processes have included bringing on board members with
different skills, competencies and experiences. More recently the criteria have encompassed attempts to infuse gender
balance and age variety. Most boards of good NGOs are now expected to have members with financial skills (to head the
finance and audit functions on the board), strategic management expertise, human resource skills, legal expertise and a
technical knowledge in the core area of the NGO.
Strengthening of Management Systems
It has been recognised by most NGOs and their funding partners that in order for these organisations to perform properly
and meet their targets or results, they must have strong management systems and structures. Such strengthening has
included strong financial & procurement management systems, good project management systems, strong human
resource management systems and a robust management information system.
At the initial phase of the strengthening of the systems, management will often have been in regular communication with
the board of directors on the issue. However once the systems are in place it is very possible for the secretariat to
implement the organisation's programmes without much input from the board. In fact, management may often see the
board's input as unwelcome interference in the running of the organisation.
Emerging Conflicts - Management v Board
As NGOs progress along their life's journey from adolescence to maturity, and as the systems and management generally
are strengthened, a number of challenges or conflicts may begin to emerge between the board and management. This
situation is further compounded by the fact that management often sees itself as the one not only driving the agenda of
the organisation but also its vision. The latter area is seen by most boards as its mandate. In commercial companies, this
challenge has often been addressed by having several Directors with executive function on the board. Within NGOs, a
number of the directors have sometimes been given certain notional executive functions including cheque signing etc. not
really along the same levels as their counterparts in commercial companies.
Other challenges have also arisen from dramatic and far-reaching changes taking place in the external environment.
Many of these changes or events have required prompt but clear reaction from persons who understand them well and
therein has been one of the key problems. Management are normally very clear in their minds as to how to handle some
of the emerging challenges and changes in the external environment including changing focus by donors, new legislation
by the authorities and shifting needs of the community.
Perhaps the critical question to be addressed by all stakeholders is really- whose
organisation is it anyway, and whom should management and even the board for
that matter answer to? The accusation from management is that many of the board
members have lost touch with the ever changing dynamics of today's world and
specifically the unmet needs of the target community. The board is viewed by
many in management as a legal inconvenience.
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How does one encourage both management and the board to be actively involved in the organisation whilst at the same
time appreciating each other's strengths, weaknesses and contributions?
According to James McGann & Mary Johnson in their article “The power shift and the NGO credibility crisis”³, there has
been a dramatic shift of both actors and factors over the last decade with NGOs coming into the centre stage. This has
happened as governments have lost much of their credibility and influence as problem solvers. But the NGOs are now
4
facing an expectation crisis which many are finding difficult to address. Liam Barrington-Bush in his article “Anarchists in
the boardroom” exposes one to a possible scenario that could have taken place if one had been in a position to predict
recent events from the uprisings in Tunisia, Libya and Egypt to more recent events in Brazil and India.
NGOs have become very important in today's world and the expectations from them are perhaps even greater than those
from commercial companies. They no longer have the luxury of waiting to agree on who is more important than the other
- board member or management. Both need to wake up and react to their new position centre stage of many countries’
development agenda.
The Role of Professionals
In all this turmoil, what is the role of the professional and how can they best undertake this role. After the Enron saga
involving Arthur Andersen, it emerged very clearly that being both auditor and consultant to an organisation would no
longer be something that would be easily encouraged as it was before. Nevertheless it is not expected that organisations,
especially NGOs, would have on board all the requisite skills and capacities to address the complicated demands in
today's world and so are likely to need to look outside their organisations.
Professional audit, management and other professionals in whatever capacities they operate must now stand up and
assist NGOs and other actors in the development sector in the ever confusing and challenging world!
Conclusion
We now live and operate in a world which is in many regards borderless and where a problem not easily and promptly
addressed in one country soon escalates to become an epidemic in the neighbouring country. How we address
governance challenges in NGOs will determine how effective they might continue to become, and how they contribute to
the whole public-private partnership.
Don Odera
Horwath Erastus & Company
Nairobi, Kenya
³ http://www.bjwa.org accessed on 18 July 2013.
4
http://brightgreenscotland.org/index.php/2013/03/anarchists-in-the-board-room-on-ngos-management-movements-and-social-change/ accessed on
18 July 2013.
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Who are the Outermost Regions (ORS) of the European Clan?
Outermost Regions (ORs) (Guadeloupe, French Guiana, Martinique, Reunion, Saint-Martin, The Azores, Madeira and the
Canary Islands) have specific features in common as defined by Article 349 of the TFEU (Treaty on the Functioning of the
European Union). The French Island of Mayotte will become a European Union OR on 1 January 2014.
ORs are a unique entity forming a group within the EU, separate from other European regions, with the following basic
features:
?
?
?
?
Extreme remoteness from the European landmass, aggravated by insularity, sometimes even double insularity or
near inaccessibility, isolated within their geographical areas and lying wide of the main trade routes, the ORs are
unable to take full advantage of EU markets;
Restricted local markets, hence economic dependency on a small number of products;
Difficult terrain and climate conditions, reduced size, vulnerability to climate change and extreme meteorological
phenomena;
A neighbouring environment exclusively consisting of EU Third Countries, or totally isolated - two crucial challenges in
terms of integration and cooperation.
The permanence, accumulation and combination of such features are so many structural constraints severely hampering
the economic, social and territorial development of those regions. This justifies special, differentiated treatment.
The 20 June 2012 Communication from the Commission entitled “The European Union's Outermost Regions : Towards a
Partnership for Smart, Sustainable and Inclusive Growth” ¹ lists five axes (accessibility, competitiveness, regional
inclusion, social dimension and climate change) defining the development strategy aimed at helping the ORs to
implement the priorities of Europe 2020 Strategy for smart, sustainable and inclusive growth.
Therefore - and ideally - it would have been imperative to “systematically assess the effects of European policies on ORs,
especially when impact analyses were made”². On that basis, OR specificities should clearly have been integrated into
the Commission's legal proposals.
The Communication from the Commission proposes to set up an Action Plan³ on the basis of development priorities in all
public policies put together. Each Action Plan will therefore target territorial requirements and the responses needed to
address them through a comprehensive, bottom-up, adaptive approach.
As we have no clearly established administrative and financial framework to date, a number of uncertainties still remain.
In spite of such difficulties and at a time when a course must be set for the development of territories in the 2014-2020
period, the ORs reaffirm their ambition to boost their economies, safeguard their traditional sectors, be active in
innovative fields with high added value, create jobs and therefore deliberately foster growth dynamics.
By presenting their Action Plan, the ORs demonstrate their desire to engage in implementing the EU Strategy axes in
favour of outermost territories. This will only make final sense on condition that the tools placed at the disposal of ORs are
commensurate with proclaimed ambitions. To reach expected results, the ORs must be sure that they have the support of
all stakeholders involved.
However, there exists no single development model. If promoting ORs' assets is necessary, it alone cannot ensure that all
challenges are met and that persisting imbalances are redressed. Permanent structural constraints require differentiated
treatment so that OR realities are taken into account.
¹ COM (2012) 287 final.
² Council conclusions dated 14 June 2010.
³ « in consultation with its respective Member State, each OR is invited to set up an Action Plan defining the way it intends to implement the Europe
2020 Strategy by means of objectives and milestones, taking into account its individual situation and the various tools available mentioned in this
Communication,” COM (2012) 287 final.
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An Ambitious and Demanding Action Plan
In times of legal and financial uncertainty, Outermost Regions are looking to the
future to restore growth, create stable jobs and pull through a currently deteriorated
socio-economic context.
This Plan falls in line with their grown long-standing reflections, which led to the
implementation of Memoranda in 2009 and 2010, as well as the publication of various contributions to European
Commission public consultations (territorial cohesion, Europe 2020 Strategy, transport, Government aid programmes,
research and innovation, interior market, maritime policy, etc.).
The May 2010 Joint Memorandum adopted an innovating approach, inviting the European Commission to seek a threelevel balance for ORs while using the strategy it developed in 2004 to reduce their accessibility gap, to improve their
competitiveness and to foster regional integration:
?
Balance between assets and structural constraints;
?
Balance between internal and external aspects of European policies to prevent inconsistencies at the time of their
implementation;
?
Balance between adaptation of common legal European policies and implementation of specific tools in certain
sectors.
The Memorandum states that when applied in ORs, all EU policies must include a territorial consistency logic going
further than the new, so-called “territorial consistency” objective as defined by the Treaty of Lisbon. The ORs can
therefore truly constitute relevant experimenting areas for the consistent, integrated implementation of EU policies at
territorial level, on the basis of multi-level (European, domestic, regional) governance.
Several elements must serve as pathways to the European framework to be established for 2014-2020 and crossfertilise all European policies :
? Taking into account the outermost status provided for by Article 349 of the TFEU, which per se justifies adapted
implementation – including a departure from normal rules – of EU policies and actions in the ORs;
? Respecting the reality and equal opportunity principles for all citizens regardless of their place of residence is
essential, especially as regards access to networked facilities and services (of general economic type). For instance,
it is not acceptable to explain the differences of treatment between OR citizens in terms of transport or IT subsidies.
General economic interest services are an example of persisting discrimination, including in the more strategic
sectors such as digital media, transport, water and energy;
? Implementing consistency and proportionality principles: successive revisions of Government aid schemes never
included the need for consistency between the various purposes of aid schemes, necessary as they were to their
potential beneficiaries. Similarly, environmental regulations on greenhouse gas emissions from air transport, for
instance, deserve specific attention considering the location of ORs to avoid any disproportionate impact.
In this line, and contrary to the guideline privileged in the 20 June 2012 Communication from the European Commission,
the consistency policy cannot alone reduce all territorial discrepancies, let alone meet the financing needs entailed by
the common ambition for a renovated strategy in ORs. The consistency policy demands extremely close coordination
with other policies having high territorial impact to ensure efficient and rational implementation of planned programmes.
This Plan of Action goes well further than such demand, paving the way as it does for a forward-thinking strategy at the
service of fully assumed territorial vibrancy. To be deployed in its full scope, this advance strategy cannot be dissociated
from an experimenting strategy. To experiment is to adapt the framework to the realities of Outermost Regions; it is to
invent new formulas to allow ORs to design their economic model for tomorrow. This strong will expressed at regional
level must now be supported by a veritable European ambition for Overseas Regions.
Such is the mindset of this Action Plan: fostering a logic of activity and responsibility, which alone can guarantee Smart,
Sustainable and Inclusive Economic Development.
Abdoullah LALA
Fiduciaire des Mascareignes
Saint-Denis, Reunion
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The Mauritian Affair
South Africa's Double Tax Agreement (DTA) with
Mauritius is being revised and the effects will be far
reaching for those that have been enjoying the fruits of
having their South African businesses structured through
Mauritian holding companies.
One may ask what all the fuss is about so let me
illustrate: The tax rate in Mauritius is 3% and capital
gains are taxed at zero percent. With such favourable
rates one can quickly see that there are advantages to
making profits and capital gains in Mauritius. On the
receiving end, South African tax authorities, seeking to
tax profits and gains in South Africa, have therefore
agreed to this new DTA.
The current version of the DTA contains a tie-breaker
clause which determines the residency of the taxpayer.
The tie-breaker clause provides certainty and clarity for
contracting parties (taxpayers) to which the DTA applies
when planning. The revised DTA seeks to change the
manner in which residency is determined and effectively
reduces the decision to what amounts to negotiations
between the “competent authorities”, being the tax
authorities in each country. This treatment will wreak
havoc with tax planning due to uncertainty about where
profits and gains will ultimately be taxed. Unless suitable
restructuring is contemplated, historically low tax charges
will increase substantially!
The new DTA has not yet been approved by the South
African Parliament and has yet to be ratified by the
Mauritian Government. The new DTA will be effective
from 1 January 2015.
Michael J McKinon
Horwath Tax Consulting (Gauteng) (Pty) Ltd
Gauteng, South Africa
? 19th to 20th November 2013
European Union and Swedish International Development Agency - in Nairobi, Kenya
Attendance at this forum will enable member firms to bid for European Union and Swedish Government Grant Audits or
compete for funds management contracts.
? 19th February 2014 to 21st February 2014
3RD CHI Africa & Middle East meeting in February 2014 - in Nairobi, Kenya
The meeting will be the third Middle-East & Africa meeting, following the successful one held in Dubai earlier this year.
As in Dubai, it will include an Audit & Assurance session and general business meetings during the other two days. For
those interested, a safari will also be included at the end of the conference. Registration will open shortly on the website
of Crowe Horwath International.
? 17th February 2014 to 19th February 2014
USAID / CDC
Those who specialise in audit and complete the three day training will get certification / accreditation to audit USAID
funds.
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Evolution and Practice of Transfer Pricing Rules in Kenya
Introduction
The ruling of the High Court of Kenya on the appeal case
of Unilever Kenya v Commissioner of Income Tax on
5 October 2005 was a landmark case in Kenya on
Transfer Pricing (TP). The High Court was petitioned to
give a ruling on whether the prices that Unilever Kenya
Limited charged Unilever Uganda Limited were or were
not at arm's length. Unilever Kenya Limited had been
contracted by Unilever Uganda Limited to manufacture
on its behalf and supply to them such products as
required by Unilever Uganda Limited. Unilever Kenya
Limited charged Unilever Uganda Limited lower prices
than that it charged its domestic buyers and importers
not related to Unilever Kenya Limited.
Unilever Kenya Limited and Unilever Uganda Limited are
related companies as defined under the Kenyan Income
Tax Act, which states “Where a non-resident person
carries on business with a related resident person and
the course of that business is such that it produces to the
resident person either no profits or less than the ordinary
profits which might be expected to accrue from that
business if there had been no such relationship, then the
gains or profits of that resident person from that business
shall be deemed to be the amount that might have been
expected to accrue if the course of that business had
been conducted by independent persons dealing at
arm's length”.
The Commissioner of Income Tax, relying on the above,
raised an assessment on Unilever Kenya arguing that
the prices that were charged to Unilever Uganda were
not at arm's length and by charging lower prices than it
charged the un-related persons, reduced their profit and
in turn reduced taxes. Unilever Kenya was of the view
that the prices they charged were at arm's length and
that they had relied on the Organization for Economic
Co-operation and Development (OECD) guidelines in
determining the transfer price of the products to Unilever
Uganda Limited since Kenya did not have any guidelines
on transfer pricing. The High Court Judge, Alnashir
Visram ruled in favour of the Unilever Kenya and advised
the Commissioner of Income Tax to develop guidelines
on how to determine transfer prices between related
entities.
Transfer pricing is the process by which related parties in
different tax jurisdictions set the price at which goods,
services, tangible and intangible assets are transferred
between each other.
In 2006, the Kenyan Minister for Finance used his
powers under the Income Tax Act to publish the Income
Tax (Transfer Pricing) Rules 2006 for Kenya which came
into effect on 1 July 2006. The Rules elaborated on the
requirements for transfer pricing situations.
The purpose of the rules is to provide guidelines to be
applied by related enterprises in different tax jurisdictions
in determining the arm's length prices of goods and
services in transactions involving them and also to
provide administrative regulations, including the types of
records and documentation to be submitted to the
Commissioner by a person involved in transfer pricing
arrangements.
The Rules apply to:
a) Transactions between associated enterprises within
a multinational company where one enterprise is
located in, and is subject to tax in Kenya and the
other is located outside Kenya.
b) Transactions between a permanent establishment
and its head office or other related branches in which
the permanent establishment shall be treated as a
distinct and separate enterprise from its head office
and related branches.
Under the Rules (Transfer Pricing) of 2006, a taxpayer is
at liberty to choose any of the following methods to
determine the transfer price:
1
The comparable uncontrolled price (CUP)
method: under this method, the transfer price in a
controlled transaction is compared with the prices
in an uncontrolled transaction and accurate
adjustments made to eliminate material price
differences.
2
The resale price method: under this method, the
transfer price of the produce is compared with the
resale price at which the product is sold to an
independent enterprise; provided that in the
application of this method, the resale price shall
be reduced by the resale price margin (the price
margin indicated by the reseller).
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3
The cost plus method: under this method, costs are assessed using the costs incurred by the supplier of a
product in a controlled transaction, with a mark-up added to make an appropriate profit in light of the functions
performed, and the assets used and risks assumed by the supplier.
4
The profit split method: under this method, the profits earned in very closely interrelated controlled transactions
are split among the related enterprises depending on the functions performed by each enterprise in relation to the
transaction, and compared with a profit split among independent enterprises in a joint venture.
5
The transactional net margin method: under this method, the net profit margin attained by a multinational
enterprise in a controlled transaction is compared to the net profit margin that would have been earned in
comparable transactions by an independent enterprise.
Documentation
Organisations with related party transactions are required to prepare and maintain a documented Transfer Pricing Policy.
The Commissioner of Income Tax may request that such a policy be submitted to them. The documentation to be kept
shall contain information relating to:
a)
b)
c)
d)
e)
f)
The selection of the transfer pricing method and the reasons for the selection.
The application of the method, including the calculations made and price adjustment factors considered.
The global organisation structure of the enterprise.
The details of the transaction under consideration.
The assumptions, strategies, and policies applied in selecting the method; and
Such other background information as may be necessary in regard to the transaction.
Powers of the Commissioner in applying transfer pricing rules
The Kenya Income Tax Act empowers the Commissioner of Domestic Taxes to adjust the profits accruing to a resident
person from a course of business conducted with related non-resident persons to reflect such profit as would have
accrued if the course of business had been conducted by independent persons dealing at arm's length. In effect, the
Commissioner could adjust prices in cross-border transactions involving related parties to reflect an arm's-length price.
Where the Commissioner has made a transfer pricing adjustment that results in the collection of any tax due and unpaid,
such tax shall be deemed to be additional tax which under the Kenyan Income Tax act will attract penalties and interest
for the period of time the tax has been understated.
Conclusion
The Commissioner of Income Tax in exercising his power to ensure full compliance and in an attempt to ensure that the
Kenyan Government does not lose revenue, is in the process of reviewing the transfer pricing rules which may be
published by the end of this year (2013).This is a wake-up call to all commercial companies with Kenyan branches and
carrying out business with related parties in different tax jurisdictions.
Good advice is “prepare elaborate Transfer Pricing Policy guidelines in line with the Transfer Pricing Rules”. Lack of a
transfer pricing policy exposes the organisation to a probable early tax audit visit by the Kenya Revenue Authority. Avoid
it if you can!
Elizabeth N. Matuku
Horwath Erastus & Company
Nairobi, Kenya
11
Crowe Horwath
TM
Tourism in Africa: Harnessing Tourism for Growth and Improved Livelihoods
- A World Bank Report
The World Bank recently published a report entitled: Tourism in Africa: Harnessing Tourism for Growth and Improved
Livelihoods. In the commentary that follows we share some of the key findings of this World Bank report, which highlights
Sub-Saharan Africa's tourism potential at a time when the region is on the radar of the world's investors. We trust the
commentary will be of interest.
Travel and tourism is the third largest economic sector in the world, behind banking and the automotive sectors. The
tourism sector has been identified as a powerful vehicle for economic growth and job creation all over the world.
The World Travel and Tourism Council (WTTC) estimate that the sector is directly and indirectly responsible for 8.8
percent of the world's jobs (258 million); 9.1 percent of the world's GDP (US$6 trillion); 5.8 percent of the world's exports
(US$1.1 trillion); and 4.5 percent of the world's investment (US$652 billion) (WTTC 2011).
In reference to the Sub-Saharan Africa region, the WTTC estimate that in 2011, the region's tourism sector directly
generated 2.7 percent of the region's GDP and directly and indirectly accounted for more than 1 in 20 of the region's jobs
(12.8 million) (WTTC 2012).
Globally, international tourist arrivals have grown steadily since the 1950s at a rate of approximately 4 to 5 percent per
annum. Yet, between 2009 and 2010, in spite of the global financial crisis, international tourist arrivals in Sub-Saharan
Africa increased by approximately 8 percent, making Sub-Saharan Africa the second fastest growing region in the world
after Asia Pacific (UNWTO 2010).
Within the Sub-Saharan Africa region, the East African sub-region has proven to be the most popular, followed by
Southern Africa, West Africa and Central Africa. East Africa captures approximately 42 percent of total tourist arrivals on
the African Continent and approximately 45 percent of the long haul tourist arrivals. With tourism receipts estimated at
US$6 332 million, the East African travel and tourism sector is estimated to contribute approximately 5.5 percent to the
sub-region's GDP.
Tourist Arrivals
(‘000)
Long Haul Arrivals
(‘000)
Receipts
(US$ mn)
Contribution to
GDP (%)
1 075
4%
654
7%
631
1.7
East Africa
11 905
42%
3 945
45%
6 332
5.5
Southern Africa
10 626
38%
2 510
28%
8 599
3.4
4 419
16%
1 749
20%
2 676
2.0
28 026
100%
8 857
100%
18 238
2.6
Central Africa
West Africa
Total
Source: World Bank
By comparison, in Central Africa tourist arrivals in the sub-region are estimated to register approximately 4 percent of total
tourist arrivals on the African Continent and approximately 7 percent of the long haul tourist arrivals. Tourism receipts in
the Central African sub-region are estimated at approximately US$631 million, contributing approximately 1.7 percent to
the sub-region's GDP.
And whilst the global hotel chains are poised to spend hundreds of millions of dollars in Africa over the coming years to
meet rising demand from both international tourists and the Continent's own fast-growing middle class, Africa falls short in
comparison with Asia and the Americas in perceptions of political, economic, and security risks, and poor infrastructure,
especially in air travel where the cost, frequency, and routing of African airlines reduces the competitiveness of tourist
destinations on the Continent.
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Crowe Horwath
TM
Tourism has the potential to help transform a country's image in the eyes of the world, and has already helped countries
like Rwanda and Mozambique, both of which were once considered war-torn, but are now known for their gorillas and
sandy beaches, respectively. The World Bank report outlined ten reasons why African countries should focus on the
development of their travel and tourism industry. These ten reasons are summarised below:
1
Transforming Potential: Tourists' propensity to spend money on retail, consumer goods, in restaurants, et cetera
means tourists have an impact on many sectors of the country's economy. While tourism has an immediate and
direct impact on the economy, it is the sector's multiplier effect that is even more compelling. According to research
undertaken by the UNWTO, international tourists spent US$339 billion in emerging economies in 2010, but their
combined direct, indirect and induced impact was even greater at US$6.3 trillion.
2
Jobs: Industry estimates project a US$250 000 investment in Zambia's tourism sector will create 182 full-time jobs;
this is 40 percent higher than if the same investment was made in agriculture and 50 percent higher than in mining.
3
Remote Access: Tourism development can help remote areas attract funding and investments, which would
improve the livelihoods of residents and secure them gainful employment.
4
Reform-Inducing: Tourism can help raise SME development and stimulate foreign investment. According to the
World Bank report, "In Cape Verde, tourism took off when the banking sector was reformed, when the escudo was
pegged to the euro, and when an attractive package of investment incentives was created. In Rwanda, significant
improvements in the 'doing business' indicators were linked to the desire to increase gorilla tourism."
5
Infrastructure Development: Major events, including conferences and festivals often lead to faster development of
roads, hotels, communications and transportation infrastructure such as airports. Hosting an event like the 2010
FIFA World Cup provided South Africa the incentive to invest US$2.6 billion in infrastructure.
6
Increase in Domestic Consumption: A developed and robust tourism sector can generate revenues for sectors as
diverse as real estate, communications, financing and retail. It can also boost export services.
7
Empowering the Marginalized: Tourism can help raise the standard of living of women and young people in
emerging economies. A UNWTO study noted that women outnumber men in certain positions in the tourism sector,
and account for 31 percent of the sector. It is also one of the few sectors where women can expect equal pay. In
addition, it can also be a great way to employ young people. The World Bank report argues "By engaging young
people in productive employment, tourism can provide an alternative to out-migration, urban poverty, and armed
conflict."
8
Heritage Restoration: A thriving tourism sector will ensure that governments divert funds to cultural heritages,
monuments and places of interest that would otherwise be neglected.
9
Private Sector Participation: The tourism sector also allows the private sector and foreign investors to participate
in the economy of the country. Hospitality investors can bring funds, skills and managerial expertise that could be
transferred to the local population. They can also be a source of tax revenues and contribute to conservation
efforts, infrastructure development and investment promotion.
10
National Pride: As Egyptians can testify, tourism can play a huge role in showcasing a country's cultural heritage.
Egyptians take great pride in the pyramids and associated ancient assets that are unique in the world.
Michelè De Witt
Horwath HTL
Cape Town, South Africa
13
Crowe Horwath
TM
Our African Network
Contact Information
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Hamza & Associés
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Crowe Horwath EA, Crowe Horwath (Mur) Co, Crowe Dr A M Hegazy & Co, Crowe Horwath Djibouti, Horwath Zeller Karro, SCG Audit, Horwath Leveton Boner, Horwath Maroc Audit, Horwath Dafinone, Hamza & Associés, Horwath
Angola, Uniconseil, Cabinet Genevieve Rabenjamina, Inter Africaine d’Audit et d’Expertise (IAE-SARL), Horwath ACF, Fiduciaire des Mascareignes, Erastus & Co, Horwath Tanzania and One & One Chartered Accountants are separate
and independent members or business associates of Crowe Horwath International, a Swiss verein (Crowe Horwath). Each member or business associate firm of Crowe Horwath is a separate and independent legal entity and is not
responsible or liable for any acts or omissions of Crowe Horwath or any other member or business associate of Crowe Horwath and specifically disclaims any and all responsibility or liability for acts or omissions of Crowe Horwath or any
other Crowe Horwath member or business associate.
14