NIGERIA INTRODUCES LEGISLATION TO COUNTER PROFIT SHIFTING THROUGH EXCESSIVE INTEREST PAYMENTS
African Tax Administration Forum • March 5, 2020
ATAF members have reported that excessive interest payments are one of the most prevalent and simple of the profit-shifting techniques used by multinational enterprises in Africa and poses a significant risk to African tax bases. The fluidity and fungibility of money makes it a relatively simple exercise to adjust the mix of debt and equity in a group company.
Most countries treat tax debt and equity differently for the purposes of their domestic law. Interest on debt is generally a tax-deductible expense for the payer and taxed in the hands of the payee. Dividends, or other equity returns, on the other hand, are generally not tax deductible and are typically subject to some form of tax relief (an exemption, exclusion, credit, etc.) in the hands of the payee. While, in a purely domestic context, these differences in treatment may result in debt and equity being subject to a similar overall tax burden, the difference in the treatment of the payer creates a tax-induced bias, in the cross-border context, towards debt financing.
In the cross-border context, subsidiary entities may be heavily debt financed, using excessive deductions on intragroup loans to shelter local profits from tax. The interest receipts often arise in jurisdictions where they are subject to low or no tax.
Most African countries are capital importers and will be net borrowers rather than net lenders. Taxpayers in African countries are usually the subsidiaries referred to above and will usually be net payers of interest rather than net payees. The tax deductibility of interest payments and potential profit shifting through excessive interest payments is therefore of high priority to most African countries
With the assistance of the ATAF International Taxation team, Nigeria has in its Finance Act 2019 enacted interest deductibility legislation
that uses a fixed ratio test based on an entity’s interest/earnings ratio, which provides an effective tool to combat base erosion and profit shifting.
• If you are an ATAF member and your country faces tax loss risks from excessive interest payments being made from your country our International Taxation team is here to help you introduce new effective rules based on our Suggested Approach to Drafting Interest Deductibility Legislation
Please feel free to contact the ATAF team on Telephone: +27 12 451 8800
E-Mail: info@ataftax.org
During the meeting, both organisations reflected on their long-standing partnership and noted the milestones achieved to date.
Ms. Baine succeeds Mr. Logan Wort , who has served as ATAF’s Executive Secretary since its establishment in 2009.
Les progrès du Bénin en matière d'analyse des données et de prévision ont également été stimulés par d'autres activités d'apprentissage par les pairs de l'ATAF.
At the heart of the discussions was the impact of the toolkits, suggested approaches, policy briefs, and technical notes developed by the committees.
Ms Mary Baine welcomed Minister Mthuli Ncube's pledge to champion tax advocacy on the continent and mobilise his counterparts for support to the African perspectives in the continental and global tax reforms agenda.
The training marked Phase One of ATAF’s broader research development programme, designed to cultivate a new generation of African tax researchers. It provides not just academic instruction, but practical tools for applying research to real-world tax challenges.
The session brought together tax officials from across Africa. Kenya, Nigeria, and Zambia presented their experiences, while Zimbabwe, Sierra Leone, and Burkina Faso officials participated in the peer learning discussions.
ATAF in partnership with the World Bank Group and the Zambia Revenue Authority launched its first technical workshop to jointly design and develop a regional Automatic Exchange of Information IT solution.
This initiative forms part of a broader regional study aimed at supporting African tax administrations in assessing the legal and administrative feasibility of strengthening compliance among individuals with substantial assets.
The ATAF Model Tax Agreement serves as a guiding instrument to help African nations negotiate treaties that better protect their interests, ensure fair allocation of taxing rights, and enhance domestic revenue mobilisation.