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By Centurion Tax and Investment Desk
With the enforcement of the new law (No. 2018 – 10 of March 30, 2018) enacted in March 2018 which amended certain provisions of the General Tax Code (CGI), the Senegalese legislator has strengthened and finalized the fiscal measures on transfer pricing. Reforms in transfer pricing were introduced in 2012 in line with the global fight against tax base erosion and profit shifting (BEPS).
Senegal is a member of the inclusive framework of the Organization for Economic Cooperation and Development (OECD) on BEPS, which currently includes 100 countries. Senegal has ensured through the adoption of minimum standards, that its tax bases will no longer be reduced by means of artificial profit transfers.
In this regard, Senegal has taken advantage of the 2018 tax reform to integrate into its domestic legislation, with certain measures stemming from the BEPS Project. This includes the country-by-country declaration and the introduction through the new Article 17.2 of the CGI; the limitation of the deductibility of the amounts paid by the Senegalese branch to its headquarters that were established abroad.
It should be noted that the concept of a foreign company branch within the meaning of the CGI does not cover the definition adopted by the OHADA legislator. Hence, under the revised Uniform Act relating to the law of commercial companies and economic interest groups (AUSCGIE), branches of a foreign legal person is considered as those belonging to a person outside the territory of the OHADA member states. This concept is to be distinguished from the one retained by the tax regulation which considers as a branch of a foreign legal entity to the one belonging to a person located outside Senegal. Therefore, the limitation of deductibility established will also apply to branches belonging to legal entities located in the OHADA area.
In terms of Article 17.2 the Senegalese legislator has taken up the position of the French Council of State (which, in a judgement dated November 9, 2015) that the transfer pricing rules were applicable to internal financial transactions between a French branch and its foreign headquarter, despite the absence of separate legal personality of the branch. Thus, the tax law recognizes it as its own fiscal personality and the branch does not have a separate legal personality/identioty from that of its head office.
Consequently, the financial flows between a branch and its headquarters are not excluded from the scope of transfer pricing. In this respect, the Senegalese legislator has adopted specific measures to prevent and limit any transfer of profits from the branch to its headquarters.
The main purpose of this article is to present the laws governing the deductibility of expenses incurred by a Senegalese branch in its relations with its foreign head office and analyze the impact of these measures in practice on the different sectors of activity as well as on the tax treaties to which Senegal is party to.
1. The principle of non-deductibility of amounts paid by the Senegalese branch to its foreign headquarters
1.1 Basis and justification of the limitation
From a fiscal point of view, the permanent establishment of a company must be taxed separately even if it has no legal personality. In applying this principle, the tax legislator has extended the requirement of compliance with the arm's length principle to the privileged financial relationships that exist between a branch and its head office.
In this respect, in order to prevent any transfer of profit from the Senegalese branch to its foreign head office, the Senegalese legislator specifies that payments made in the form of interest or royalties by the Senegalese branch from a foreign company will be deducted from taxable profit.
In order to understand this concept of provision, it is necessary to make reference to the ministerial reply made by Mr. Georges Mesmin (deb. AN, JO of January 19, 1981, p.245, n° 31725) and the decision of the administrative court of appeal of Paris in CAA Paris, May 28, 1991 n°2918, Weston Hyde Products Ltd. It was held that since the branch has no separate legal personality or autonomy over its assets, the payments it makes to its head office actually represent part of the profit made by the foreign company in the country where the branch has been established.
1.2 What about head office expenses and the concept of head office ?
Article 17.2 of the CGI rejects the deductibility of the amounts paid in particular for the management activities by the Senegalese branch to its head office. This limitation has raised questions about the deductibility of head office expenses, which have not yet been defined by the tax legislator or the administrative doctrine. In general, the head office expenses refer to general administration and management expenses, so they could be assimilated to management activities.
Therefore, it becomes imperative for the Senegalese taxpayer to know whether the management services mentioned in Article 17.2 refer to headquarters expenses. In such instances, there is a contradiction between Article 9.5 of the CGI, which provides for the possibility of deducting 20% of the accounting profit for head office expenses, and the limitation set out in Article 17.2. The arbitration of the application of these seemingly contradictory provisions would provide clarity of the tax system to the taxpayers. To this end, it is recommended that taxpayers take up the issue by inviting the Senegalese tax authorities to give a formal ruling, in particular through a rescript.
In our opinion, the basis of Article 17.2, which takes up the provisions of Article 7 of the OECD Model Convention, was to exclude from the right to deduct all amounts paid by the Senegalese branch to its foreign headquarters. If this was the aim of the Senegalese legislator, the latter should, in order to be consistent, be modified or repealed the provisions of article 9.5 of the CGI. By default, in view of the current tax system, it can be validly argued that the amounts paid by the Senegalese branch to its foreign head office as head office expenses remain deductible up to 20% of the accounting profit made in Senegal.
In addition, would this limitation still apply if the amount is paid to another establishment linked to the central office? One may be led to believe that the Senegalese legislator wanted to avoid this possibility by specifying that the limitation applies to “the central office of the legal person or to any of its offices”. In our perspective, this wording is not sufficient to exclude from the right to deduct sums invoiced by another establishment of the head office. Especially since it raises an even more important question: what reality or content should be attributed to the offices of the head office of the legal person?
Finally, the principle of non-deductibility of amounts due or paid by the branch to the head office is not absolute. It may be overridden in certain situations under certain conditions, in particular because of the nature of the transaction, or the sector of activity of the entities concerned, or also because of the effect of international tax conventions.
Limits to the principle of non-deductibility of amounts paid by the Senegalese branch to its foreign headquarters.
This mitigation is materialized in three cases: (i) in case of reimbursement of expenses incurred by the head office on behalf of its branch, (ii) when it is a banking company (iii) the impact of double tax treaties signed by Senegal.
2.1. The case of expense reimbursements
The Senegalese legislator has excluded all the amounts paid to the foreign head office with the exception of reimbursements of expenses from the deductible expenses. This exclusion is expected because the branch has the responsibility to control these expenses. As such, the branch has the possibility to deduct interest paid at its head office and corresponding to financing contracted from a third party for the needs of the branch.
It should be noted that even if Article 17 of the CGI is not explicit on this point, the reimbursements of expenses in question must comply with the provisions of Article 8.II of the CGI, which sets out the conditions for deductibility. Among other conditions, the reimbursement of expenses must be duly justified and relate to the activity of the branch.
The amounts to be reimbursed must be evaluated practically, as the tax authorities may reject the lump sum and approximate calculations. Therefore, reimbursements are deductible only when they relate to the activity pursued by the branch. The reimbursements of the expenses has further raised some additional questions, particularly with respect to indirect taxation. As a matter of fact, in practice the Senegalese tax authorities claim VAT in cases of rebilling. Reimbursements that are excluded from the scope of VAT are subject to compliance with the following three cumulative conditions:
The agent must act under a prior and explicit mandate; He must give an exact account of the amount of the expenditure to his mandate and the reimbursements must give rise to an exact rendering of account; He must justify to the tax department the exact amount of the disbursements and the sums in question must not be the counterpart of a service provided even at cost price.
Thus, the reimbursement by the Senegalese branch of expenses incurred by its foreign headquarters are not subject to transfer pricing rules because they do not reflect a flow of goods or services.
2.2. The banking exception: the case of interest paid to the head office-foreign bank
The legislator of the Senegalese branches of foreign banks has set a principle of non-deduction of amounts paid by a Senegalese branch to its foreign head office. This exception specifically concerns interest paid by the branch to its parent banking institution followed by a loan.
This is in line with the banking legislation which enshrines the principle of single approval. In this respect, the establishment of a duly authorized bank or financial institution in a WAEMU Member State other than the one for which the authorization was granted may be done under the legal status that the applicant bank or financial institution deems appropriate (branch, agency or subsidiary).
In fact, in France, the Conseil d'Etat has confirmed that the deductibility of interest in a banking context in the Bayerische Hypo, Unicredit and Caixa Geral de Depositos cases, which involved the French branches of German, Italian and Portuguese banks respectively. (CE n°344990, 346687 and n°359640 of April 11, 2014).
The derogatory regime applicable to branches of foreign banks is based on the fact that the granting and the collection of advances are operations closely related to their ordinary activity.
In contrast, branches of foreign insurance companies do not benefit from any special regime. As a result, the deduction of financial charges relating to funds made available to them by their head offices is denied to them.
2.3. The impact of tax treaties on the deductibility of amounts paid to the foreign head office
In the case of a tax treaty signed by Senegal, it replaces the provisions of the CGI, including those of article 17.2. Tax treaties may provide for deductibility rules that differ from the provisions of the Senegalese legislation. These rules should be applicable to both the Senegalese branch and the foreign headquarters.
For example, under the terms of the Senegal-France tax treaty, amounts paid by the branch to its headquarters are not excluded from the right to deduct. The said convention even allows for the deduction of a proportion of the head office overheads in proportion to the figure.
On the other hand, the new tax conventions inspired by the OECD model, in the case of the Senegal-UK tax convention and the UEMOA convention, apply the same provisions as article 17.2 of the CGI, which exclude the right to deduct the amounts paid by the Senegalese branch to its foreign headquarters.
However, in practice the Senegalese tax authorities did not apply these provisions. In fact, the WAEMU convention has been in force since 2008 but there has not been a situation where the Administration questioned the deductibility of the amounts paid by the branch to its headquarters.
Even practitioners do not generally raise this specificity when advising their clients on the deductibility of expenses incurred by the Senegalese branch of a foreign legal entity. The traditional analysis in this regard has been limited to the threshold for deductibility of head office expenses under the domestic tax system.
With the introduction of the provisions of Article 17.2 by the new law of March 30, 2018, the tax practice in this matter is bound to evolve, as the tax administration will be more attentive to the relationship between the branch and its headquarters.
The new transfer pricing regime relating to the branch-head office relationship may appear to be a new tax issue. This relative novelty can be explained, among other things, by the fact that the tax authorities do not apply it in practice. The fact remains that there is still a certain antilogy between the provisions of the new article 17.2 and those of article 9.5 of the CGI, which the legislator or the tax authorities must clarify.
In any case, it is now appropriate, to control the determination of the tax result of a Senegalese branch of a foreign legal entity such as bank branches established in Senegal, to ensure the limitation of deductibility introduced both by the General Tax Code and international tax conventions. The innovations made by Law No. 2018 – 10 of March 30, 2018 amending certain provisions of the General Tax Code (CGI), definitely puts Senegal into the space of BEPS.
The fight against the tax base erosion must however be balanced with economic attractiveness. It should be certain that the branch office is a legal form appreciated by foreign investors therefore It allows to penetrate markets durably and efficiently at a relatively lower cost. In light of all the limitations and restrictions built around the branch office, the latter may risks losing all its appeal to foreign investors who will prefer to invest in jurisdictions with certainly more flexible regulations.
Distributed by APO Group on behalf of Centurion Law Group.
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