Functional Analysis & FAR Reviews (Functions, Assets, and Risks)
Functional Analysis & FAR Reviews (Functions, Assets, and Risks)
For Functional Analysis & FAR Reviews, TaxIQ Africa provides the foundational economic mapping required to sustain any transfer pricing structure. In the African context, where revenue authorities frequently challenge the "substance" of local operations, a robust FAR review is the primary defense against profit-shifting allegations.
TaxIQ Africa can help with:
Functional Analysis & FAR Reviews
Functional Analysis & FAR Reviews ?
Diagnostic FAR Interviews & Mapping
We move beyond theoretical descriptions to capture the operational reality of the business
Personnel Interviews
Conducting structured interviews with key decision-makers (CFOs, Supply Chain Heads, Technical Directors) to identify who actually makes "Significant People Functions" (SPFs).
Risk Control Assessment
Determining who actually manages and controls risks (e.g., inventory, credit, or operational risks) versus who merely bears them contractually.
Asset Utilization Review
Identifying the high-value intangibles and specialized equipment (especially in extractives) used in the transaction and where the legal vs. economic ownership lies.
Entity Characterization & Profiling
Based on the FAR analysis, we categorize each entity into a "profile" that dictates its expected return:
Manufacturing Profiles
Differentiating between Toll, Contract, and Full-fledged Manufacturers to ensure that low-risk entities receive stable margins while the "Entrepreneur" captures the residual profit/loss.
Distribution Profiles
Defining entities as Commissionaires, Limited Risk Distributors (LRDs), or Fully-fledged Distributors, which is critical for managing Permanent Establishment (PE) risks in various African markets.
Substance-over-Form Validation
African tax authorities (URA, KRA, etc.) are increasingly aggressive in looking past contracts. We provide:
Gap Analysis
Identifying discrepancies where a contract says an entity manages risk, but the personnel are actually located in a different jurisdiction.
Substance Remediation
Providing a roadmap to move functions or decision-making power to align with the desired tax profile, ensuring the structure is not viewed as a "sham."
Digital & Remote Function Reviews
For modern, borderless businesses, we analyze:
Remote Management Risk
Assessing whether regional hubs (e.g., in Nairobi or Johannesburg) are inadvertently creating a taxable nexus or performing the core functions for subsidiaries in other countries.
Intangible Value Creation
Determining if local marketing teams are "enhancing" a global brand (DEMPE functions), which would entitle the local entity to a higher share of the profit.
FAR-Based Benchmarking Strategy
We use the results of the FAR review to drive the economic analysis:
Search Criteria Refinement
Ensuring that the "comparable" companies selected from global databases (like TP Catalyst or Amadeus) actually perform similar functions and bear similar risks to the client's African operations.
Working Capital Adjustments
Adjusting the financial data of comparables to account for different levels of assets (like high inventory or heavy equipment) held by the African entity.
Transactional Segmented FAR Reviews
For diversified groups, we perform "Siloed" FAR reviews:
Product-Line Segmentation
Separating the functions and risks of different business units (e.g., a company that both manufactures and provides technical services) to ensure each is priced correctly according to its unique FAR profile.
Service vs. Product Allocation
Ensuring that "bundled" transactions are unbundled so that the reward for the "risk-free" service is separated from the reward for "high-risk" manufacturing.
Dispute Defense (The "Litigation-Ready" FAR)
In the event of an audit, we provide:
Counter-FAR Rebuttals
Defending the client when a tax auditor incorrectly characterizes a local entity as a "full-risk" entity to justify a higher tax assessment.
Expert Witness Testimony
Utilizing your dual legal and CPA background to testify on how the FAR profile supports the chosen arm's length price during Tribunal or Court proceedings.