Transfer pricing: Fairness in taxing multinationals and extractive
Dar es Salaam, 3-4 October 2013
TJN has just held a seminar on transfer pricing in Dar es Salaam, Tanzania. The seminar programme is available here.
Click on the links in the headlines below to see the presentations themselves. See also our transfer pricing page.
This event followed on from an international conference we organised in conjunction with our partners at the Government of Finland and the development NGO Kepa in Helsinki last year. More information about last year's event is available here.
The seminar attracted government officials, officials from inter-governmental agencies, practitioners, researchers, activists and others from many countries.
The following summary notes from the seminar have been prepared by the rapporteur, Adrienne Margolis.
Pamela Chisanga, country
director, Action Aid, Zambia
One third of the Zambia
Sugar’s pre-tax profits are paid out of Zambia. This is done through:
Mystery management: US $2.6
million is paid for services each year to Ireland, but there is no physical
Treaty shopping: taking
advantage of unfair tax treaties
reshuffling ownership, using treaty loopholes and tax haven regimes
The law does not require
companies to keep or produce evidence of transactions. There are difficulties
in information exchange with other countries
“A major challenge . . .
is to try and come up with new ways to deal with these problems.” Pamela Chisanga
View from Tanzanian Parliament Accounts Committee
Hon. Tundu Lissu, MP
In 1996 a Canadian
company said that the Tanzanian government would receive US $100 million in
taxes annually in return for starting up a goldmine. Artisan miners were
violently dispersed. Over the 12 years since then the companies paid one 10th
of what it promised. This is unfair to host communities whose lives and
livelihoods have been destroyed.
“Companies in the
extractive industries are not very good corporate citizens. But this is a
sideshow. The real show is the laws that have allowed them to get away with
murder.” Tundu Lissu, M.P.
Gerdi Van Der Westhuysen,
South African Revenue Service
Transfer pricing in South
Africa is wide in scope. It precludes downward adjustments. There are no
specific transfer pricing rules for extractive companies. Taxpayers are using
offshore marketing companies in tax havens and low tax jurisdictions. One of our investigations showed that in 10
years, 10 billion rand worth of profits were channeled through this
“It is very important to
seek to understand the business model for accounting in the value chain and to
seek to understand the industry.” Gerdi Van Der Westhuysen
governance manager, Oxfam South Africa
With the advent of
democracy in South Africa in 1994 the country faced a number of constraints on
development. It has weak and economic growth which has revealed a tax system
not fit for purpose. Transfer pricing and illicit financial flows are
contributing to rising income inequality. Improving transparency and mandatory
reporting of payments are priorities. Policy and legislative certainty are needed.
“Citizens should be part
of the process of deciding the mobilisation and use of domestic and resources.” Thembinkosi Dlamini
Marcos Valadao, Brazilian
Ministry of Finance
The transfer pricing law
was enacted in 1996. In 2012 a law was introduced with different fixed margins
the different economic sectors. There were also simplified rules for
commodities. This removes the distortion of competition in the country as
companies are subject to the same tax burden. It is easy to implement and low
“Due to its simplicity
and practicality this is a feasible alternative for developing countries to
deal with the important issue of transfer pricing”. Marcos Valadao
Dao Real Pereira dos
Santos, director of institutional relations, Instituto Justica Fiscal
As long ago as 2000 a parliamentary
investigation found pharmaceutical companies were overpricing inputs by up to 5,000%.
The problem is not new. Tax havens are the real problem. Since 2010 Brazil has
drawn up a list of 65 jurisdictions with no or low taxes and /or no
transparency. Taxpayers are now required to declare transactions with related
parties or residents in tax havens.
“A big problem is to
define what is legal and illegal. When a company does not have the capacity to
operate it is difficult to determine if it is fraudulent.” Dao Real Pereira dos Santos
A report was published this year by the OECD on base erosion and profit
shifting. This was followed in July by the publication of the BEPS Action Plan
which was welcomed by G20 leaders. If governments are not happy with the
current international tax rules the plan will provide recommendations to change
the rules. The actions set out in the plan will be finalised by December 2015.
Input is being gathered from a range of stakeholders including developing
The OECD also has a tax and development programme that includes the Tax
Inspectors Without Borders (TIWB) initiative. Tax experts from a country will
be directly deployed to work with local tax officials of a developing country
on current audits and audit related issues concerning international tax matters
and to share general audit practices. In some cases this will require funding
from donors to meet the costs of the deployment.
"Under the Tax and Development program there is the Tax Inspectors Without
Borders initiative. Some countries may not be able to meet costs of deploying
foreign tax experts in their country and we will be seeking assistance from
donors in such cases”. Lee Corrick
Prof Sol Picciotto,
senior adviser, TJN
This is not the first
time this issue has been addressed. In 1998 the OECD published a report on harmful
tax competition. It has taken 20 years to get to where they are now. This new
project is ambitious and requires a long time scale. Civil society groups need
to contact the OECD if they want to be involved. The OECD approach is limited -
we need to move towards unitary tax.
“The central problem is
that intangibles are seen as discrete but they are organic. Developments like
the digital economy mean that it needs a complete rethink.” Sol Picciotto
Krishen Mehta, senior
global justice fellow,Yale University
Success stories like Norway,
Chile, and Botswana have things in common. They include transparency, creating
a stable revenue base, investing in education, social programs, infrastructure
and setting aside reserves the future. Transparency and accountability can be
best achieved through country by country reporting leading to a unitary
taxation approach. There are 10 reasons why this is a good roadmap.
“Adoption of country by
country reporting is the only way to move from voluntary to mandatory
transparency and the only way to translate transparency into accountability.” Krishen Mehta
Ane Foged, TJN Africa
Should Kenya adopt it,
and if so, how? Revenue authorities, accountants, corporations and tax experts interviewed
concluded Kenya is capable of using country by country reporting and it would
simplify the system. International adoption would help because global problems
need global solutions.
The head of audit at the
Kenyan revenue authority said: “We know
what we want, we know what we are looking for and how to use it but we do not
know how to get it.”
executive director, Afrodad
Africa is number one in
the world for many metals and minerals. The continent is rich and citizens have
a right to know how governments are selling their resources. Conflicts start
because people feel bypassed. Multinational companies and governments benefit so
they do not want transparency. The African Mining Vision is very important – so
is the high-level panel on illegal financial flows chaired by Tabo Mbeki.
“There must be an
international regulator because the OECD is not all of us.” Collins Magalasi
Silas Olan’g, Revenue
Watch Institute, Tanzania
Tanzania is the most mineral
rich country in Africa. Around 50% of exports are from the extractives sector,
but in 2012 it accounted for only 4% of government revenue. It is location
specific and returns vary between locations. Aggregation delays tax revenue to
“Project by project
reporting helps citizens to follow the money.” Silas Olan'g
Wanda Montero, Dominican
Republic Internal Revenue Authority
The tax regime was based
on contracts dating back to the 1960s. It meant that the country was losing
lots of revenue. The mining code was also old. Recently, in the case of one
gold mining company, people felt the contract was unfair. They demanded that
the government renegotiate the contract. Also, there was no minimum tax
legislation. The company was told to renegotiate or leave. The company
renegotiated – it wanted legal certainty. Now there is an assured minimum tax
in place for the life of the mine even if they engage in transfer pricing.
“Good governance requires
that contracts be re-negotiated as and when circumstances change. Reality has
changed a lot from 1960 to now.” Wanda Montero
Slim Gargouri, chartered
accountant and tax journalist
Slim provided a
comprehensive guide to transfer pricing in Egypt, Algeria Tunisia, Morocco and
Libya. Details are provided in the hyperlink
Hon. Zitto Kabwe, MP
Developing countries are
ripped off by extractive companies’ hedging. Thin capitalisation allows
companies to use loans to finance setting up other mines. This has led to huge
revenue losses to Tanzania. The 2012 Finance Act has strengthened the rules to
reduce abuse through tax deductibles. There are lots of abuses in the telecoms
sector because it is fast-growing. But it is generating very little tax revenue
and shell companies are used when telecoms companies are sold on. The law needs
to be strengthened to ensure export levies are paid.
“The government has the
people who know these things and they are using taxpayer’s money. Not all MPs are
tax experts but some would like to see changes.” Hon. Zitto Kabwe
Charles Bajungu, Tanzania
It is crystal clear that
multinational companies will always seek higher profitability and reduce their
tax liability legally or illegally. We don't know how much money we are being
deprived of. We face common challenges.
“We are interested to
know how Mauritius can rank third in Africa for foreign direct investment. This
is of great concern to the Revenue Authority.” Charles Bajungu
Dr Attiya Waris, senior
lecturer, Law School, University of Nairobi
In Rwanda the
Constitution comes first. This is not the situation in most countries. The
country used a Dfid (UK Dept of International Development) funded process to
put its international tax regime in place. This means they never interrogated
their legislation. The amendments are now being put in place. In revenue
authorities lawyers are not often trained in transfer pricing.
When Rwanda tried to
change transfer pricing rules it got stuck. Changes were needed before the
rules could be enacted.
Almost everyone thinks
unitary tax is the best way forward.
“What I found was more
like a donor led to procedure. We must allow each country to have a smorgasbord
of what ever they want. The problem is that they only know the OECD model and
not the UN model or other alternatives.” Attiya Waris
Milly Isingoma, Uganda
In July 2011 transfer
pricing regulations came into effect. With support from the global transparency
movement we are putting frameworks in place for extractives. We need to analyse
the complexity of the industry that we're being asked to tax. We need effective
dispute resolution and new ways to allocate profits to low tax jurisdictions.
“This is not about
unitary tax, BEP's etc. We just want something that is efficient for us and can
help us collect revenue for our country.” Milly Isingoma
Erika Dayle Siu,
International Centre for Tax and Development
Unitary tax better
reflects the modern corporation. It reflects the whole, rather than the legal
parts. You first need to harmonise the tax base. You also need to consolidate
“Within the East African
community, the background is there and the community is there. Actions need to
be presented in a way that leaders and countries feel appropriate.” Erika Siu
Michael Durst, senior
adviser, Tax Justice Network
It is very clear that
large amounts of tax are avoided all over the world
countries have a large informal sector, a large proportion of the tax base
comes from the corporate sector
· One of the great
achievements of the OECD report was to highlight that dealing with transfer
pricing is not enough.
What would the greatest
political barrier be taking steps?
“The world is closer to
solving these problems from a technical standpoint than it is politically.” Michael Durst
Joyce Rita Addae Kumi,
Ghana Revenue Service
Any attempt to plug
loopholes to prevent tax avoidance is met with cries from transnational companies that
it will lead to job cuts. Ghana's attempt at introducing a windfall profit tax
in mining has met with this response. In 2000 a new tax law dealt with tax avoidance
schemes. In 2012 new transfer pricing regulation was introduced.
“I believe these measures
combined with vibrant tax administration will ensure that multinational
enterprises satisfy the legitimate tax obligations.” Joyce Kumi
Lincoln Marais, director,
institutional development, ATAF
Lack of proper transfer
pricing legislation or lack of any legislation is a problem.
There is an adequate
human capacity to deal with it.
Taxpayers are unaware of
the full scope of transfer pricing arrangements.
It is not clear that the
arm's-length principle is understood.
Feedback from members and
partners is that we need to develop legislation, capability and engagement with
“One of the things we're
trying to setup is a community of practice so that officials dealing with
transfer pricing can share information and approaches to cases.” Lincoln Marais
Update: for more information on corporate tax, see here.