Transfer Pricing Toolkit to Give African Tax Authorities Clout
• Interventions have brought in over $120m tax revenue in two years
• Toolkit empowers authorities to assess transfer pricing risks
The African Tax Administration Forum has published a toolkit (https://www.ataftax.org/en/products-services/technical-assistance/transfer-pricing-tp) for transfer pricing and risk assessment in the African mining sector, with the help of Germany’s Federal Ministry for Economic Cooperation and Development.
The toolkit focuses on transfer pricing issues that present a high risk to revenue, according to the forum. “A loss of even 1 percent of the value of these transactions is likely to be significant for developing country revenues”, ATAF stated.
ATAF cites the United Nations Economic Commission for Africa, saying Africa is losing approximately $50 billion a year in illicit financial flows, adding that “transfer mispricing is one of the primary sources of these losses” with the problem is particularly acute for resource-rich developing countries.
Multinationals involved in transfer pricing disputes include BHP Billiton Ltd., which is involved in an A$1 billion ($784 million) transfer pricing dispute with the Australian Tax Office in connection with commodity payments to its Singapore marketing business, and South African miner Kumba, which announced Feb. 3 a 2.5 billion rand ($185 million) settlement with the South African Revenue Service.
Technical assistance programs on transfer pricing implemented in various African countries over the past two years have resulted in the collection of more than $120 million in additional revenue collectively, according to Lee Corrick, technical adviser on international taxation at ATAF.
The organization’s toolkit is one of a series of interventions aimed at strengthening tax authorities’ capacity to determine whether they should audit particular high-risk related party transactions.
Four-Phase Risk Assessment
The risk assessment aspect of the toolkit is made up of of a four-phase transfer pricing compliance process, which includes case selection, risk assessment, audit and dispute resolution.
“In Africa, there are some key issues,” Corrick said. “One is quite weak legislation, the second is limited resources to address transfer pricing issues.”
He noted that a transfer pricing investigation “is a resources-intensive exercise—the average time to complete a transfer pricing audit is sitting at 18 months.”
ATAF developed three ways to assist tax authorities. The first, says Corrick, was an approach to drafting legislation designed around the framework of arms-length principle but adapted with specific provisions which simplify some of the difficult challenges.
It also developed a general transfer pricing risk assessment tool to assist African tax administrations to identify the highest risk companies.
Finally, the toolkit was aimed at helping countries deal with risk assessment.
The toolkit outlines four big issues for tax authorities:
• Marketing arrangements, where, for example, a related company buys mineral products from a mine and consideration of whether the related company performs value-adding functions and assumes entrepreneurial risk or is a hub that merely provides a support function.
• Intercompany debt, where a subsidiary receives debt from a parent or an affiliate company, often a corporate treasury located in a low-tax jurisdiction, to finance geological exploration or mine development. Corrick says these arrangements enable some companies to slash profits through interest payments.
• Procurement services, where companies buy from or on behalf of subsidiaries at inflated prices.
• Management services, where fees are paid to a related party.