Arcotia Hatsidimitris - International Tax Dialogue

68 – 8. TRANSFER PRICING AND DEVELOPING COUNTRIES
Introduction
Context
There is a growing awareness on the part of developing countries of the risks posed by transfer
pricing. Their goal in addressing these risks is identical to that of developed countries – to protect their tax
bases while continuing to attract foreign direct investment and facilitate cross border trade. It is important
to note that for some developing countries the tax base is still relatively small and for a subset it is still less
than the aid they receive. Consequently it is not surprising that many developing countries are
inexperienced in dealing with transfer pricing issues and their top priority is to assess the level of potential
transfer pricing risk in their own country and grow capability and increase capacity in their tax
administrations to effectively address that risk.
A recent report to the G20 on "Supporting the Development of More Effective Tax Systems" 1
considers some of the challenges developing countries face in the field of transfer pricing and some of the
ways in which those challenges can be addressed. In their final declaration following the G20 Summit in
Cannes the G20 leaders had this to say: "Consistent with the Multi-Year Action Plan agreed in Seoul, we
strongly support developing countries mobilisation of domestic resources and their effective management
as the main driver for development. This includes technical assistance and capacity building for designing
and efficient managing of tax administrations and revenue systems and greater transparency, particularly in
mineral and natural resource investment. We urge multinational enterprises to improve transparency and
full compliance with applicable tax laws. We welcome initiatives to assist developing countries, on a
demand led basis, in the drafting and implementation of their transfer pricing legislation. We encourage all
countries to join the Global Forum on Transparency and Exchange of Information for Tax Purposes." This
Chapter looks at the practical steps that can be taken to overcome the administrative challenges developing
countries face in the field of transfer pricing and to improve financial transparency. It also considers the
specific ways in which the FTA can provide the demand led assistance that the G20 declaration envisages.
There is a limit to what any country, whether developed or developing, can achieve acting alone and
so international co-operation has a crucial part to play. Developing countries have much to learn from one
another about the practical solutions to the problems they face, both in terms of building capacity and in
relation to specific cases, and regional organisations such as ATAF and CIAT provide a means of
facilitating this dialogue and the pooling of knowledge and best practice. In addition, international bodies
such as the OECD, International Monetary Fund and the World Bank have a part to play too as do
countries that have tackled these types of challenges in the past and are able to share skills, knowledge and
experience. Some developing countries may also buy in learning from major private sector tax firms but
this can give rise to potential conflicts of interest where the firm is active in providing tax advice to private
sector entities in the developing country and/or in its trading partners.
When considering the scope of their transfer pricing programmes, developing countries may wish to
focus initially on the business sectors in their economy and types of transactions where transfer pricing
issues are most likely to be found – for example, the exploitation of mineral wealth and other types of
natural resource, manufacturing, service industries and wholesale/retail supplies. This may be a more
efficient use of resources than seeking to develop a transfer pricing regime focused, for instance, on an
emerging financial services industry.
Challenges
For many developing countries the first challenge is to understand the number and type of MNEs
operating in their jurisdiction and the types of transfer pricing risks that are likely to arise. This assessment
DEALING EFFECTIVELY WITH THE CHALLENGES OF TRANSFER PRICING © OECD 2012