Arcotia Hatsidimitris - International Tax Dialogue

72 – 8. TRANSFER PRICING AND DEVELOPING COUNTRIES
Box 20. Difficulties in obtaining relevant information – an African Tax Commissioner’s Experience
• Multinational enterprises can be economical with the provision of data and information to auditors
and inspectors. This can make it extremely difficult for tax administrations to prove that their transfer
pricing concerns are well founded. In many cases key information is thought to be deliberately
withheld from the tax administration in order to hide the potential tax liabilities.
• In other circumstances, multinational enterprises overwhelm tax administrations with volumes of
irrelevant information with the result that the attention is diverted from the real information that the
tax administration needs to reach proper conclusions.
• Double Tax Agreements are not always effective in securing vital information needed in a transfer
pricing audit or enquiry. Often the tax administration requesting the information has to wait for long
periods of time, sometimes over six months before receiving any feedback and even then it might
not receive the crucial information it needs.
• Management fees are one of the many ways that multinational enterprises are using to reduce
taxable profits in African countries. Usually these fees have no relationship with the actual cost of
providing any management services but are just expressed as a fixed percentage of revenues.
When questioned about the justification of the fees, the multinational enterprises provide a figure of
Head Office expenses that has been apportioned to the entity which eventually bills the African
entity. When requested to provide the trial balances of the Head Office so that the tax administration
can apply its mind to the expenses apportioned, a multinational’s subsidiary or branch says that it
does not have access to that information. The conclusion the taxpayers make is that even if a direct
method of charging the African entity was used, the results would have been the same or an even
higher charge could have been made to the African entity.
• Another example of difficulty relates to management fees. Often management fees are charged
where the local company has competent and capable management of its own. There is often visible
duplication of functions and/or services but multinational enterprises seek to find ways of explaining
away any duplication. Auditors and inspectors are sometimes not sure what criteria to apply to
decide whether to accept these explanations as valid. For example, the taxpayer will usually
describe a lot of value adding activities that the parent company or related party is performing, and
yet these aspects will be outside the scope of the contract signed between the related parties, and
the contract is the only legal basis of the management fees that are being paid.
• The use of tax havens is still prevalent in an African context. Goods are often sold by a related party
to the tax haven entity which simply acts as a re-invoicing vehicle. An inability to access financial
statement of the tax haven vehicle can make it hard to test whether re-invoiced prices are arm’s
length prices. This problem is further compounded by the lack of transfer pricing documentation in
Africa. The majority of subsidiaries of branches of multinational enterprises simply state that they do
not have transfer pricing documentation but they are transacting with related parties at arm’s length.
Even in situations where the transaction is not routed through a tax haven vehicle, the lack of
information from the other group entity regarding their margins and other accounting ratios makes
arm’s length testing in the value chain very difficult.
• The tax authorities’ lack of access to databases like Amadeus and Orbis, and the lack of knowledge
on how to carry out an economic analysis based on such databases where they are available is a
problem that makes transfer pricing audits and enquiries even harder.
This testimony illustrates how problematic transfer pricing can be and the particular difficulties
associated with the issue of management fees. However, it is possible to challenge the arbitrary allocation
of head office expenses on the basis that there is no evidence of any value being received, or if there is
value added that it is not proportionate to the amounts being charged. This is an example of how the
application of first principles, rather than complex transfer pricing concepts, can be very effective. It is
helpful if the legislative framework makes it clear that it is for the MNE concerned to establish that the
level of management fees is justified by the value that has been added by the other parts of the MNE. But
this does not alter the fact that a lack of good quality commercial information in developing countries is a
major challenge for their tax administrations.
DEALING EFFECTIVELY WITH THE CHALLENGES OF TRANSFER PRICING © OECD 2012