TACKLING TAX EVASION RESULTING FROM TRANSFER PRICING
The availability of mineral resources in many African countries present an opportunity to engage in various economic activities that has the potential to provide significant economic value for African countries, if well managed. The mineral sector of many African countries also presents an opportunity to grow other sectors through the provision of revenue and raw materials for such sectors as industries/construction, consumer products, education and health.
The extractive sector constitutes a complex value chain, and requires expertise to adequately coordinate the activities of the sector especially in the area of revenue collection in form of taxation. Most African countries lack the requisite capacity to coordinate a holistic revenue collection system and this has led to several revenue leakages. A prominent source of leakage in revenue collection in African countries is “transfer pricing“. By this, transactions by some companies and multinationals enterprise (MNEs) are illegally misrepresented in other to reduce taxable income and tax per transaction. The African Development Bank (AfDB) attributes major losses of public revenue to the “inefficient taxation of extractive activities and the inability to fight abuses of transfer pricing by MNEs.” Also, the Africa Progress Panel has identified cross-border transactions between related parties as a major threat to the tax base of African countries (Africa Progress Panel 2013, 65). Due to the nature of this transactions between related companies which are internal and are not subject to market pricing, companies move profits to low tax-jurisdictions.
The “arm’s length principle” is a rule which is led by the Organization for Economic Cooperation and Development (OECD) to control transfer pricing. The rule requires that tax on transactions between related parties are priced as though they are typical transactions between unrelated parties. The rule is already being implemented in several African countries, although the effectiveness of the rule is still being limited by a lack of implementation capacity in most of the countries.