by Alexandra Readhead
African tax officials stymied by a host of sophisticated tax avoidance tactics were given a nimble new toolkit Thursday aimed at tackling a pervasive problem: transfer mispricing.
Transfer mispricing occurs when two related parties—such as a parent company making a purchase from its subsidiary—distort the price of a good or service to reduce their global tax bill.
The Toolkit for Transfer Pricing Risk Assessment for the African Mining Industry was launched on September 28, 2017 at the International Conference on Tax in Africa, convened by the African Tax Administration Forum (ATAF). The IGF is the official training partner for the toolkit.
Representatives from 38 African tax authorities converged in Abuja, Nigeria to discuss how to improve the collection of corporate income tax.
The regulatory environment in Africa has been evolving in response to transfer pricing risks resulting from increased multinational investment over the past decades.
Between 1995 and 2014, the number of African countries with transfer pricing rules has grown by 600 per cent, according to Ernst & Young. They are developing standalone transfer pricing regulations, building specific expertise, setting up specialized transfer pricing units and working together to share best practices through ATAF.
However, evidence shows that few African tax authorities have the sector-specific expertise to detect and mitigate transfer mispricing in the mining sector. Many tax authorities do not have close knowledge of the mining sector, which hinders their ability to distinguish between abusive versus standard industry practice. Risk assessment is critical for developing country tax authorities given the limited resources they have to audit taxpayers.
“The use of aggressive and suspicious tax planning and transfer mispricing by multinationals to minimize their tax payments” is a major constraint to domestic revenue mobilization in African countries, His Excellency Professor Yemi Osinbanjo, Vice President of Nigeria, said in his keynote address to the tax conference.
That is why the toolkit was developed by ATAF and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ).
The toolkit is practical. Tax authorities can immediately integrate it into existing transfer pricing compliance processes. It can be used in any national context and adapted for legal differences. Authorities can identify and assess transfer pricing risks in the mining sector, select the most high-risk cases for audit and protect the mining tax base against profit shifting.
The toolkit is also precise. For instance, the toolkit addresses the use of offshore marketing hubs: cases where a mine sells its product to a related company that then sells the product to a final customer. The risk is that the marketing hub pays an artificially low price to the mine—reducing profits in the host country—and sells the product to a third party at market rate. This allows profits to accumulate with the hub, which are typically incorporated in a low-tax jurisdiction. These transactions can represent big losses for resource-rich countries. BHP Billiton is currently in a dispute with the Australian Tax Office (ATO) over a USD 755 million tax bill relating to its use of a marketing hub based in Singapore used to sell commodities to Asia.
How would a tax authority use the toolkit? Let’s assume the authority is planning a general audit of a large mining company. It is deciding whether the issue of a related party loan should be included in the audit. The tax authority uses the toolkit as a basis for reviewing the terms and conditions of the loan. It spots that the loan lacks a fixed repayment period, as well as financial and non-financial conditions. According to the toolkit, the absence of a clear obligation to repay may indicate that the loan is not arm’s length. Consequently, the authority decides that there is a sufficiently high risk of transfer mispricing to warrant an audit.
In addition to the toolkit, which can be downloaded here, tax authorities can now receive training on how to use it. Workshops are currently being developed for the governments of Côte d’Ivoire in October 2017 and Liberia in February 2018.
More information is available on the tax base erosion and profit shifting (BEPS) project page.
Alexandra Readhead is Technical Advisor to the IGF on tax base erosion and profit shifting. She is also the author of the toolkit.