Notes from the Rapporteur on the seminar on taxing transnational companies in Dar es Salaam, Tanzania, 3-4 October 2013

Transfer pricing: Fairness in taxing multinationals and extractive industries

Dar es Salaam, 3-4 October 2013

TJN has just held a seminar on transfer pricing in Dar es Salaam, Tanzania.  The seminar programme is available here.

Click on the links in the headlines below to see the presentations themselves. See also our transfer pricing page.

This event followed on from an international conference we organised in conjunction with our partners at the Government of Finland and the development NGO Kepa in Helsinki last year.  More information about last year's event is available here.

The seminar attracted government officials, officials from inter-governmental agencies, practitioners, researchers, activists and others from many countries.

The following summary notes from the seminar have been prepared by the rapporteur, Adrienne Margolis.  

Case study onAssociated British Foods subsidiary, Zambian Sugar

Pamela Chisanga, country director, Action Aid, Zambia

One third of the Zambia Sugar’s pre-tax profits are paid out of Zambia. This is done through:

·         Mystery management: US $2.6 million is paid for services each year to Ireland, but there is no physical presence

·         Treaty shopping: taking advantage of unfair tax treaties

·         Tax-free takeaway: reshuffling ownership, using treaty loopholes and tax haven regimes

The law does not require companies to keep or produce evidence of transactions. There are difficulties in information exchange with other countries

“A major challenge . . . is to try and come up with new ways to deal with these problems.” Pamela Chisanga

View from Tanzanian Parliament Accounts Committee

Hon. Tundu Lissu, MP

In 1996 a Canadian company said that the Tanzanian government would receive US $100 million in taxes annually in return for starting up a goldmine. Artisan miners were violently dispersed. Over the 12 years since then the companies paid one 10th of what it promised. This is unfair to host communities whose lives and livelihoods have been destroyed.

“Companies in the extractive industries are not very good corporate citizens. But this is a sideshow. The real show is the laws that have allowed them to get away with murder.”  Tundu Lissu, M.P.

South African Transfer pricing system

Gerdi Van Der Westhuysen, South African Revenue Service

Transfer pricing in South Africa is wide in scope. It precludes downward adjustments. There are no specific transfer pricing rules for extractive companies. Taxpayers are using offshore marketing companies in tax havens and low tax jurisdictions.  One of our investigations showed that in 10 years, 10 billion rand worth of profits were channeled through this arrangement.

“It is very important to seek to understand the business model for accounting in the value chain and to seek to understand the industry.”  Gerdi Van Der Westhuysen

Practical nature of South African transfer pricing system

Thembinkosi Dlamini, governance manager, Oxfam South Africa

With the advent of democracy in South Africa in 1994 the country faced a number of constraints on development. It has weak and economic growth which has revealed a tax system not fit for purpose. Transfer pricing and illicit financial flows are contributing to rising income inequality. Improving transparency and mandatory reporting of payments are priorities. Policy and legislative certainty are needed.

“Citizens should be part of the process of deciding the mobilisation and use of domestic and resources.” Thembinkosi Dlamini

Brazilian transfer pricing system

Marcos Valadao, Brazilian Ministry of Finance

The transfer pricing law was enacted in 1996. In 2012 a law was introduced with different fixed margins the different economic sectors. There were also simplified rules for commodities. This removes the distortion of competition in the country as companies are subject to the same tax burden. It is easy to implement and low cost.

“Due to its simplicity and practicality this is a feasible alternative for developing countries to deal with the important issue of transfer pricing”.  Marcos Valadao

Practical nature of the Brazilian transfer pricing

Dao Real Pereira dos Santos, director of institutional relations, Instituto Justica Fiscal

As long ago as 2000 a parliamentary investigation found pharmaceutical companies were overpricing inputs by up to 5,000%. The problem is not new. Tax havens are the real problem. Since 2010 Brazil has drawn up a list of 65 jurisdictions with no or low taxes and /or no transparency. Taxpayers are now required to declare transactions with related parties or residents in tax havens.

“A big problem is to define what is legal and illegal. When a company does not have the capacity to operate it is difficult to determine if it is fraudulent.”  Dao Real Pereira dos Santos

Base erosion and profit shifting: OECD approach
Lee Corrick, senior adviser, OECD 

A report was published this year by the OECD on base erosion and profit shifting. This was followed in July by the publication of the BEPS Action Plan which was welcomed by G20 leaders. If governments are not happy with the current international tax rules the plan will provide recommendations to change the rules. The actions set out in the plan will be finalised by December 2015. Input is being gathered from a range of stakeholders including developing countries.
The OECD also has a tax and development programme that includes the Tax Inspectors Without Borders (TIWB) initiative. Tax experts from a country will be directly deployed to work with local tax officials of a developing country on current audits and audit related issues concerning international tax matters and to share general audit practices. In some cases this will require funding from donors to meet the costs of the deployment.
"Under the Tax and Development program there is the Tax Inspectors Without Borders initiative. Some countries may not be able to meet costs of deploying foreign tax experts in their country and we will be seeking assistance from donors in such cases”.  Lee Corrick

OECD action plan: actions and alternatives

Prof Sol Picciotto, senior adviser, TJN

This is not the first time this issue has been addressed. In 1998 the OECD published a report on harmful tax competition. It has taken 20 years to get to where they are now. This new project is ambitious and requires a long time scale. Civil society groups need to contact the OECD if they want to be involved. The OECD approach is limited - we need to move towards unitary tax.

“The central problem is that intangibles are seen as discrete but they are organic. Developments like the digital economy mean that it needs a complete rethink.”  Sol Picciotto

Country by country reporting with a combined report in the extractive industries

Krishen Mehta, senior global justice fellow,Yale University

Success stories like Norway, Chile, and Botswana have things in common. They include transparency, creating a stable revenue base, investing in education, social programs, infrastructure and setting aside reserves the future. Transparency and accountability can be best achieved through country by country reporting leading to a unitary taxation approach. There are 10 reasons why this is a good roadmap.

“Adoption of country by country reporting is the only way to move from voluntary to mandatory transparency and the only way to translate transparency into accountability.”  Krishen Mehta

 

Country by country reporting in Kenya

Ane Foged, TJN Africa

Should Kenya adopt it, and if so, how? Revenue authorities, accountants, corporations and tax experts interviewed concluded Kenya is capable of using country by country reporting and it would simplify the system. International adoption would help because global problems need global solutions.

The head of audit at the Kenyan revenue authority said:  “We know what we want, we know what we are looking for and how to use it but we do not know how to get it.”

Transparency in extractives

Collins Magalasi, executive director, Afrodad

Africa is number one in the world for many metals and minerals. The continent is rich and citizens have a right to know how governments are selling their resources. Conflicts start because people feel bypassed. Multinational companies and governments benefit so they do not want transparency. The African Mining Vision is very important – so is the high-level panel on illegal financial flows chaired by Tabo Mbeki.

 “There must be an international regulator because the OECD is not all of us.”  Collins Magalasi

Project by project reporting in Tanzania

Silas Olan’g, Revenue Watch Institute, Tanzania

Tanzania is the most mineral rich country in Africa. Around 50% of exports are from the extractives sector, but in 2012 it accounted for only 4% of government revenue. It is location specific and returns vary between locations. Aggregation delays tax revenue to the government.

“Project by project reporting helps citizens to follow the money.”  Silas Olan'g

Dominican Republic system of extractive industry taxation

Wanda Montero, Dominican Republic Internal Revenue Authority

The tax regime was based on contracts dating back to the 1960s. It meant that the country was losing lots of revenue. The mining code was also old. Recently, in the case of one gold mining company, people felt the contract was unfair. They demanded that the government renegotiate the contract. Also, there was no minimum tax legislation. The company was told to renegotiate or leave. The company renegotiated – it wanted legal certainty. Now there is an assured minimum tax in place for the life of the mine even if they engage in transfer pricing.

“Good governance requires that contracts be re-negotiated as and when circumstances change. Reality has changed a lot from 1960 to now.”  Wanda Montero

  

Transfer pricing in North Africa

Slim Gargouri, chartered accountant and tax journalist

Slim provided a comprehensive guide to transfer pricing in Egypt, Algeria Tunisia, Morocco and Libya. Details are provided in the hyperlink

Tanzania case studies

Hon. Zitto Kabwe, MP

Developing countries are ripped off by extractive companies’ hedging. Thin capitalisation allows companies to use loans to finance setting up other mines. This has led to huge revenue losses to Tanzania. The 2012 Finance Act has strengthened the rules to reduce abuse through tax deductibles. There are lots of abuses in the telecoms sector because it is fast-growing. But it is generating very little tax revenue and shell companies are used when telecoms companies are sold on. The law needs to be strengthened to ensure export levies are paid.

“The government has the people who know these things and they are using taxpayer’s money. Not all MPs are tax experts but some would like to see changes.”  Hon. Zitto Kabwe

Transfer pricing in Tanzania

Charles Bajungu, Tanzania Revenue Authority

It is crystal clear that multinational companies will always seek higher profitability and reduce their tax liability legally or illegally. We don't know how much money we are being deprived of. We face common challenges.

“We are interested to know how Mauritius can rank third in Africa for foreign direct investment. This is of great concern to the Revenue Authority.”  Charles Bajungu

Rwanda transfer pricing case study

Dr Attiya Waris, senior lecturer, Law School, University of Nairobi

In Rwanda the Constitution comes first. This is not the situation in most countries. The country used a Dfid (UK Dept of International Development) funded process to put its international tax regime in place. This means they never interrogated their legislation. The amendments are now being put in place. In revenue authorities lawyers are not often trained in transfer pricing.

When Rwanda tried to change transfer pricing rules it got stuck. Changes were needed before the rules could be enacted.

Almost everyone thinks unitary tax is the best way forward.

“What I found was more like a donor led to procedure. We must allow each country to have a smorgasbord of what ever they want. The problem is that they only know the OECD model and not the UN model or other alternatives.”  Attiya Waris

 

Ugandan transfer pricing case study

Milly Isingoma, Uganda Revenue Authority

In July 2011 transfer pricing regulations came into effect. With support from the global transparency movement we are putting frameworks in place for extractives. We need to analyse the complexity of the industry that we're being asked to tax. We need effective dispute resolution and new ways to allocate profits to low tax jurisdictions.

“This is not about unitary tax, BEP's etc. We just want something that is efficient for us and can help us collect revenue for our country.”  Milly Isingoma

Unitary taxation option for the region

Erika Dayle Siu, International Centre for Tax and Development

Unitary tax better reflects the modern corporation. It reflects the whole, rather than the legal parts. You first need to harmonise the tax base. You also need to consolidate cross border.

“Within the East African community, the background is there and the community is there. Actions need to be presented in a way that leaders and countries feel appropriate.”  Erika Siu

Base erosion, transfer pricing and developing countries

Michael Durst, senior adviser, Tax Justice Network

 ·      It is very clear that large amounts of tax are avoided all over the world

·         Because developing countries have a large informal sector, a large proportion of the tax base comes from the corporate sector

·        One of the great achievements of the OECD report was to highlight that dealing with transfer pricing is not enough.

·         What would the greatest political barrier be taking steps?

 “The world is closer to solving these problems from a technical standpoint than it is politically.”  Michael Durst

Practical options for transfer pricing, Ghana

Joyce Rita Addae Kumi, Ghana Revenue Service

Any attempt to plug loopholes to prevent tax avoidance is met with cries from transnational companies that it will lead to job cuts. Ghana's attempt at introducing a windfall profit tax in mining has met with this response. In 2000 a new tax law dealt with tax avoidance schemes. In 2012 new transfer pricing regulation was introduced.

 “I believe these measures combined with vibrant tax administration will ensure that multinational enterprises satisfy the legitimate tax obligations.”  Joyce Kumi

ATAF perspective

Lincoln Marais, director, institutional development, ATAF

·         Lack of proper transfer pricing legislation or lack of any legislation is a problem.  There is an adequate human capacity to deal with it.   Taxpayers are unaware of the full scope of transfer pricing arrangements.

·         It is not clear that the arm's-length principle is understood.  Feedback from members and partners is that we need to develop legislation, capability and engagement with taxpayers.

 “One of the things we're trying to setup is a community of practice so that officials dealing with transfer pricing can share information and approaches to cases.”  Lincoln Marais

Update: for more information on corporate tax, see here.