Transfer Pricing Transgression Erodes Africa’s Tax Revenue

African countries are losing revenue needed for development because multinational companies are not getting their transfer prices right, says Nishana Gosai, Manager of the Transfer Pricing Unit of the South African Revenue Service (SARS). She acknowledged most organizations are stepping up transfer pricing as a relevant area of taxation, but there are inadequate infrastructure, expertise and legislation to deal with the issue in most African countries. Though there have not been formal studies on how much is lost through transfer pricing practices of multinational enterprises, the mining and extractive industries are high focused areas. Christian Aid however estimates that about 60 percent of total capital flight from developing countries is a result of transfer pricing. “It is a common perception that multinationals are driven to manipulate their transfer prices to avoid paying tax or to move profits from a high tax jurisdiction to a low tax jurisdiction,” noted Gosai. A transfer price is the price at which goods or services are sold between divisions of a company, or between companies in the same group. Gosai observed that developing countries suffer most from the fallout of transfer pricing, because transgression is difficult to track and analyze. According to her, countries in Africa need to first muster the political will to take transfer pricing issues on board all governance matters in order to save the local economies from revenue loss. “If we’ve identified that transfer pricing is one such mechanizing that is possibly depleting the tax base in Africa, we should do everything we can to make sure that gab is closed,” Gosai told a group of African journalists on a Thomson Reuters Foundation training in South Africa. Some international organizations, like the Organization for Economic Cooperation and Development (OECD), are helping developing countries to build capacity and capabilities in transfer pricing. Perceived instability of African economies, weak exchange control regulations and cultural preference to pay transfer pricing in countries of parent companies are some reason for transgression. Presently, the OECD Transfer Pricing Guidelines serves as the bases of application to audit companies. Nishana Gosai said multinational companies should to be encouraged to voluntarily disclose and comply with transfer pricing.