INTERNATIONAL DEVELOPMENTS & TRENDS IN

TRANSFER PRICING

PRESENTED BY

E.D PHIRI & C.S MUTISI

ZIMBABWE REVENUE AUTHORITY (ZIMRA)
INTRODUCTION

A number of African countries have, over the past

decade reformed their income tax systems and
adopted modern income tax legislation with a view
to ensure compatibility with fundamental tax
policy principles of simplicity, equity, neutrality
and consistency with international best practices.
Governments and MNEs have both been putting
pressure from either side to get Transfer Pricing
policies in their favour. Governments, just like any
other Tax law, want to earn more tax (or save
outflow of justified tax) and MNEs want the
flexibility to save taxes.
BACKGROUND

DEFINITION OF TERMS
Transfer Pricing
Transfer pricing is simply the act of pricing of
goods and services or intangibles when the same
is given for use or consumption to a related party
(e.g. Subsidiary)
Transfer Pricing Manipulation
TPM is fixing transfer price on non-market basis
which generally results in saving the total
quantum of organization’s tax by shifting
accounting profits from high tax to low tax
jurisdictions.
BACKGROUND

Multinationals often aim to maximise profits in low tax

jurisdictions

Two possible approaches

 Tax Structuring 
 Price manipulation


Led to introduction of transfer pricing and thin

capitalisation rules
COMPARATIVE EFFECTIVE TAX RATES (FEBRUARY 2010)

  Corporate Tax Rates

National Local Branch
UK 30.00% 0% 30.00%
US 35.00% 0% – 12% 35.00%
Germany 15.00% 14% -17% 15.00%
China 25.00% 3.00% 25.00%
India 30.00% 0% 40.00%
South Africa 28.00% 0% 33.00%
Australia 30.00% 0% 30.00%
Botswana 25.00% 0% 25.00%
Kenya 30.00% 0% 37,5%
Nigeria 30.00% 0% 30.00%
New Zealand 33.00% 0% 33.00%
Mauritius 15.00% 0% 15.00%
Ghana 25.00% 0% 25.00%
Zimbabwe 25.75% 0% 25.75%
TRANSFER PRICING POLICY-WHY IS IT SO
IMPORTANT?
MAIN FOCUS AREAS
RELEVANT SOURCES OF RULES
INTRA-GROUP SERVICES
INTRA-GROUP SALES OF GOODS

• Purchase of goods above or below market-related prices

• Level of functions and risks important
INTRA-GROUP SALES OF GOODS
MANUFACTURING: RELEVANCE OF FUNCTIONS AND
RISKS

Reward R&D
volume
pricing
quality
raw material costs

long term contracts

labour costs
down time
fixed overhead
manufacturing services

risk

Toll Contract Full

Manufacturer Manufacturer Manufacturer

INTRA-GROUP SALES OF GOODS
DISTRIBUTION: RELEVANCE OF FUNCTIONS AND RISKS

volume
market share

Reward product mix

pricing
currency exposure
obsolescence
warranty
credit risk
marketing costs
duties
sales expense
admin & accountancy
risk

Commissionaire Distributor
USE / PURCHASE OF INTELLECTUAL
PROPERTY
Examples:
Production intangibles Marketing intangibles
Know-how Brands and trade names
Systems and procedures Trademarks and logos
Patents Franchises
Software Market intelligence
Copyright, design rights Publishing rights
Technical data Customer lists
Blueprints and plans Goodwill
COMPONENTS TO CONSIDER IN TRANSFER PRICING
TRANSFER PRICING MATTERS TO CONSIDER
MOTIVATIONS FOR TRANSFER PRICING MANIPULATION

•High Customs Duty

•Restriction on Profit Repatriation
•Ownership Restrictions
•Tax Regimes
EFFCECTS OF TPM ON NATIONS

•Loss of Government Tax and Custom Duty revenues

•Distortions in Balance of Payments
•Location of international production and
employment
TRANSFER PRICING CONSEQUENCES

Court cases

Legislation

Transfer Pricing regulations in many countries

Adjustments

Interest and penalties

CHECKING TRANSFER PRICING MANIPULATION
ARM’S LENGTH PRINCIPLE (ALP)

•Transfer pricing: Keeping it at arm’s length

•Transfer pricing can deprive governments of their
fair share of taxes from global corporations and
expose multinationals to possible double taxation.
No country – poor, emerging or wealthy – wants its
tax base to suffer because of transfer pricing. The
arm’s length principle can help.
ALP : CONTINUED

The arm’s length principle requires that transfer

prices charged between related parties are
equivalent to those that would have been charged
between independent parties in the same
circumstances.
ALP: CONTINUED - ARTICLE 9

“If conditions made or imposed between associated

enterprises in their Commercial or financial
relations differ from those which would have been
made between independent enterprises, then
profits that, but for those conditions, would have
accrued to one of the enterprises may be included
in the profits of that enterprise and be taxed’’
ALP: CONTINUED - ARTICLE 9

 Treats associated enterprises as separate entities

and not as simply parts of a unified whole.
 Effect of approach is that associated and
independent enterprises are treated the same.
ALP METHODS

•These are the methods that are used to arrive at

an arms length price where non arms length
transfer pricing exists between related parties.
•The methods used to be followed in their
hierarchical order when determining the
applicable transfer pricing method to be used as
follows:
ALP METHODS - CONTINUED

1. The Comparable Uncontrolled Price Method (CUP)

2. The Cost Plus Method
3. The Resale Price Method
4. Transactional Net Margin Method(TNMM)
5. Profit Split Method
Contribution Analysis
Residual Analysis
TRANSFER PRICING TRENDS - TPM GAINING IMPORTANCE

•Organizations acquiring huge economic power

•Increasing liberalization - establishment of truly
global corporations
•Governments moving away from control of
productive resources
TRANSFER PRICING TRENDS - TPM GAINING IMPORTANCE -
CONTINUED

•Introducing detailed transfer pricing laws

•Tightening existing transfer pricing laws
•Investigating the need for the process of
formulating such laws
TRANSFER PRICING DEVELOPMENTS

Dispute Resolution and Prevention Mechanism

Corresponding Adjustments
Mutual Agreement Procedure
Arbitration
Advance Pricing Agreement
RESOLUTION OF INTERNATIONAL TAX DISPUTES

•Most common are transfer pricing disputes of large

MNEs
•Disputes have increased in number and complexities
and this trend is likely to continue
•Major concern for business since double taxation is
an impediment to cross border trade and
investment
REMEDY
 Domestic administrative appeals
 Domestic judicial appeals ( Courts/ Litigation)
 Mutual Agreement Procedures
KEY PARAMETERS FOR SUCCESSFUL DISPUTE
RESOLUTION

A dispute resolution process requires:

 Transparency
 Timeliness
 Guaranteed Outcome
 An outcome based upon principles
NB: These parameters are essential to maintain the
confidence of the taxpayer.
CORRESPONDING ADJUSTMENTS

Article 9 (2) of the OECD - Relieve (eliminate) double

taxation
Corresponding adjustment “only if the state to whom
request was made considers that the figure of adjusted
profit correctly reflects what the profit would have been
if the transaction had been made at arm’s length”
Transfer pricing adjustment justified in principle & by
amount
Corresponding adjustment to be made by giving tax credit
or by adjustment of the profits of the associated
enterprise
NB: MAP Process – Two Stages
MUTUAL AGREEMENT PROCEDURE

Article 25 of the OECD provides for competent

authorities of two countries to meet and consult
with each other
“…. Endeavour to resolve the case by mutual
agreement … with a view to the avoidance of
taxation which is not in accordance with the
Convention’’ = attempt to resolve double taxation
Competent authorities are not compelled to reach
agreement
Only deals with tax – not penalties or interest
charged (not subject to relief)
MUTUAL AGREEMENT PROCEDURE BENEFITS

1. More uniformity
2. A mechanism to resolve the most contentious
&/or controversial international tax disputes
3. Minimise the number of prolonged disputes at
the map level
4. Minimize time and costs f MAP
5. Consistent with overall goals of a fair, efficient
and competitive tax system
ADVANCE PRICING AGREEMENTS

 Arrangements between a taxpayer and one or

more national tax authorities
Arrangement term is usually between 3 to 5
years
 Can be renewed if no major changes take place
No adjustments or penalties if taxpayer applies
the agreed transfer pricing methodology in
accordance with APA
NB: History of APA
FORMS OF APAs

1. Unilateral APA – Agreement between taxpayer

and one tax administration (on the basis of
domestic rules of procedure)
2. Bilateral APA – At the request of the taxpayer,
tax administration of country A agrees with the
tax administration of country B (on the basis of
international law) – Tax Treaty or OECD
Transfer Pricing Guidelines
MAJOR BENEFITS OF APA

FOR TAXPAYERS:
 Legal certainty (up to 5 years +possible renewal
and planning reliability.
If bilateral or multilateral eliminates of risk of
double taxation
Limits costly and time consuming transfer pricing
examinations in future tax audits
Reduction of MAP/litigation risk
Multiplier effects
MAJOR BENEFITS OF APA

FOR TAX ADMINISTRATION:

Profits are correctly attributed and taxed

Enhanced taxpayer compliance
Better insight into complex transactions and
improved industry and taxpayer knowledge –
development of specialist skills
MAJOR BENEFITS OF APA - CONTINUED

Reduced risk of time consuming MAP/litigation

Less time needed to reach agreement as current
data are available as opposed to prior year data
that may be difficult and time consuming to
produce.
Limits costly and time consuming TP examinations
in future tax audits.
CONCLUSION

•Three principles underlie the international tax

regime:
1.The international equity principle – determining
which jurisdiction has the right to tax,
2.The international neutrality principle – ensuring
that the international tax system does not distort
private decisions, and
3.The taxpayer equity principle – ensuring that
taxpayers are treated fairly by the tax authorities.
CONCLUSION - CONTINUED

•Transfer pricing is inherent in the way the global

economy is structured with sourcing and consuming
destinations being different, with numerous
organizations operating in multiple countries and
most importantly due to varying tax and other laws
in different nations.
• Also nations have to achieve a fine balance
between loss of revenues in the form of outflow of
tax and making their country an attractive
investment destination by giving flexibility in
Transfer Pricing.
CONCLUSION - CONTINUED

•The main obstacle to coordination through

delegation at international level is, of course, the
absence of global institutional structures
•A global agency could calculate the profit of a
multinational company worldwide and then
allocate it to an individual country on the basis of
a formula that reflected the firm’s presence in
that country.
CONCLUSION - CONTINUED

•Countries could have their choice of tax rates and

incentives, but the MNCs’ tax base could be
determined by the global agency, in a transparent
manner, and allocated rationally and effectively.
This agency could be modelled along the lines of
an international criminal court or tribunal with a
clear mandate based on a multilateral treaty.
CONCLUSION - CONTINUED

•Once such a body had established its credibility,

and the advantages were known, countries would
join, and it would have the long-term benefit of
promoting global integration.
• The creation of such an agency may go a long way
to achieving a “level playing field” in international
business and global governance as well as helping
to mitigate the huge administrative cost to both
governments and taxpayers.
CONCLUSION - CONTINUED

•An independent multinational agency for collecting

and sharing information will benefit all tax
administrations, and its establishment should be
considered in an appropriate forum.
CONCLUSION - CONTINUED

THANK YOU FOR YOUR

ATTENTION

THE END