Africa to lead against abusive transfer pricing with new risk assessment tool
Africa is to lead the way in combating abusive transfer pricing, with a new transfer pricing risk assessment tool, which is projected to reduce the $50 billion in illicit financial outflows, transfer pricing specifically, down by 30 per cent to $34 billion.
Hogan Lovells, an international law firm, says it has developed a prototype of the transfer pricing risk assessment tool, the first in Africa and the world, to help governments and tax administration authorities identify multinationals that could be abusing transfer pricing and shifting profits in various industries such as mining, chemicals, finance and pharmaceuticals.
The risk assessment tool, as demonstrated by a consultant of Hogan Lovells at a subregional workshop in Accra on curbing illicit financial flows, would allow manual input of data on various transactions by companies, while incorporating databases used by tax administration authorities and multinational corporations into its computations.
Beyond identifying tax offenders, the software can assess the feasibility of tax recovery by factoring the taxes evaded against time and other available resources to be used in recovery, to determine whether recovery would be worthwhile.
The firm says it is interested in piloting the software which will be customized according to the specific needs of countries, with interested governments.
Thulani Shongwe, Head of Multilateral Cooperation at the African Tax Administration Forum (ATAF) said gains have been made by Africa by way of changes to the OECD (Organisation for Economic Cooperation and Development) Transfer Pricing Guidelines employed in countries with no transfer pricing legislation of their own.
While Africa is party to regional and global commitments to curb illicit financial flows, Africa is a source of huge illicit financial flows which has cost the continent $1 trillion since the 1970s.
Transfer pricing is believed to be a significant component of the illicit financial flows out of Africa.
It is basically the artificial pricing of trade between subsidiaries of multinational companies or allied companies, to deceive tax authorities and move profits to tax havens.
According to Washington-based Global Financial Integrity, illicit financial flows out of Africa between 2003 and 2012, amounted to about $528.9 billion, outweighing financing in Official Development Assistance (ODA) to the continent within the period – about $348.2 billion.
Meanwhile, paragraphs 23 – 27 of the Addis Ababa Action Plan aim at redoubling efforts at reducing illicit financial and arms flows, by 2030 and strengthening the recovery and return of stolen items. Goal 16.4 of the Sustainable Development Goals is also to significantly reduce illicit financial flows by the year 2030.
By Emmanuel Odonkor
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