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Developing countries lose $160b yearly through transfer pricing as Ghana loses $36m in mining sector

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Mining4Developing countries are said to be losing about $160 billion every year to the practice known as transfer pricing.

The Minister of Finance, Dr. Kwabena Duffuor who said this during the 2012 Ghana Budget presentation to parliament revealed that Ghana loses $36 million through transfer pricing in the mining industry alone. Figures for other sectors are not available.

Meanwhile, tax expert, Ali Nakyea says transfer pricing is not an offence – but it is “transfer pricing manipulation which is,” he told ghanabusinessnews.com in an exclusive interview.

According to Mr. Nakyea, group of companies use transfer pricing to evaluate the performance of their divisions and sub-divisions. “For example, a car manufacturing plant has divisions that make different parts of a car. There are companies that make the bodies, others make the engines and some make the tyres. The price at which the tyre maker will transfer to the one doing assembling is what is called transfer pricing.” He adds that the company adds a margin to the price to make some profit .

He said transfer pricing is used by companies that belong to the same group to determine which of the divisions are doing well.

“It is what companies use to determine which divisions should be closed down or which ones should be put together,” he said.

Mr. Nakyea emphasised that the issue of concern to tax authorities is not transfer pricing, but its manipulation.

He said manipulation happens when a company within a group does what is known as ‘loading on’.

“When the tyre manufacturing division of the group sells to the assembling division above the going market price. For example, we know that the price on the open market of tyres is GH¢300 that is cost plus profit, but you sell it at GH¢500. That is loading on,” he said.

According to Mr. Nakyea, what encourages some companies to manipulate the system is when the companies operate in areas with different tax thresholds. The subsidiary in the jurisdiction with a higher tax threshold, would sell at higher than going market prices to the one in lower tax jurisdictions and in that way they pay less tax in that jurisdiction.

According to him, if the tax rate is fixed at 25% in one country and it is 15% in another, the company operating in the country with a 25% tax rate would transfer all the profits to the company in the country with a 15% tax rate and make an extra 10% from the profits.

He was of the view that where there are differences in tax regimes within a region, like the ECOWAS sub-region, it is good grounds for transfer pricing to occur, adding that it is for that reason that there have been calls for harmonisation of the tax regimes within the region.

However, he indicated, “harmonisation is not necessarily looking at the equalization of the tax rates. Because whatever is making it profitable for somebody  to engage in transfer pricing manipulation, if some way can be found to attach a tax to that activity, then he will stop doing that.”

He called for capacity building for tax audit staff as well as increasing the number of tax auditors by the Ghana Revenue Authority to address the situation in Ghana.

By Emmanuel K. Dogbevi

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