Every year, the Economic Community of West African States (ECOWAS) loses billions of US dollars because some subsidiaries of multinational corporations based in the region pay less tax than they should.
This lost tax revenue from Nigeria's crude oil exports or Liberia's timber sales, for example, represents a crucial but missing source for development financing to meet the region's economic growth targets and human development goals.
Transfer Pricing By The Numbers
A recent study by Dalberg, commissioned by the Open Society Initiative for West Africa, estimates that West African states lost roughly US $3 billion in tax revenues in 2011 due to transfer mispricing. Dalberg projects these losses will reach US $14 billion in 2018 if current trends continue.
So what exactly is transfer mispricing? About 60 percent of trade between West African states and the rest of the world occurs within branches or subsidiaries of the same single corporation.
In such transactions, some multinational corporations can artificially lower or increase their prices in order to shift taxable profits from West African states to another country with lower tax rates, enabling them to hold on to a larger portion of their profits.
Most concerning is how transfer mispricing deprives West Africa from badly needed domestic resources that could be put toward potentially transformative social and economic projects.
For instance, if measures had been taken to effectively curb transfer mispricing, West African states would have collected an additional US $15 billion between 2012 and 2014. These funds are more than enough to cover the US $11.3 billion financing gap outlined in the ECOWAS Regional Poverty Reduction Strategy Paper, which aims to ensure poverty eradication in the region.
Addressing Transfer Mispricing in Context
Each West African state is in a different stage of addressing transfer mispricing within their respective tax regulations. Countries like Niger, Togo, Guinea-Bissau, and Cape Verde do not yet have transfer pricing regulations at all, while others have some form of transfer pricing policy with different levels of sophistication and enforcement.
Our study recommends harmonizing transfer pricing policies to avoid the risk of undermining the effectiveness of measures put in place by individual countries.
As illustrated below, a multinational corporation with subsidiaries in various West African countries can use a subsidiary based in a country with absent or weak transfer pricing rules, like Niger or Togo. In doing so, these corporations indirectly avoid paying taxes or bearing compliance costs imposed by countries with transfer pricing policies, taking advantage of existing regulations that promote trade and investment within the region.
It is also worth noting that all West African states have common requirements for building the institutional capacities of tax administrations to effectively address transfer mispricing.
Beyond adopting new tax legislation, these states need new processes and procedures backed up with information systems and market intelligence, as well as the technical assistance to introduce them. It is also crucial for each state to have access to tax information exchange platforms that provide information automatically or on request relating to specific tax matters.
Another necessary resource is formal training in audit and investigation techniques. Unfortunately, these requirements are often missing or limited even in countries with the most progressive transfer pricing policies like Nigeria and Ghana.
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Pooling Regional Efforts and Resources Will Help
We believe pooling regional efforts and resources to achieve the above aims is crucial. For example, the ECOWAS Commission could create an advisory body that would bring together representatives of tax administrators, accounting and tax advisors, and multinational corporations. In this way, all parties would have a platform for consultation, experience sharing, and discussion on transfer pricing issues to build the capacity of tax administration across West Africa.
With regulation frameworks and policies tailored to the West Africa context, we can ensure that domestic resources are fully harnessed to address the pressing economic and social problems these nations face.
Follow Modou on Twitter @ModouNdoyeFall1
