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Study on Transfer Pricing and Developing countries

Jose Correia Nunes, Head of Unit, DG for Development and Cooperation - EuropeAid Barbara Grenko, Policy Officer, DG for Taxation and Customs Union

12 September 2011

ITC Workshop : How to Operationalize the International Tax and Development Agenda

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OUTLINE

•  Background

•  Objective

•  Scope

•  ITC role

•  TP reform

•  Preconditions for TP reform

•  Recommendations

•  Follow up

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Background

•  April 2010 Commission Communication on Tax and Development:   Need to strengthen assessment capacities in tax

administrations of developing countries.   Encourage research on innovative approaches to the

implementation of the OECD transfer pricing [TP] guidelines and the application of the arm's length principles by developing countries.

•  Millennium Development Goals: increase in domestic revenues [adaptation of TP legislation based on OECD Guidelines]

•  Challenge: knowledge and expertise gap •  Strong support from the EP [Resolution of 8 March 2011

and the financial support for good governance in the tax area]

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Objective Main purpose of the Study:

  Present the possibilities and recommendations on suitable approaches in adoption/implementation of TP rules in developing countries [DCs]

  Assess the existence and fulfilment of the preconditions [economic, legal, tax] for effective establishment of TP expertise and what measures should DCs take to introduce proper or appropriate TP rules

  Identify likely challenges and benefits DCs could expect given the information, expertise and human resource gaps in TP

  Identify the best form of assistance [i.e. financial, technical, people, training and/or other] and how could donors’ support be made more effective and efficient given the main specificities of DCs

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Scope

•  Four countries were selected to be considered in-depth:

  Kenya [TP legislation since 2006]   Vietnam [TP Circulars since 2001]   Honduras [at the verge of adopting TP legislation]   Ghana [no TP legislation]

•  Country studies cover:   Tax environment and perspectives of MNE tax treatment in the

respective country   Overview of the current TP legislation and audit practices   Experiences with TP reform processes: legal reforms and capacity

development   Appropriateness of and actions needed to introduce TP legislation   Country-specific recommendations for future donor support in the area

of TP

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ITC role •  Events organised jointly by the ITC and the EC:

  24 February Inception report presentation   3 May Country studies presentation   5 July Final report presentation

•  Draft reports were presented at these events to a large number of stakeholders [international donors and organisations, government officials, civil society organisations, think-tanks and respective developing countries] and suggestions from these meetings were largely taken on board by the consultants.

•  This process enabled to: [a] ensure that the elaboration process was followed up by interested

stakeholders who are working in area of TP, [b] benefit from their input, and [c] ensure a well balanced study based on shared TP knowledge

available in the international community.

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Why TP reform?

•  2/3 of all business transactions worldwide take place within a group

•  DCs are opening up to foreign direct investment [about 1/5 of GDP in the four pilot countries]

•  Potential increase in tax revenue > anticipated costs of TP reforms

•  Necessary legal framework to enforce TP

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Preconditions for TP reform

•  Economic and political preconditions

•  Legal preconditions

  Comprehensive accounting rules   Comprehensive income tax law   Existing network of tax treaties [to provide a legal mechanism to question double taxation and set exchange of information]

•  Tax administration

  Staff capacities   Tools for exchange of information within the tax administration   Information technology

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Recommendations

Recommendations for future donor support Universal recommendations

  Planning of TP reform processes should take ongoing initiatives of donor support into consideration

  Donor support should be tailored to individual needs of different countries

  However, all developing countries could welcome assistance in four specific areas:

1. Broadening of treaty networks and gaining practice in application 2. Identification and pooling of local comparables 3. Building TP expertise, HR policy and adequate control mechanisms 4. Developing risk-based audit procedures

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Recommendations (1) Broadening of treaty networks and gaining

practice in application

•  Development of DTAs network to foster local investment climate

•  Creation of appropriate domestic framework for exchange of information

•  Assistance in negotiating treaties

•  Encouragement to join international structures and processes [e.g. Global Forum]

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Recommendations (2) Identification and pooling of

local comparables

•  Ensuring the implementation of TP provisions and tackling the lack of local comparables

•  Developing data bases that contain information on comparables on a local or pan-regional level

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Recommendations (3) Building TP expertise, HR policy and

adequate control mechanisms

•  Setting up TP unit/team

•  Tailoring strategic HR policies to attract and maintain core staff

•  Implementation of revenue targets

•  Developing and implementing suitable internal policies [compliance checks, quality reviews, learning programmes, etc.]

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Recommendations (4) Developing risk-based audit procedures

•  Shaping audit strategies

•  Mapping of local economy and industry sectors to facilitate risk-based selection procedures

•  Taxpayers’ features: size, structure, complexity of the business, transparency

•  Other risk-based selection criteria [transactions with so called « tax havens » and low tax jurisdictions]

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Follow up

•  This Study will be used to shape support in assisting DCs in the adoption and implementation of TP legislation in order to enhance domestic resources mobilization in line with the principles of good governance in the tax area and help DCs to:

  Increase their domestic tax collection by processing tax information better and ensuring tax compliance for all economic actors, in line with international standards

  Attract additional investments by multinational companies by providing a tax system based on international standards

•  OECD/EC/WB initiative on TP - collaborative project to enhance the transfer pricing capabilities of developing countries

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The Study is available at the European Commission website.

  http://ec.europa.eu/taxation_customs/common/publications/studies/index_en.htm

  http://ec.europa.eu/europeaid/what/economic-support/taxation/index_en.htm

Thank you for your attention.

Q & As