Tax Inspectors Without Borders: Practical Solutions for Transfer Pricing Inspections in Developing Countries

Author: Edland Graci

The Organization for Economic Co-operation and Development (OECD) is attacking Base Erosion and Profit Shifting (BEPS) by any means, especially with the help of the most relevant Global economies such as the G20 to support its efforts.

One of the most typical methods used by multinational enterprises (MNEs) in their aggressive tax planning is an inappropriate transfer pricing policy. This means that MNEs could shift their profits to jurisdictions with a lower tax rate (and which usually lack transparency) by taking advantage of their size and by setting a lower remuneration to their subsidiaries located in high tax rate jurisdictions.

In order to counter this situation, OECD published a package of Action Plans, being Action 13 the most important one from the point of view of transfer pricing compliance.

Under Action 13, MNEs will have to disclose the most relevant information regarding their subsidiaries located worldwide, such as their tax jurisdiction, revenues, tax rates, EBIT, intellectual properties, number of employees, etc. This information would furnish tax authorities with a better knowledge of the group and its value chain. 

On the other hand, practice has shown that MNEs also benefit from the lack of experience of tax authorities from developing countries with regard to transfer pricing, which allows them to easily erode their taxable base or to shift their benefits to other jurisdictions.

However, it seems that the OECD has found the solution to this problem by creating Tax Inspectors Without Borders (TIWB). This body would facilitate inspections in developing countries by appointing international experts in transfer pricing, thin capitalization, advance pricing agreements, anti-avoidance rules, among others. 

According to its webpage: “The objective of the TIWB Initiative is to enable sharing of tax audit knowledge and skills with tax administrations in developing countries through a targeted, real time "learning by doing" approach”.

So far, this body has finished 3 inspections: one in Albania and two in Senegal. In both countries the inspections were related to transfer pricing. In case of Albania, an adjustment of 7% of the EBIT of an MNE’s subsidiary was imposed; whereas in Senegal the two tax audits have terminated resulting in additional tax revenue and penalties of USD 12.3 million in favor of the local administration.

Additionally, there are 15 ongoing tax audits and 7 more are planned for 2017. 

It appears that, OECD will continue this useful and practical solution to help developing countries to stay in line with the international movements against aggressive tax practices.

On the other hand, an assumption should not be made that transfer pricing planning is in and of itself illegal or necessarily abusive. Therefore, MNEs located in developing countries facing these kinds of inspections should respond in the same manner as would their counterparts in developed countries: placing their defense in the hands of international transfer pricing specialists.