draining development.pdf - Khazar University

256 Draining Development?Box 8.4. Zambia: Tax Collection in the Copper SectorA recent boom in the copper sector in Zambia resulted in a substantial increase in copper exports,but only minimal increases in tax revenue: mining royalties received by the Zambian governmentin 2006 represented only 0.6 percent of sales. As identified by advocacy group Southern AfricaResource Watch, the culprits were the fiscal terms in agreements signed by the government duringthe slump experienced in the copper sector in the late 1990s. Faced with falling levels ofinvestment, a collapsing state-owned mining conglomerate, and low global prices, the governmentagreed to renegotiate the original contracts and include sector-specific incentives designedto make mining investments more attractive (Horman 2010).As a result, the new mining tax regime proposes to raise tax rates, reduce incentives, andrequire that transfer prices be based on the price of copper quoted at the London Metal Exchangeor the Shanghai Stock Exchange.For purposes of transfer pricing, the commodity nature of unprocessed copper (as exportedby Zambia) makes the use of market-quoted prices the undisputed choice for a transfer pricingmethodology (possibly with an adjustment for differential transportation costs). In other words,the simple adoption of the ALP would bring about the desired result with relatively little need forupfront capacity building (market quotes are widely available) and would also avoid an ad hocsector-specific approach to the problem.enforcement areas where they are most needed. 33 At the same time, theenhanced opportunities for international cooperation and access to awider set of knowledge resources will tend to strengthen efforts at capacitybuilding.Consistent with these priorities, OECD has focused its tax evasionwork on the widespread adoption of the OECD transparency andexchange of information standard. In the circumstances, the number oftax information exchange agreements, a key platform of this approach,doubled to over 80 during the first six months of 2009. This should makeit easier for tax authorities to share information and cooperate on casesof tax evasion, and it may even lead to the increased use of simultaneousexaminations (by different tax authorities of the same taxpayers). 34ConclusionIn discussing the role of transfer pricing in illicit financial flows in developingcountries, we start with a review of the current OECD-supportedsystem based on the ALP, and we examine the differences between taxavoidance and tax evasion. Although an elegant and simple concept as atheoretical construct, the ALP becomes a fact-intensive and judgment-