draining development.pdf - Khazar University

Accounting for the Missing Billions 287were to be charged was thus capable of discretionary determination bythe company liable to make the payment of the taxes due. In addition, allthe agreements include fiscal stability clauses, and most specify that thebasis of the pricing of gold (even though unspecified) should not beunilaterally changed, presumably by the government of Tanzania. Forthis reason, recent changes to Tanzanian law introducing transfer pricingregulation are likely to have little or no impact in this critical Tanzanianexport sector.The problem has also been found within the Extractive IndustriesTransparency Initiative. In a review of the first audit of the initiative inGhana, Murphy (2007, 10) notes that the audit objective to “ascertainthe appropriateness of payments made with regards to mineral royalties;ground rent; dividends; taxation on profits and for mineral rights” hadnot, in the opinion of the reviewer, been fulfilled, largely because of theuse of indeterminate prices unrelated to verifiable benchmarks and theuse of apparently uncorroborated exchange rates for valuing goldexports, both clear indications that proper transfer pricing controls werenot in operation.The evidence appears to be telling: there is a pattern of transfer pricingabuse or at least the risk of such abuse in developing countries. Theevidence from mineral development agreements implies there is nochange in the prospects in this area even if legislation to introduce arm’slengthpricing rules is enacted because companies in the extractiveindustries are almost entirely immune to legislative changes affecting theway in which their tax liabilities are computed for periods of up to 30years after signing mineral development agreements.It is also important to note another key feature emphasized by thiswork: the transfer pricing abuse in these cases is highly unlikely to bemotivated by taxes on corporate profits alone. The abuse is likely toextend to royalties, sales and purchase taxes, dividends, abuse of profitsharingagreements, and more. The incentives to abuse are high, indeed;the consequences of not tackling the issue are considerable; and theprospects for tackling the abuse within current legislative and contractualconstraints are not good.Even if arm’s-length transfer pricing rules do exist in developingcountries, there appear to be almost insurmountable problems in enforcingthem. As one of the rare cases of suggested transfer pricing abuse