Essel Mills writes: Transfer pricing what we need to know

    /    Jul 20, 2017   /     Business, NewsBreak  /    Comments are closed  /    321 Views

The theme above has become one of the most nagging subject and has attracted an extra-ordinary attention from the academia, business professionals and policy makers alike as far as developing countries are concern and most specifically, the sub-Saharan region of the Africa continent.

Since the beginning of the 1990, most countries as defined above committed their policy initiatives to attract businesses both within and outside their sovereign borders to invest in their economies to create jobs, reduce employment and to ensure sustained economic growth.

Ghana for that reason, introduced the free Zone Act 1995; Act 505, Amended the G.E.P. Act 1969, N.L.C.D. Act 396 to bring birth to the Ghana Export Promotion Authority Act, Act 562 in 1998 and finally, the G.I.P.C. Act, Act 865 of 2013.

Briefly, the focus of all these exercises as outlined above was to open the country’s economy to the emerging and the new global economic integration.

As a result, several multinational enterprises responded positively and took advantage of those conducive environments through absolute acquisitions, joint ventures, subsidiaries etc.

According to the World Bank, the total value of Ghana’s economy in the 1990 was US$ whilst the C.I.A. estimated the total value of the economy by the end of 2016 to be US$ 42.73bn.

It is instructive to note that, the economy has seen over 320% growth.

This spectacular performance could not have been achieved without the contributions of the multinational enterprises.

Nevertheless, Ghana (and other host countries) is/are exposed to the complex nature of the multinational enterprises for a simple fact that, they normally rely on their sister enterprises in overseas for services, leasing, product exports and imports and as a result, control or manipulate trans-national pricing or price transfer to avoid paying the required tax to the host countries.

Transfer Pricing is an illegitimate price-setting for inter or intra firm transaction above or below the level of what the independent market determines in order to repatriate revenue.

Those MNE’s who are involve either use a mechanism called over or under invoicing to achieve their dishonest objectives.

Relative to the over-invoicing, an MNE that operates in country “A” and has affiliates in country “B” will procure services or products at an exorbitant cost.

By so doing, it affects the operational cost of the MNE in country “A”, bloats cost of revenue on financial statement and subsequently reduces profit before tax.

On the aspect of the under invoicing, MNE’s operating in country “A” and exports an “n” units of products to a different country for onward selling, will intentionally use a very low per unit price to reduce total expected revenue.

Most countries including Ghana operates revenue repatriation quota.

In Ghana, businesses that are operating in the free zone enclave are to return about 80% of their sales back into the country.

However, firms result to this practice to avoid the required threshold (be mindful, 80% of US$ 7m is different from 80% of US$ 4m) to deny the country of the most needed foreign currency.

Classical examples of these nefarious activities are as reported in 2013 by the Global Financial Integrity and Africa Development Bank that, between 1980 and 2009, Africa economies lost about US$ 1.4 trillion in net resources transferred away from the continent averaging US$ 48.5bn annually.

On the contrary, the World Bank is said to have “allocated” US$ 61 bn to over 77 developing countries in the 2016 financial year.

In dealing with these nefarious activities by MNE’s, Ghana and Nigeria have resulted to the arm’s length principle to deal with its occurrence.

The key principle of transfer pricing is based on the arm’s length rule, which means that pricing term between related firms or companies in the exchange of goods and services should realize same result as if they are unrelated.

Furthermore, related companies must act as if they are unrelated. The purpose of this requirement is to ensure that profit, which should be liable to domestic tax, does not become a gain to another country to which profit is shifted.

In Ghana, through Transfer Pricing Regulation 2012 (L.I.2188) empowers the Commissioner General to punish any organisation that engages in those activities.

The commissioner general is empowered to do desktop or on site auditing to cross check companies transactions yet, according to transparency international, the country hardly implement that.

Tax on transaction between related companies is provided in Nigerian tax laws elucidated in section 13 (2) (d) Companies Income Tax Act (CITA) laws of the federation 2004.

Similarly, section 11 (2) (d) of the Nigerian Tax Law of 1990 cited in (Nnaemeka N. Obasi, 2015) in a nutshell explains that:

(i) The profits of a foreign company in Nigeria from any trade or business are deemed to be gotten from Nigeria.

(ii) Where transactions between the companies are deemed fictitious, the profit can be adjusted by the tax board to reflect arm’s length transaction.

Section 18 of the Nigerian Tax Law of 1990 clarifies on the meaning of artificial transaction as follows:

Where the tax authority is of opinion that a transaction is fictitious or would reduce tax payable by a company, it is required that such disposition should be adjusted and liable to tax as considers appropriate without ostracizing companies involved in the fictitious transaction.

This suggests that the tax authority is conferred with the onus of making adjustments where the internal pricing system of the related parties does not reflect the open market prices.

Michael Essel-Mills















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