The financial relationships between multinationals and their subsidiaries can be labyrinthine, involving several
countries and jurisdictions. Take transfer pricing, for instance, which essentially covers transactions within multinationals as a firm buys goods and services from subsidiaries or vice versa. Think of automotive components shipped within Toyota, or customer services in Apple. In financial terms, these transactions can be substantial: it is estimated that around two-thirds of all cross-border transactions occur between entities belonging to the same group.
Putting a value on such transactions to determine how much tax is owed among different jurisdictions can be difficult. Sometimes that’s because there is genuinely nothing to compare them with in the open market and sometimes it’s because firms use such transactions to reduce their tax bills. Other problems also arise, says Anthony Munanda, a transfer pricing analyst at the Kenyan Revenue Authority who audits tax returns from multinational firms operating in Kenya. “Sometimes you realise you don’t know who is the ultimate shareholder, so it becomes a challenge even to sustain an argument over whether the case involves transfer pricing.”
To help meet such challenges, tax officials around the world have been increasingly turning to colleagues from other countries for help and advice. The need is especially great in developing countries, which typically have less experience in dealing with cross-border tax issues and far fewer resources than, say, OECD ones. “We really need more knowledge in this area,” says Mr Munanda. “There is so much in transfer pricing and international pricing.”
The challenges facing developing countries are now being acknowledged internationally with the launch of a partnership between the OECD and the United Nations Development Programme (UNDP) on Tax Inspectors Without Borders, an international programme designed to help developing countries by bringing together tax auditors from developing and developed countries. The new partnership on Tax Inspectors Without Borders will be launched at the Financing for Development conference at Addis Ababa in mid-July.
Tax Inspectors Without Borders is about “learning by doing”. Tax auditors from mostly OECD countries will go to work alongside their peers in developing countries on real-time tax cases. Their joint efforts will focus on several key areas, including learning how to spot cases that may need to be looked into further, the mechanics of investigating cases and negotiating settlements with taxpaying firms. A joint OECD and UNDP team will operate a matchmaking service, linking requests for help from developing countries with the right experts from wherever they are located.
A number of pilot projects and international tax workshops have already taken place, and these give a taste of how Tax Inspectors Without Borders will operate. The Kenyan Revenue Authority has taken part in several such exchanges, and the benefits for staff are already clear, according to James Karanja, team leader in the Kenya
Revenue Authority’s international tax office.
“At the end of the day we have transferred the expertise of the international tax expert into the local officer who deals with the taxpayer,” says Mr Karanja. “He’s now confident, he knows what to ask for, knows what outcomes he should be looking for. This has been revolutionary. This has really changed the way we do our work.” That change has been noticed by taxpayers and audit firms, adds Mr Karanja: “They do recognise that there is a shift in outlook, in attitude, in confidence that officers are expressing as they undertake this very difficult work.”
There have been benefits, too, for the public purse, according to Mr Karanja: “As an example of how international tax expertise has helped us, in a period of three years we’ve seen our recovered tax revenue grow from about $52 million to $107 million last year.”
If Kenya’s experience so far is anything to go by, the benefits of Tax Inspectors Without Borders will also be felt not just nationally, but regionally. “We also have been able to share our experience with tax officials around the region,” says Mr Munanda. “Last year we had officials coming from Tanzania and previously we had officials come from Zambia.”
Patrick Love helped in preparing this article.
For more information on Tax Inspectors Without Borders, visit www.oecd.org/tax/taxinspectors.htm
NOTE: Launch of the OECD-UNDP partnership 13 July
Tax Inspectors without Borders launch information
The official launch of the Tax Inspectors Without Borders (TIWB) initiative and the TIWB-partnership between the OECD and UNDP for the execution of the programme will take place at The Third International Conference on Financing for Development in Sholla 1 room, Hotel Radison Blu, Addis Ababa, Ethiopia, from 18:15-19:45 on 13 July: Agenda
Please contatct Katherine.Perkins@oecd.org for more information on how to attend.
©OECD Observer July 2015