G20 Development Working Group Submissions

In-Depth Assessment: Help developing countries tax MNEs fairly through effective transfer pricing regimes A transfer price is the price charged for a transaction by one MNE to one or more MNEs in the same multinational group of companies. The transfer prices used will influence the amount of profit an MNE reports (and pays tax on) in each country where they operate. While transfer pricing is a legitimate feature of commercial activity, it can be used to reduce an MNE's global tax bill by shifting profit from normal tax-rate countries to low tax-rate countries. This can also have wider implications: tax avoidance by high profile corporate taxpayers will be perceived as "unfair" by citizens, and may undermine the legitimacy and credibility of the tax system, thus discouraging compliance among all taxpayers. Most OECD and many non-OECD countries have introduced transfer pricing rules into their tax legislation. However, relatively few developing countries have fully effective transfer pricing regimes and often lack the administrative, technical and auditing capacity to conduct effective and efficient audits. Alignment with Core G20 and DWG Mandate In the globalized economy, developing countries are increasingly opening their borders to international trade and investment. It is estimated that as much as two-thirds of all cross-border business transactions take place between companies belonging to the same group. Such cross-border trade and investment is vital to economic development, but it is also essential that developing countries should be able to collect tax on the profits that MNEs earn in their countries in a way that does not discourage or distort international trade and investment. COMMITMENT 63: Help developing countries tax multinational enterprises through effective transfer pricing regimes 124 Implementation In 2010, G20 leaders called on relevant IOs to supportthe development of more effective tax systems by identifying ways to help developing countries tax MNEs through effective transfer pricing regimes. To implement this action, some G20 members joined the European Commission, OECD Task Force on Tax and Development and World Bank to deliver support to developing countries on transfer pricing. The work led by the OECD Task Force on Tax, which brings together all major stakeholders on tax and development, assists developing countries in putting in place measures to protect their tax bases and foster a transparent, predictable investment climate through the introduction of rules that create certainty and consistency for business. Under the DRM Pillar, a program of intensive support for transfer pricing capacity development is underway. The programs have already achieved a significant impact in all countries of operation leading to increases in tax revenues, and a more transparent and predictable investment climate through the introduction of rules that create certainty and consistency for business. Some of the practical results achieved include: • • Colombia transfer pricing adjustments made as a result of audits of MNEs have increased revenues from US$3.3m in 2011 to US$5.83m in 2012 (a 76% increase). ― Kenya the Kenya Revenue Authority (KRA) successfully negotiated a transfer pricing adjustment based on the advice given through the pilot program, which resulted in additional tax revenue of US$ 12.9m. Ghana - in September 2012, new transfer pricing regulations that are aligned with international standards were introduced. Rwanda - the pilot program is working with the Rwanda Revenue Authority to design an effective transfer pricing regime. - Vietnam A recent audit of a large MNE resulted in the increased tax of US$3.9m paid in Vietnam. 63

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