By Ndanki Kahiurika
NAMIBIA can expect to see its first transfer pricing audit early this year once the transfer pricing unit concludes gathering data from the affected sectors and companies.
Experts yesterday, however, said it would be difficult to establish how much money has been lost through transfer pricing manipulation (also known as mispricing), and to determine to what extent the practice is rife.
Transfer pricing happens when divisions of a company transact with each other, such as the trade of supplies or labour between departments.
Tax Justice, an international body which fights illicit financial flows, says transfer pricing is not illegal as long as the two companies agree on a certain transaction price and trade with each other.
However, Tax Justice says the practice becomes illegal when the companies manipulate the prices.
Although Namibia enacted the transfer pricing legislation in 2005 that gave way to the creation of a transfer pricing unit, it was not until 2014 that the country set it up.
The unit is supposed to monitor possible transfer pricing manipulation and ensure that multinational companies have the right documentation in place.
Inland revenue commissioner, Justus Mwafongwe confirmed the impending audits in a recent interview with The Namibian.
He said they could not rule out the possibility of transfer pricing manipulation in Namibia, as companies which are related to other companies outside of the country exist.
"They distort the prices at which transactions are recorded," he stated.
Mwafongwe said they were compiling data, and will identify which cases to investigate in the transfer pricing audits, based on the information gathered.
The pricing unit's staff have now been receiving training and technical assistance due to the support of the Africa Tax Administration Forum (ATAF), and this training will continue past March 2018.
Mwafongwe further told The Namibian that transfer pricing manipulation could be due to the corporate tax rate, which stands at 32%, while mining companies get taxed at a much higher rate.
"The temptation for multinational companies to declare their profits in low tax jurisdictions and pay less tax thus exists," he said, adding that companies may distort prices at which transactions are recorded.
The agency, when fully operational, will also work to the pricing unit's advantage.
Institute for Public Policy Research (IPPR) research associate Max Weylandt, who is an expert within the extractive industry, told The Namibian yesterday that there is no way one can know whether transfer mispricing has occurred, or to what extent that has happened.
"That is the problem. This is a very complex issue that requires a lot of specialised skills to untangle," he noted.
Weylandt quoted from the mines ministry's annual report of 2012/13, which states: "Suspicious discrepancies on volumes and values of mineral commodities declared on the royalty payment schedule leads to under-estimation of royalties".
"In some cases, transfer pricing is suspected", adding that the government now taking steps to see whether its worries were justified is a positive step.
Weylandt also said the move to have audits would deter any business guilty of dodging taxes through transfer pricing manipulation.
The researcher said it is not easy for anyone to engage in transfer mispricing as it involves complicated business arrangements.
"The key point is that large multinational corporations who want to engage in mispricing often have more access to the skills and resources than the government trying to detect and punish it," he added.
Popular Democratic Movement parliamentarian, Nico Smit said the government has been complacent in pushing for the operation of the transfer pricing unit, and that this shows that some politicians are benefiting.
"They are deliberately dragging their feet so that those who have shares in these companies, like their families and friends and even themselves, can continue benefiting," he charged.
Smit, who urged that the unit becomes fully operational to curb the outflows of millions of dollars from the country, said the government is trying to fool people by having the necessary laws in place without implementing them.
"We must enforce these laws as we cannot afford to lose more money," he added.
Smit said the country also needs to broaden its tax base, but that cannot happen when there are loopholes and incentives in place allowing various companies to move profits out of the country, or pay little or no taxes.
Audit firm PricewaterhouseCoopers points out on its website that the unit will need to investigate where management services are provided from a low tax jurisdiction, or where local loss-making companies have a high-interest rate, in comparison to market-related prices.
In 2015, a report by a high-level panel on illicit financial flows chaired by former South African president Thabo Mbeki revealed that over US$50 billion had been lost in illicit financial flows between 2000 and 2008.
President Hage Geingob also took a stance on the issue, urging African countries to close any loopholes, as the same money lost could be used for development.
Just last year, the European Union blacklisted Namibia as a tax haven for the country's delay in submitting compliance documents which show that the state has laws in place to fight those who fail to cooperate or deal efficiently with tax-related matters and illicit financial flows.
Published on AllAfrica on January 15, 2018