The commodity downturn represents an opportunity to invest in good practices that will help countries break from a legacy of inadequate governance and legal structures, weak enforcement of tax legislation and imprudent revenue management. Improvements now in establishing and enforcing strong governance and fiscal frameworks to capture resource rents will also pay off when mineral prices rise again. A critical area of reform is to counter aggressive tax planning and tax evasion. Tax planning, or tax avoidance, is the use of legal methods to minimize the amount of income tax owed by multinational enterprises (MNEs). In the absence of rigorous controls, some MNEs also employ illegal ways to reduce their taxable income, by knowingly and illegally misrepresenting their transactions (i.e., tax evasion).
The Africa Progress Panel has identified cross-border transactions between related parties as a major threat to the tax base of African countries. One of the principal vectors of losses in these transactions is transfer pricing, which occurs when one company sells a good or service to another related company. Because these transactions are internal, they are not subject to ordinary market pricing and can be used by MNEs to shift profits to low-tax jurisdictions.
This collection of work, consisting of a report and five case studies, assesses the development and implementation of rules to monitor transfer pricing in the mining sector in countries with varied experiences.