At a time when the Nigerians extractive industry is gaining momentum, experts have advised on the best way to boost tax revenue expected to come from the sector and other sectors of the economy.
Experts from the World Bank and other professions have also observed that a notable source of leakage in revenue collection in African countries is “transfer pricing,” a process by which transactions by some companies and multinational enterprises (MNEs) are illegally misrepresented with the intention to reduce taxable income and tax per transaction.
In a recent report titled, “Curbing tax evasion in the extractive sector,” by CIA and NEITI, made available to the media, World Bank Consultant, Alexandra Redhead called for review of the transfer pricing rules to block tax revenue leakages through this source.
Alexandra Redhead in her study for tackling transfer pricing titled” Preventing Tax Base Erosion in Africa: a Regional Study of Transfer Pricing Challenges in the Mining Sector “ advocated for the establishment of a system with rigorous and consistent rules that will enable revenue authorities determine the tax value of intra-company transactions.
Redhead called on tax authorities to set up skilled and sufficiently trained manpower to implement transfer pricing rules effectively and also improve inter-agency coordination on mining revenue collection.
According to her, revenue officers should be equipped with the adequate expertise to monitor and evaluate transfer pricing risks that are peculiar to the extractive sector and also ensure the shrinking of the information gap in the mining sector.
Civil societies and parliaments, Redhead recommended in her study, should play advocacy roles for transfer pricing rules implementation by the political class, while the tax authorities are advised to examine the feasibility of adopting other tax rules to limit reliance on the arm’s length principle and overcome its limitations.
Checking leakages of tax revenue through transfer pricing would ensure growth and development of African economies noted for high rate of transfer pricing fraud.
The African Development Bank (AfDB) attributes major losses of public revenue to the “inefficient taxation of extractive activities and the inability to fight abuses of transfer pricing by MNEs.” Also, the Africa Progress Panel has identified cross-border transactions between related parties as a major threat to the tax base of African countries (Africa Progress Panel 2013, 65). Due to the nature of these transactions between related companies which are internal and are not subject to market pricing, companies move profits to low tax-jurisdictions.