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mobilising revenue from their own domestic sources.

However, what is quite clear is the fact that revenues generated from these domestic sources are still way below the actual amount of revenue required to finance the infrastructure development projects and provision of public services particularly water and sanitation, health, education, electricity and public transport on the continent.
The general emerging consensus amongst tax planners, development experts and policymakers in these countries is that a more viable option amongst many others that can be used to open up more fiscal space is to stop the capital flight resulting from illicit revenue losses caused by rampant transfer pricing in these countries.

This write-up looks at the harmful effects of transfer pricing in Africa, current and future development prospects and what can be done to mitigate it using examples from a few selected Southern African countries.
Transfer pricing is the price charged by one subsidiary of a multinational company to another subsidiary of the same company in another country.

In other words, it is a term used to describe all aspects of inter-company pricing arrangements between related business entities, including transfers of intellectual property, transfers of tangible goods; services and loans and other financing transactions.
All types of transactions within subsidiaries of multinational companies are subject to transfer pricing including raw materials, finished goods, equipment and payments such as management fees, intellectual property royalties, loans, interest on loans, payments for technical assistance and know-how, etc.

The rules guiding transfer pricing between two subsidiaries of a multinational company require them to conduct their transactions on an “arms length” basis.
This means that any transaction between the two should be priced as if the transactions were conducted between two unrelated companies, with no over-or-under pricing being allowed to take place.

Unfortunately, this does not happen at all times.
In actual fact, inter-company transactions of the same subsidiaries of multinational companies across borders have experienced rapid growth and are becoming much more and more complex with consequent tax revenue losses resulting from illegal transfer pricing.

The removal of restrictions on capital flows in the majority of developing countries under the IMF and World Bank supported structural adjustment programmes has helped a lot in facilitating harmful transfer pricing.
Transfer pricing works as follows: A subsidiary of a multinational company charges goods or services at prices that are not market-related to another subsidiary of the same multinational company with the aim of moving funds out of or into the chosen country.

For example, Holding Company A has its head office in country X and a subsidiary B in country Z.
Company A sells goods to Company B worth US$1 million but the invoices and shipping documents are altered to reflect a value of US$200 000.
The net effect is that US$800 000 is siphoned to Country Z. Income tax and duty values are also altered in contravention of the law.

Hence the difference of US$800 000 is concealed from the tax authorities and nothing will be paid from it.
As the example above illustrates, therefore, transfer pricing is a strategy frequently used by multinational companies to make huge profits through illegal means.
The transfer price could be purely arbitrary or fictitious, therefore different from the price that unrelated subsidiaries would have had to pay, that is the “arm’s length” one.
Since each country they operate in has different tax rates, multinationals can increase their profits with the help of transfer pricing.

By lowering prices in countries where tax rates are high and raising them in countries with a lower tax rate, multinational companies can easily reduce their overall tax burden, hence increasing their overall profits.
According to the statistics, it true that a number of Southern African countries have not been spared from revenue losses resulting from rampant illegal transfer pricing.

Between the years 2005 to 2007 some Sadc countries have systematically experienced an escalation capital losses resulting from trade mis-pricing of which transfer pricing contributes more than 60 percent.

At an aggregated level, Namibia is the most affected experiencing almost a 232 percent growth in capital losses through trade mis-pricing.
It is then followed by Mozambique and South Africa with 212 percent and 130 percent growth in capital losses respectively.
However, in all the cases percentage losses are more pronounced in the case of capital losses emanating from trading with the EU.

This is not surprising given the fact that the EU is an important trading partner of most Southern African countries.
The capital losses could be much worse if we take into account those arising from trading with the rest of the world, particularly emerging big economies like China, India, Russia and Brazil and South Korea.

What this means is that while multinational companies and their subsidiaries operating in these selected Southern African countries are making huge profits through manipulative transfer pricing, the countries themselves are losing huge amounts of local revenue given the fact no tax is paid from the capital losses.

This is money which is desperately needed for social spending by these countries, particularly in the health sector were high HIV and Aids prevalence is causing many premature deaths and rapid fall in life expectancy.

Besides the multinational companies and subsidiaries international accounting firms play a key role in facilitating abusive transfer pricing.
Usually these firms have a strong international network of dedicated transfer pricing professionals with advanced training in economics, accounting, law and project management, ready to work for

multinational companies providing advice on matters related to transfer pricing.
In addition, banks also assist in the concealment of the benefits accruing from illegal transfer pricing by providing false invoices and bills of lading.

Given the fact that banks are the ones at the core of the financial system, they have over the years been able to develop sophisticated products, which has added additional mystique to the already complicated global financial system that is supportive of abusive transfer pricing.

Abusive transfer pricing and the consequent tax revenue loss it entails is proving to be a big problem in many countries in Africa.

• The writer is a lecturer of international economics at Bindura University. He can be contacted on [email protected]