Special Meeting Held as Committee of Experts on Tax Matters Launches ‘Practical Manual on Transfer Pricing for Developing Countries’
Special Meeting Held as Committee of Experts on Tax Matters Launches ‘Practical Manual on Transfer Pricing for Developing Countries’
|Department of Public Information • News and Media Division • New York|
Economic and Social Council
12th & 13th Meetings (AM & PM)
Special Meeting Held as Committee of Experts on Tax Matters Launches
‘Practical Manual on Transfer Pricing for Developing Countries’
A United Nations expert panel on tax matters launched today at Headquarters a manual intended to help developing countries expand fiscal stability and tax revenues by more accurately gauging the way in which multinational corporations set the prices for goods traded between corporate subsidiaries.
Tax experts from around the world gathered in a special meeting of the Committee of Experts on International Cooperation in Tax Matters, a subsidiary body of the Economic and Social Council, to discuss efforts to strengthen the tax-gathering skills of developing countries. The publication ‑ the United Nations “Practical Manual on Transfer Pricing for Developing Countries” ‑ was finalized at the Committee’s annual session in October 2012. With the global fiscal crisis having intensified the desire of tax officials worldwide to build up tax revenues and tax-collection abilities as trade among subsidiaries of global companies increases, the Manual helps tax officials in developing countries pinpoint the prices of goods and services traded by multinationals.
Néstor Osorio (Colombia), President of the Economic and Social Council, said the Manual was one of the Committee’s primary contributions, and had demonstrated the prominent role played by the United Nations in the area of international cooperation on tax matters. Transfer pricing ‑ the setting of prices during international transactions between companies belonging to a multinational enterprise group ‑ was today one of the most important topics in international taxation, “as a significant share of global trade takes place within multinational enterprises”, he said.
The Manual helped tax authorities in developing countries, challenged by the unavailability of data and technical skills, determine how the “arm’s length price” principle could be used. Both the United Nations and the Organisation for Economic Cooperation and Development (OECD) used the principle as a test to determine whether transfer pricing occurred at a proper price ‑ the one that each participating entity would pay in the market when acting independently in its own interest.
Shamshad Akhtar, Assistant Secretary-General for Economic Development in the United Nations Department of Economic and Social Affairs, introduced the Secretary-General’s report on further progress in strengthening the work of the Committee of Experts on International Cooperation in Tax Matters (document E/2013/67). Noting that tax matters had taken on even greater importance as capital flows moved increasingly swiftly around the world since the financial crisis, she said the Group of 20 (G20) was now looking at tax evasion and avoidance. Such developments had made the Committee’s work increasingly valuable. While consistent with the OECD Transfer Pricing Guidelines, the United Nations Transfer Pricing Manual had helped developing countries understand those guidelines and apply them practically. It had helped developing countries learn from each other, and in Chapter 10, Brazil, China, India and South Africa outlined their transfer-pricing experiences.
Alexander Trepelkov, Director of the Department’s Financing for Development Office, outlined the work of the United Nations Capacity Development Programme in International Tax Cooperation, saying it had begun in 2012 after the Department had identified fiscal policy and international tax cooperation as a priority area, with the aim of supporting and disseminating the Committee’s output. Working with partners to avoid duplication, one of its primary areas of focus was strengthening the capacity of developing countries to negotiate, administer and interpret tax treaties, drawing on the 2011 version of the United Nations Model Double Taxation Convention between Development and Developing Countries.
Another focus was strengthening the developing-country capacity to apply transfer-pricing analysis, particularly the arm’s length principle, to transactions between associated enterprises of multinational groups. A third priority was helping developing countries develop more effective and efficient tax systems, including improved tax-administration processes and systems. The Financing for Development Office would begin developing a comprehensive set of capacity-development tools based on the Manual, he said.
Marlies de Ruiter, Head of OECD’s Tax Treaty, Transfer Pricing and Financial Transactions Division, laid out the importance of building developing countries’ tax-administration skills and the benefits it provided to those countries. Cooperation was essential since resources were limited and must be used in the best possible way. For example, a $5.3 million invested by the United States Agency for International Development in El Salvador between 2004 and 2010 had helped the Central American country improve its tax collection by $350 million annually.
Compared to aid expenditures, it was more beneficial to strengthen a country’s capacity to gain tax revenues, she said. Increasing revenue collection was not the only objective of OECD’s work. It also aimed to expand tax compliance, to better tax Governments and to build sustainable tax administrations. As for OECD’s work in transfer pricing, she stressed the need for global dialogue and cooperation, saying international cooperation could help developing countries strengthen their capacity to strengthen their tax functions.
Socorro Velazquez, Director of Planning and Institutional Development at the Inter-American Centre of Tax Administration, said the entity had been working since 1967 to promote cooperation and strengthen tax administration among its members. It now had 39 members from around the world. The Centre helped countries develop products and models that they could use on a daily basis to carry out business transactions.
One model, for example, had been developed with help from an electronic invoicing working group, he said. That had been prompted by the commercial sector, which wished to use less paper to process invoicing documents needed for tax collection. The initiative had developed into an electronic invoicing standard, which in turn had led to a website that enabled members to exchange information. The Centre collaborated and worked with many partners, including OECD, the Inter-American Development Bank and the United Nations.
Lincoln Marais, Director of Institutional Development at the African Tax Administration Forum, said that was a new group which felt learning from peers was very important to its members’ work. It had worked with tax academics in Senegal, at their own request, and developed the idea of teaching students about tax professions that could help contribute to national development, not just those that helped corporations to minimize taxes.
The Forum was working to develop tools that would help countries work together and improve their tax collection and administration, he continued. It investigated what regional economic groups were doing to improve tax collection and collaborated with more established organizations, he said, noting that there was much work to be done in Africa. Even though the financial contributions of its members did not cover its programmes, the Forum did not allow donors to dismantle its work plan, he said, emphasizing that it continued to focus on members’ needs.
Michael Keen, Deputy Director of the Fiscal Affairs Division at the International Monetary Fund (IMF), said his Division aimed to develop simpler, more efficient, transparent and fair tax systems that would promote growth, equity and good governance. It wished to provide administrative and legal advice to Governments through a strategic vision and a rapid-response capacity. The Division had eight regional technical assistance centres covering 80 countries, and they were closely integrated with its headquarters office as they helped Governments implement tax laws. The Division was increasing its technical assistance and developing tools that tax officials could use, he said.
He went on to state that the Division provided extensive transfer-pricing advice and helped countries determine where to put their minimal resources in order to gain the most benefits from increased revenue. One goal was to make the information learned from developing countries available to other nations through online tools, publications and other methods. There was no shortage of work, but resources remained limited, even with increased resources from donors. It was increasingly important to manage relationships between Governments and the officials attending the conference, he stressed, pointing out that while developing relationships was time-consuming, it worked very well.
Richard Stern, Global Product Specialist for Business Taxation at the World Bank Group, said that its work on international tax issues aimed to promote economic growth and generate tax revenues. The Group worked to develop tax environments that helped support private-sector growth and improve tax compliance at every level, from small and mid-size enterprises to multinational corporations. Tax reform was not possible unless it “has a buy-in from the private sector”, which could effectively inhibit the implementation of good tax laws. The Group’s approach relied on partnerships, including a core global group that worked with local experts on the ground.
While acknowledging that transfer pricing was grabbing global attention and media headlines, he said the best work of tax experts did not appear on the front pages of newspapers. Developing countries needed a transfer-pricing framework in place to avoid losing revenues as business transactions increasingly occurred within corporations. Auditing was very important, and it was also necessary to develop transfer-pricing frameworks that developing countries could use. Multinationals wanted rules and frameworks in order to avoid the risk of unexpected actions by tax authorities, but frameworks allowed a country to protect its tax base and gave investors security while providing a “level playing field”.
The representative of Fiji, speaking on behalf of the “Group of 77” developing countries and China, said all Member States should have an equal say in tax matters, and commended the Committee’s efforts, noting that it was the only international group doing such specific work. The Manual would be very useful, he added.
The representative of the European Union delegation noted that the Committee paid attention to the needs of developing countries and helped them seize fiscal opportunities. Tax fraud and evasion meant that countries could not achieve their fiscal opportunities, he said, noting that efforts towards capacity development must incorporate transparency and fair tax competition.
The representative of Haiti, speaking on behalf of the Caribbean Community (CARICOM), emphasized the need for an informed discussion on tax matters in the context of meaningful economic development. CARICOM was concerned about the growing and detrimental narrative dividing the world into developed, developing and international financial centres. It reaffirmed the important role of the United Nations in addressing matters relating to international tax cooperation, which allowed all Member States to participate on an “equal footing”, and supported the proposal by the Group of 77 and China to convert the Committee into an intergovernmental body of the Economic and Social Council.
The representative of France said his country had been a driving force in efforts to combat tax evasion within the frameworks of the G20, OECD and the European Union. Tax evasion created uncertainty and unfavourable competition, causing problems for developing and other poor countries. The entire international community should be involved in dealing with tax evasion, he stressed. “We can only make progress if we work based on principles that are widely known” and widely acknowledged, he said.
Mr. Trepelkov said that even though transfer pricing did not inherently imply any tax evasion or avoidance, there was a risk that prices declared for intra-group transactions did not reflect their real economic value. If that was the case, less income, or greater expenses, might be reported in a country where, in fact, more income, or fewer expenses, should be reported. Transfer pricing was also becoming more important for developing countries, as multinational enterprises increasingly operated in their economies.
He also briefly described the “arm’s length principle” as a generally accepted and widely used method of determining appropriate transfer prices for cross-border intra-group transactions, under which the conditions of transactions between companies belonging to the same multilateral group were compared to those between unrelated entities under comparable circumstances. He warned, however, that while the principle was simple, its actual application could be very complex, for developing countries in particular.
Armando Lara Yaffar (Mexico), Committee Chairperson, provided a broad historical overview of the Manual, saying it had been intended for practical uses from the start, and took the views of all Member States into account. It was a “live document”, with some of its technical details still under discussion. Noting that the Manual had been drawn up with few resources, he asked the Economic and Social Council to consider allocating greater resources to the Committee in the future. He also expressed gratitude to the Subcommittee on Transfer Pricing, which had undertaken “gargantuan” efforts to draft the Manual.
Stig Sollund ( Norway), Coordinator of the Subcommittee on Transfer Pricing, said the Manual could help in determining the right amount of profits for companies, which was important for national tax bases. Profits normally resulted from an enterprise’s own activities and transactions in a market, but when associated enterprises engaged in business relationships, that was not necessarily the case. Indeed, transaction-based analysis relied upon the legislation of arms length rules. Indeed, domestic laws must establish rules on reporting and documentation, while double-taxation agreements should provide for the exchange of information between tax administrations, among other things.
In the ensuing dialogue, a number of speakers confirmed that transfer pricing was an emerging issue and that tax avoidance and tax evasion were critical challenges. The representative of Nepal added that the Manual would help his country resolve some of those problems, but stressed that it would still require further support and capacity-building on tax matters. Meanwhile, the representative of Finland underscored the importance of today’s discussion, welcoming the fact that the United Nations had taken “a very practical approach” in dealing with complicated tax questions.
Romania’s representative asked whether the panellists foresaw the possibility of joining the existing model tax treaties ‑ those of the United Nations and OECD ‑ in the future.
Mr. Yaffar replied that the Committee had already laid out an agenda for its next session, and that question was not included.
Mr. Sollund added that, while there was broad consistency between the OECD guidelines and the United Nations Practical Manual, he did not foresee that the two approaches could be joined. “Both models have their area of use.”
In concluding remarks, Mr. Osorio ( Colombia) summarized the day’s panel presentations and the points raised, saying he there was already great progress in cooperation between various partners involved in the area of internal taxation. He said he was particularly pleased with the planned joint United Nations-OECD initiatives, which marked a new era of practical cooperation between the two organizations in the area of capacity development.
He said that, during the afternoon session on transfer pricing, panellists had explored how transfer pricing fit into the financing for development agenda. The special meetings of the Economic and Social Council on international tax cooperation emphasized that organ’s central role in strengthening the Committee’s work and its cooperation with concerned multilateral bodies and relevant regional and subregional organizations.
* *** *