Introduction
This article aims at
throwing some light on one of the hardly discussed subject matters of the
Ethiopian tax system, that is, transfer pricing by multinational corporations(
herein- after MNCs). The earlier tax laws of the country simply by-passed this
matter without devoting a single provision governing the area. Given the
economic and political realties at the time, absence of legal regime is
understandable, to say the least.
After the change of
government in 1991, the country immediately embarked on decentralizing the
economy and opening up many investment areas previously considered as
government’s only. In addition, the government has also lifted the restrictions
on private ownership of properties. Encouraged by these and subsequent
investment laws, many local and international companies have started to apply
for new investment permits in Ethiopia. In the past ten years, around 6,000
foreign based companies have applied for investment permits at the Ethiopian
Investment Authority.[1]
Year
|
No. of Investment requests
|
|
1
|
2004
|
07
|
2
|
2005
|
294
|
3
|
2006
|
394
|
4
|
2007
|
567
|
5
|
2008
|
908
|
5
|
2009
|
945
|
6
|
2010
|
1270
|
Table 1 Source: Ethiopian Investment Authority (EIA)
The volume of import has
also increased from 4,932,925 metric tons in 2004/05 to more than 8 metric tons
in 2009/2010.[2]
With the increase of imports, the income from customs duty has also increased
from 2,953.81 billion birr in 2005/06 to 5.854.66 billion birr in 2009/10, with
annual average growth rate of 19.90.[3]
The total revenue from foreign trade has also increased from 11.26 in 2005/06
to 35.71 in 2009/2010. [4]The
country is profoundly benefiting from the recent increase in FDI .Nonetheless,
I would argue, investment measures not complimented with the appropriate
transfer pricing measures, could result in a loss of desperately needed local
tax revenue.
Year
|
Volume of import(Metric Ton)
|
|
1
|
2004/05
|
4,932,925
|
2
|
2005/06
|
5,344,825.5
|
3
|
2006/07
|
4,665,454.28
|
4
|
2007/08
|
5,8511,904.23
|
5
|
2008/09
|
7,807,006,73
|
6
|
2009/10
|
8,492,485.84
|
Table 2 Source: Ethiopian Revenue and Customs Authority (ERCA)
In this article, the
transfer pricing provisions of Ethiopia as provided in the Income and Customs
Proclamations is critically examined. The writer has conducted an extensive
literature review with the view of examining the transfer pricing principles
and methods applicable in most jurisdictions around the world. Focus group
discussions with the responsible departments in Ethiopian Revenue and customs
Authority, (here in after ERCA) have also been conducted.
The article has five
sections. The first section provides a brief sketch on the relevance of the
concept of transfer pricing to the Ethiopian tax system. Section two outlines
the basic precepts of transfer pricing and the transfer pricing methods
existing in the Ethiopian Income Tax Proclamation. The third section deals with
the provisions of the Customs Proclamation governing the same subject matter,
but from different perspective. The convergence-divergence nature of the Income
Tax and Customs Proclamation in terms of regulating transfer pricing is dealt
with in the third section. The main pitfalls of the current tax system in
regulating transfer pricing is discussed in the fourth section followed by
short conclusion.
1. Transfer pricing: Basic concepts
and Methods
Recent
developments in technology, transportation and communication have resulted in
the growth of MNCs around the world. It is estimated that there are now more
than 82,000[5] MNCs
each with an average of 10 affiliates around the world.[6]
Value added activities of MNCs amount to 11% of the world gross domestic
products (GDP).[7] MNCs
transact with each other extensively, it is even estimated that 60% of the
international trade is between MNCs.[8] MNCs
charge each other for the services or goods one receives from the other; the
price at which they transact is referred to as transfer price. Transfer
pricing, therefore, is the pricing of goods and services for transactions among
MNCs.[9] It
generally ‘refers to the setting of prices for transactions between associated enterprises involving the
transfer of property or services’.[10]
In efficient market system, sale between two
enterprises is based on market profitability. The company selling the item or
rendering a particular service will not sell the items or render the services
unless it gets a profit from the transaction. At times, companies provide goods
or render services to a party at a price that it would not be willing to give
to other clients. This by itself is not a problem. Companies may sale their
items at lower or higher prices due to various justifiable economic reasons,
more frequently than not, however, MNCs sell their products at a lower price or
purchase a product from the subsidiary at a hugely inflated prices solely to
reduce their tax obligations.[11] These
kinds of acts ‘impact on the
legitimate tax revenues of countries where economic activity of the MNC takes
place, and therefore the ability of such countries to finance development.[12] For instance, it
is estimated that Ethiopia has lost around 10 million Euros in tax revenues due
to mispricing by MNCs.[13]
Many countries
around the world use the arm’s length as the main method in order to regulate
transfer pricing.[14]
Brazil[15]
notably, however, introduced a unique system to determine prices. In addition,
there is a growing suggestion from group of economists for the adoption of a
formulary approach, especially in developing countries.[16]
In Ethiopia,
article 29 of the Income tax Proclamation regulates MNCs intra trade. The
article reads: [17]
‘Where conditions are made or imposed between persons carrying on
business in their commercial or financial relations which differ from those
which would be made between independent persons, the Tax Authority may direct
that the income of one or more of those related persons is to include profits
which he or they would have made but for those conditions. The Tax Authority
shall do so in accordance with the directives to be issued by the Minister.’
According to the above provision, ERCA can use either
one of the following approaches to regulate MNCs intra trade.
i)
The Arms’ Length Method
As provided in
article 29(1) of the proclamation, the arms length approach is the primary
approach that would be made applicable in case of MNCs intra trade.
The arms length
approach, as enunciated in the OECD and UN guidelines, is the most widely
practiced method around the world. The arm's-length principle states that the
amount charged by related party to another for a given product must be the same
as if the parties were not related. An arm's-length price for a transaction is,
therefore, the price of that transaction on the open market. The principle
prohibits the regulation of the price for a particular item by anything other
than market forces. In this regard, article 9 of the OECD Model Tax Convention
states the following:
[Where] conditions are made or imposed
between the two [associated] enterprises in their commercial or financial
relations which differ from those which would be made between independent
enterprises, then any profits which would, but for those Conditions, have
accrued to one of the enterprises, but, by reason of those conditions, have not
so accrued, may be included in the profits of that enterprise and taxed
accordingly[18]
The OECD
empowers local tax authorities to adjust profits when the price charged by
related companies differs from those which might have been charged by unrelated
parties for the same transaction. Both model laws treat related MNCs as if they
were unrelated independent entities.
Transfer pricing
rules are intended to govern transactions among related parties.[19]
As a result, relatedness or otherwise of it, is a central concept to the
operation of transfer pricing. As result tax evasion arrangements between
unrelated parties, albeit showing
clear pricing differences from the ordinary market, are not subject to article
29.[20]
According to the
Income Tax Proclamation, a related person, for natural person includes any
relative of the natural person.[21]
Relative, on the other hand, encompasses the spouse of the person; or an
ancestor, lineal descendant, brother, sister, uncle, aunt, nephew, niece,
stepfather, stepmother, stepchild, or adopted child of that person or of the
spouse, and in the case of an adopted child the adoptive parent.[22]
All these individuals are considered as related according to the law. As a
result, transactions among enterprises owned by these individuals will be the
subject of the law. For instance, an enterprise owned by two brothers shall be
considered as related hence, could be subject to transfer pricing procedures.
In addition, a
trust and in respect of which a relative is or may be a beneficiary is
considered as related persons.[23] For
instance, ‘A’ who is the brother of ‘B’ may be beneficiary of a particular
trust, therefore, any dealing between the trusts and ‘A’ could be considered as
a related party transaction. A partnership, joint venture, or unincorporated
association or body or private company; and any member thereof irrespective of
the degree of control shall be considered as related persons.[24]
In case of a
share company, a person who controls 10% or more of the right to vote , or the
rights to distributions capital or profits, either directly or through one or
more interposed companies, partnerships, or trusts is considered as a related
person to the share company.[25]
The writer of this paper argues that a 10% threshold for establishing
relatedness is a very low standard for starter country like Ethiopia . This
will create a cumbersome task on the tax auditors as it requires them to check
the books and accounts of many related companies.
When MNCs transact with each they structure their
transactions in such a way as to ensure that profits are located in a
jurisdiction with the most desirable tax consequences. As result, transfer
pricing is basically viewed as a transaction between related and non related
party. Consequently, the presence of a resident and nonresident company is
considered as an indispensable part of transfer pricing rules in most
countries. The Ethiopian law, however, does not require the presence of
nonresident party in the transaction. The rules governing transfer pricing can
even be made applicable on transaction made between two related parties.
ii)
Advance pricing Agreement (APA)
An advance pricing agreement
(herein after APA) is an agreement between the tax authority and MNC regarding
the pricing of goods. A typical APA
includes the set of criteria for the determination of the arm’s length transfer
pricing, transactions within the scope of the agreement and time within which
the agreement applies.[26]
APA is considered by many as a more co-operative approach to addressing
transfer pricing compliance.[27]
In addition to that, APA is further credited for reliving the taxpayer and the
tax authority of costs related to tax audits. The Income Tax proclamation also
provides the following regarding APA:
‘In order to ensure the just and efficient application of this Article
the Tax Authority may make agreements in advance with persons carrying on
entrepreneurial activities, subject to conditions if necessary that specified
conditions between related persons do not differ from those which would be made
between independent persons’[28]
In the Ethiopian context, ERCA is given the power to
make advance pricing agreements with MNCs.
In countries like Ethiopia
where there exists a very ineffective auditing system MNCs will have little
incentive to enter into an APA agreement with tax authorities. As a result not even single MNCs have applied
for an APA to this date.
In addition to
article 29 of the Income Tax Proclamation, ERCA may also use other provisions,
introduced by the law with the main purpose of achieving other objective, to
complement the application of article 29. These scattered provisions and the
extent of their applicability in regulating transfer pricing is discussed in
the next sub section.
Debt financing is one of the fund raising schemes available for traders,
equity financing being the other. According to Ethiopian tax law, Schedule ‘C’ taxpayers
while calculating their taxable income are given the right to deduct interest
payment on their debt from their gross income.[30]
When it comes to loans from foreign institutions, however, the law has
made it crystal clear that such loans can only be deducted if it fulfills some
requirements. First, the lending institution must secure permission from the
National Bank of Ethiopia. Furthermore, prior to granting the loan the lending
institution must inform the tax authority about the modality of the loan .And
finally, ‘the borrower … withhold 10%
from the gross interest payable to the lender and transfer same to the Tax
Authority within two months of the end of the fiscal year’. [31]
These requirements give ERCA a golden opportunity to examine inter alia the nature of the loan, the
modality of repayment, the interest to be paid, the relationship of the parties
etc. As a result, ERCA will have an ample opportunity to keep at bay the
possibility of related parties giving loan to each other and moving large
amount of money as interest payment. In addition, the 10% withholding
obligation on the local taxpayer reduces the amount of untaxed profit leaving
the country even when the loan agreement is undetected mispricing arrangement, albeit by 10%.[32]
1.2.Services rendered by the head company to the subsidiary
One of the transfer pricing schemes by the MNCs is in
the form of a fee called consultancy fee. According to this scheme, subordinate
companies transfer large amount of fund as a consultancy fee to the head
company or to affiliates controlled by the head company. For example, a resident horticulture
exporting company may enter into a market assessment service contract with a
related non resident company.
Receiving services from nonresident unrelated party
has not been outlawed by the proclamation. The law rather made it difficult for
MNCs to transfer funds untaxed by using this scheme. Accordingly, a business
located and operating in Ethiopia as the branch, subsidiary or associated
company of a business located and operating abroad must prove the following in
order to deduct the cost of service to nonresident company from its gross
income. First, the payment in question was made for services actually rendered.[33]
Secondly, the company is required to prove that the service was necessary for
the business and could not be performed by other persons or bodies or by the business
itself at a lower cost.[34]
This has never been a problem to MNCs as they normally present a cooked data to
present that the services were in fact rendered [35]
1.3.Regulation of Commission works
Commission works is the
other area of concern. A related company residing outside of the country may
demand payment from the company in Ethiopia for commission works it
has carried in favor of the Ethiopian company. Regarding this matter, the law
has laid down stringent criteria that must be fulfilled for payment of these
kinds to be deductible. Accordingly, companies are required to prove that the
services are in fact rendered. This requires companies to present objective
evidence showing the completion of the work. Furthermore, the amount paid as a
commission must correspond to the normal rate used by other businesses engaged
in similar trade.[36]
1.4.Transfer of Business Assets
A property purchased for
business purposes may be sold by the taxpayer at a later date. The transfer may
attract a loss or gain. The loss by the taxpayer is recognized by the Income
Tax Proclamation.[37]
Accordingly, a taxpayer is entitled a deduction for losses incurred while
transferring business assets. The law, however, does not recognize losses
incurred when the transfer is between related parties.[38]The
non recognition of the loss prohibits transfer of properties mainly aimed at
avoiding tax obligations.
1.5.Loss on Transfer of Certain Investment Property
An income derived from
transfer of investment properties are subject to the payment an income tax.[39] A
taxpayer may record loss or gain from the transfer of the property. The gain is
subject to tax at 15% flat rate. On the other hand when the taxpayer records
loss, the loss is offset against gains derived from properties which are
subject to the same schedule. For instance, a person who losses 10,000 ETB on
transfer of shares can deduct this same amount from the income that he
recognizes by selling another set of shares at other times. This loss carry
forward rules, however, does not apply on losses recorded between related
parties. [40]This
rule restricts the possibility of moving around shares between two companies
not motivated by economic reasons.
2. Transfer pricing in the Customs
Proclamation
A customs duty
is levied on all imports into the country unless the goods are specifically
exempted. The customs value of the goods is the base of the duty. Consequently
,the amount of customs duty from each item depends on the customs value for the good, higher customs
value results in higher tax revenues to the tax authorities and the vice versa
results in lower tax revenue.
According to the Customs proclamation, the
transaction value is the primary valuation method that would be used to
determine the customs value for imported goods.[41]The
transaction value is defined in the proclamation as ‘the price actually paid or
payable for the goods.[42] As explained in the interpretive note to
article 1 of GATT , the payment need not be made in the form of money payment,
other forms of payment such as payment
through letter of credit or other form of negotiable instruments will
also be included in the price actually paid or to be payable.[43]
The transaction value, which is the primary chosen
method of valuation in GATT and in the proclamation, may not be accepted by the
customs authorities due to various justifiable reasons. When that happens, the
customs value for the good is to be determined using the value of identical goods.[44] When
a good identical to the product being assessed does not exist in the market,
the transaction value of similar goods shall be taken as a third alternative
transactional value of the good. [45]The
deductive, the computed and the fallback methods are the other methods that
could be used by the customs authority in order to determine the customs value
when the other systems fail to produce the needed result.[46]
When the parties involved in the international trade
are related parties, the transaction value must pass either the circumstances
of sale test or test value in order to be accepted as the customs value for the
good. [47]
If the importer fails to prove either one of the test , ERCA can determine the
customs value the good. How it determines it has not been provided in the
proclamation. Obviously, it will determine it based on estimation.
i)
The
Circumstances of sale test
As provided in article 33(5) of
the proclamation the transaction value between a related buyer and seller may
be accepted as customs value if examination of the circumstances of the sale of
the imported merchandise indicates that the price has not been influenced by
the relationship of the parties involved.[48]
The Customs Proclamation nonetheless failed to specify what circumstances to
look and how to look at those matters. It is unfortunate that the valuation
directive that was supposed to cover this matter has completely over looked the
matter.[49]
ERCA however can use the interpretive note to paragraph of the GATT as
guidance. The interpretative note provides that during transaction among
related parties, the customs authorities among others should look at whether:
‘[t]he price was settled in a manner consistent with the normal pricing
practices of the industry in question…[t]he price was settled in a manner
consistent with the way the seller settles prices for sales to buyers who are
not related to it; or [t]he price is adequate to ensure recovery of all costs
plus a profit that is equivalent to the firm’s overall profit realized over a
representative period of time in sales of merchandise of the same class or
kind’[50]
ii)
Test Value
Under test the transaction value between related
parties is tested using specified standard values. This method requires
importers to prove that their transaction closely approximates either the
transaction value in sales, between buyers and sellers who are not related, of
identical or similar goods for export to Ethiopia during the same period or the
customs value of identical or similar goods the customs value of which is
determined according to the computed value method or the customs value of
identical or similar goods the customs value of determined according to the
fallback method. [51]
3. Income Tax V Customs Duty:
Divergence or Convergence?
Rules regulating
transactions among related parties exists in both the Income and the Customs
Proclamations. The Customs Proclamation primarily targets to increase the
transfer price between related parties so as to generate the maximum revenue
possible. On the contrary, the Income Tax Proclamation aims at reducing the
transfer price as low as possible so as to increase the taxable income of the
resident company by reducing the legally allowed deductible items. This
divergent nature of the two rules creates additional cost on the MNCS as it
requires them to comply with two at times contradictory formalities answering
the same single question ‘what is the arm’s length price of a
product?’[52]
As it has been discussed in the
previous section, the Ethiopian Income Tax Proclamation governing transfer
pricing cannot be put into practice as it is due to lack of directives outlining
the arm’s length approach to be deployed. On the other hand we can find
provisions enough to govern customs valuations in the customs Proclamations.
This gives unique opportunity for the country in terms of integrating the
customs and Income tax provisions governing the area. Accordingly while
drafting the arm’s length methods to be applied in the country ERCA must align
it to customs valuation lest importers will incur unnecessary compliance
burdens, ultimately making the country a less desired destination for FDI.
4.
Challenges in controlling transfer pricing in Ethiopia
Flow of FDI into the country is increasing every year, with the increase
in investment the volume of import into the county is also increasing. These
two factors make income and customs transfer pricing a huge risk to the
national revenue unless tackled by appropriate legislative and administrative
measures. Currently, nonetheless, the tax machinery has blatantly failed to
address the problem due to the following reasons.
Firstly, the Customs Proclamation has incorporated
detailed provisions governing transfer pricing, albeit with provisions require further clarity.[53]The
same cannot be said about the income tax proclamation, however. The
Proclamation has entrusted the ministry with the power of legislating a
directive to further implement the transfer pricing provisions. Yet the
ministry has failed to come up with a detailed directive governing this area.
Secondly, the
primary step in regulation of transfer pricing, inter alia, is the identification of those businesses considered as
related. Both the income and the customs Proclamations have incorporated their
own tests in order to determine the relatedness or otherwise of companies. Yet
again, the authority has not identified companies considered as related;
consequently, companies trade with each other without any restrictions.[54]
Thirdly, controlling transfer pricing requires well
trained expertise and well organized documentation system. Nonetheless, the
department in the tax authority is under staffed compared to the MNCs that it
strives to control.[55]In
addition the Income tax proclamation has not incorporated a single provision
that require companies to keep and submit documents when they transact with
related parties.
Fourthly, the transfer pricing approach incorporated
in the income tax proclamation requires the availability of a comparable data.
Obviously, for some items comparable data is unavailable in the country due to
absence of competing market forces. The authority, nonetheless, failed to organize
a comparability data even in areas where more than market forces exist.
Conclusion
The Ethiopian government has done a commendable work
in making the country a desirable destination for investment. As a result, the
flow of foreign investment in the country is at rise. With increase in flow of
international trade, the revenue from international trade is increasing.
Nonetheless absence of clear transfer pricing rules and non implementation of
the scanty provisions that the country has is resulting in a loss of the very
much needed local revenue.
An organized and clearly structured income and
customs transfer pricing regulations, therefore, would enable the country to
collect revenues from international transactions. In order to realize this
objective, the country must first introduce a directive that clearly outlines
the arms length approach to be used by related parties. In addition, the
documentations to be submitted when related parties enter into transactions
must be clearly specified in the Income tax Proclamatio. The documentation
submitted by taxpayers, in addition to its use to determine the arm’s length or
otherwise of transactions at hand, can also further assist the authority in its
assessment of the comparability of other businesses dealing with identical or
similar matters. Furthermore, while drafting the directive contradictions must
be avoided with the provisions of the Customs Proclamation dealing with similar
matter.
[1] Data
gathered from the Ethiopian Investment Authority. The data can be accessed from
the data collection center of the Authority free of charge. The investors
applied to the authority between July 2003-2013.
[2]
Ethiopian Revenues and Customs Authority, Ethiopia:
Foreign Trade and Federal Duty and Tax Revenue Collection (2005/06-2009/10),
Statistical Bulletin Vol.1p.16.
[3]
Id. In addition to the customs duty goods imported into the country are subject
to Excise tax (average rate of 30% for some goods the rate can be 100%), Value
Added Tax (Flat rate of 15%) and Sur tax (10%).
[4] Id.
Imports into Ethiopia are subject to the
payment of Customs duty(the rate vary from good to good ), Value Added Tax( 15%
flat rate tax for all imports of goods and services),Sur Tax ( there is a 10% Sur
tax on all imports ) and Excise tax.
[5]
UNCTAD Word Investment Report 2010 available at http://unctad.org/en/Docs/wir2010_en.pdf
accessed on August 31,2013.
[6]
Ibid.
[7]
Ibid.
[8]
Ibid.
[9]
Alexandre Tadeu Seguim, New Transfer Pricing Rules in Brazil, 19 NW. J. INT‘L
L. & BUS. 393,
395 (1999); see Susan C.
Borkowski, Advance Pricing (Dis)Agreements: Differences in Tax
Authority and Transnational
Corporation Opinions, 22 INT‘L TAX J. 23 (1996).
[10] UN
Practical Manual On Transfer Pricing for Developing Countries, Department of
Economic and Social Affairs(2013).2.
[11] Death and taxes
:the true toll of tax dodging ,A Christian aid Report (2008)5, Glen
Rectenwald, A Proposed Framework For
resolving The transfer Pricing Problem: Allocating the tax base of
Multinational entities based on real economic Indicators of benefit and burden , DUKE JOURNAL OF COMPARATIVE &
INTERNATIONAL LAW [Vol 223,2012)423, Robert Z. Aliber ,Transfer
Pricing A taxonomy of Impacts on Economic welfare ,in Alan M.Rugman and
Lorriane Ednen(ed), Multinationals and Transfer Pricing(1985)82, Marc M.
Levey et el ,Transfer Pricing Rules and
Compliance Handbook(2007)2.
[12] UN
manual Cited supra note 7 at 3.
[13] False profit:
Robbing the poor to keep the rich tax free ,A Christian Aid Report(2009)22,
U.S. researcher Raymond Baker estimates that up to $500 billion in capital
flows out of developing countries through transfer pricing abuses. See Raymond Baker,
Capitalism’s Achilles: Dirty money and how to renew the free market
system(2005)172.
[14] John Braithwaite, Markets in Vice, Markets in
Virtue(2005)89-91, Karl Wündisch(ed.), International Transfer Pricing in the
Ethical Pharmaceutical Industry(2003)105-108, Michelle Markham, The Transfer Pricing of Intangibles(2005)20-23, Brian J. Arnold and Michael J. McIntyre, International Tax Primer(2002)60-62.
[15] Marcos Aurélio Pereira Valadão,Transfer Pricing in
Emerging Economies :Brazilian Case,Avilable at http://www.un.org/esa/ffd/tax/2012EgmTax/Presentation_PereiraValadao.pdf,Accessed
on May,21,2013, Brazil-Changes to Transfer Pricing rules(2013)available at http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxnewsflash/pages/brazil-changes-to-transfer-pricing-rules-2013.aspx
accessed on May 22, 2013, Tatianina Falaco,Brazzilian tTransfer pricing –A
Practical Approach Could this be a model for Developing Countries ,A presentation available at http://www.taxjustice.net/cms/upload/pdf/Tatiana%20Falcao%201206%20Helsinki%20ppt.pdf,accessd
on May22,2013.
[16] Reuven S.Avi-Yonah and Kimberly Clausing, A Proposal To Adopt Formulary Apportionment
For Corporate Income Taxation: The Hamilton Project , Working Paper No.85 of
June 2007, University of Michigan Law School (“The Hamitlon Project”), Reuven
S. Avi-Yonah, etal , Allocating Business
Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split,
University of Michigan Law School Program in Law and Economics working paper
,available at http://law.bepress.com/umichlwps-olin/art95
accessed on June 12 ,2012.
[17] Income Tax Proclamation No.286/2002,art.29.
[18] Michelle
Markham,cited supra note 14,at110, Wagdy
Moustafa Abdallah,Critical
Concerns in Transfer Pricing and Practice(2004)150, Michael C.
Durst, Making Transfer Pricing Work for Developing Countries, December 10,2013
,available at http://www.taxjustice.net/cms/upload/pdf/Durst_2010_developing_countries.pdf,acessed
on may 18,2013. See also Michael C. Durst, It’s
Not Just Academic: The OECD Should Reevaluate Transfer Pricing Laws,’ Tax Notes
International , Jan. 18, 2010, p. 247, Doc 2009-26892 , or 2010 WTD 11-14 ;
and Durst, The President’s International
Tax Proposals in Historical and Economic Perspective, Tax Notes
International, June 1, 2009, p. 747, Doc 2009-11696 , or 2009 WTD 103-14, Robert Feinschreiber and Margaret Kent, Asia-Pacific Transfer Pricing Handbook(2012)485,
Robert Feinschreiber, Transfer Pricing Methods: An Applications
Guide(2004)70, Marc M. Levey
et al , Transfer Pricing Rules and
Compliance Handbook(2007)160, Alan Paisey
and Jian Li, Transfer
Pricing: A Diagrammatic and Case Study Introduction, with Special
Reference to China(2012)108, Erik Wintzer, Transfer Pricing for
Multinational Enterprises: An Integrated Approach (2007)22, See also Article
9 paragraph 1 of the OECD Model Tax Convention , available at http://www.oecd.org/tax/transfer-pricing
accessed on June 12 ,2013, The UN Model Convention Article 9(1) states the
following
“Where
(a)
an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State,
or
(b) the same persons
participate directly or indirectly in the management, control or capital of an
enterprise of a Contracting State and an enterprise of the other Contracting
State, and in either case conditions are made or imposed between the two
enterprises in their commercial or financial relations which differ from those
which would have been made between independent enterprises, then any profits
which would, but for those conditions, have accrued to one of the enterprises,
but, by reason of these conditions, have not so accrued, may be included in the
profits of that enterprise and taxed accordingly
[19] In the UN model tax convention the term used in order
to refer to these groups of taxpayers is ‘associated enterprise’. The model has
defined associated enterprises as (a) an enterprise of a Contracting State
participates directly or indirectly in the management, control or capital of an
enterprise of the other Contracting State, or
(b) the same persons
participate directly or indirectly in the management, control or capital of an
enterprise of a Contracting State and an enterprise of the other Contracting
State.
[20] A
transfer pricing rule resembling to that introduced by Brazil will give an
opportunity to tax authorities to tackle profit moving scheme even when the
parties are unrelated.
[21] Income
Tax Proclamation Cited supra note 17, art.2(4)
[22]
Id.
[23]
Id.
[24]
Id.
[25]
Id.
[26] OECD Tax and Development Center, Advance Pricing
Arrangements Approach to Legislation (2012)2.
[27] Diane M.
Ring, On the Frontier of Procedural Innovation: Advanced Pricing Agreements
and the Struggle to Allocate Income for Cross-Border Taxation, 21 Mich.
J.of Int. Law (2000) 143, Anuschka Bakker and March M.Levy (ed), Transfer pricing and Dispute Resolution:
Aligning strategy and Execution(2011)116,
Carlo Romano, Advance
Tax Rulings and Principles of Law: Towards a European
Tax Rulings System?(2002)38, Alan Paisey
and Jian Li cited supra note 18 at 108.
[28] Income
Tax Proclamation Cited supra note 17, art.29(2).
[29]
Thin capitalization is when large proportion of the capital of the company is
through debt financing rather equity financing.
[30]
Ethiopia follows a scheduler approach to the taxation of income. Accordingly
there are four schedules each taxing a distinct and separate type of income
Schedule `A` is used for income from employment, `B` for incomes from rental of
building , `C` for incomes from business and the rest of incomes will be taxed
using schedule D.
[31] Income
Tax Regulation No.78/2002 ,art.10.
[32] A
resident company that failed to withhold the 10% from the nonresident company
shall be prohibited from deducting the amount paid as interest as the end of
the tax year. In addition there will be a penalty for failure to withhold the
stated amount.
[33] See
article 8(6) of the Income Tax Regulation.
[34]
Id.
[35]
In the chapter dealing with the Dirty Money User manual, Baker, from his rich
experience working with MNCs has discussed ways of easily by passing
requirements like this . See Baker Cited Supra note 13at p.24
[36] Id.art.8
(5).
[37] Income Tax Proclamation supra note 17, art .24.
[38] See
art.24(6)of the Income Tax Proclamation.
[39]Id
art.37. Shares of Companies and building used for factories and offices are the
properties that will be subject to the payment of the tax.
[40]
Id. art.37(6)of the Income Tax Proclamation.
[41] Customs Proclamation No. 622/2009, art.33(1). See also Winham, Gilbert R., International
Trade and the Tokyo Round Negotiation (1986).106,Sheri
Rosenow and Brian
J. O'Shea,A Handbook
on the WTO Customs Valuation Agreement(2010)5, Nuschka Bakker,
Belema Obuoforibo, Transfer
Pricing and Customs Valuation:
Two Worlds to Tax as One(2009)62,
Ainsworth, RT 2007, IT-APAS: harmonizing inconsistent transfer pricing rules in
Income Tax Customs VAT, Boston University School of Law, Working Paper
Series, Law and Economics, No.
07-23(2007),http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1013518_code355514.pdf?abstractid=1013518&mirid=1,accessed
on April 11,2012. Rajkarnikar, P., 2007 “Implementation
of the WTO customs valuation agreement in Nepal: An ex-ante impact assessment”,
pp. 195-220, Chapter VI in ESCAP, Trade facilitation beyond the multilateral
trade negotiations: Regional practices, customs valuation and other emerging
issues – A study by the Asia-Pacific Research and Training Network on Trade,
(United Nations, New York) Available
online at: http://www.unescap.org/tid/artnet/pub/tipub2466.pdf
accessed on July 10,2012,Dominik Lasok, The Trade and Customs Law of the European
Union,3rded(1998)278, Junji Nakagawa, International Harmonization of Economic
Regulation(2011)31,Hironori Asakura, World History of the Customs and Tariffs
(2003)282.
[42]
Id. See also article 1(1) of the Agreement on Implementation of Article VII
of the General Agreement on Tariffs and Trade 1994.
[43] Interpretative
note to article 1(1) of the Agreement.
[44] Customs Proclamation Cited supra note 41 , Art.34, the
identical goods must be of those sold for export to Ethiopia at the same
commercial level and in substantially the same quantity at or about the same
time as the goods being valued. When information is not available on identical
good of substantially the same quantity at about the same time, the transaction
value of identical goods sold at a different commercial level or in different
quantities by making adjustments to take account of differences attributable to
the commercial level or to the quantity.
[45] Id. art.35.
[46] Id.
arts.36-38.
[47] A buyer and a seller shall be deemed to be related if
they met one of the if one of them is an officer or director of the other’s
business or the two businesses b) they are legally recognized partners in
business or the two businesses have
employer-employee relationship. In addition if one of the business owns
at least 10 % of the shares of the
other's business or one of them directly
or indirectly or both of them are directly or indirectly controlled by a third
party or
both of them directly or indirectly or
related by consanguinity or affinity up to the second degree.
[48] Id.
art.33 (5).
[49]
See Customs Valuation Directive 70/2004, available at http://www.erca.gov.et/docs/1564.pdf.acessed
on may 12,2013.
[50]
Interpretive Note to article 2 of the agreement.
[51] Customs
Proclamation cited supra note 41, art..33(5).
[52] In order to find a workable solution to this problem
the World Customs Organization (WCO) and the OECD jointly hosted two
international conferences on Transfer Pricing and Customs Valuation. The first
conference took place at the WCO headquarters in Brussels in May 2006, and the
second conference was held at the same venue in May 2007WCO/OECD CONFERENCE ON
TRANSFER PRICING AND CUSTOMS VALUATION at
INTERNATIONAL CONFERENCE ON
TRANSFER PRICING AND CUSTOMS VALUATION at
http://www.oecd.org/document/39/0,3343,en_2649_201185_36541927_1_1_1_1,00.html.Even though an agreement had not been reached on
convergence of the two systems, delegates came to understanding that tax
authorities must take the implications of one decision over the other.
[53]
Under the circumstances of test , the law has to make it clear the
circumstances that will be used in order to test a particular transaction.
[54]
One Task force organized by the Ethiopian Customs and Revenue Authority is
compiling data on enterprises suspected of being related.
[55]
Till August 2013 the department in the customs branch entrusted with this
responsibility has only less than 5 personnel. Whereas its income branch does
not exist at all. Field observation conducted by the researcher .
