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DOMESTIC RESOURCEMOBILIZATION IN WEST AFRICA:MISSED OPPORTUNITIES

FEBRUARY 2015

A Study by Dalberg, commissioned by the

Open Society Initiative for West Africa

DOMESTIC RESOURCE MOBILIZATION IN WEST AFRICA: MISSED OPPORTUNITIES 2

ACKNOWLEDGMENTS

This report was made possible thanks to the generous contributions of time and expert

knowledge from many individuals and organizations. The Open Society Initiative for West

Africa (OSIWA) team provided invaluable insight, guidance, and support throughout the

preparation of this report. We would particularly like to thank Ibrahima Aidara, Mohamed

Sultan, and Vera Mshana. In addition, special thanks go to all the individuals who took part in

the interviews, sharing their wealth of experience, understanding, and data on fiscal policy in

West Africa.

ABWA Association of Accountancy Bodies in West Africa

AfDB African Development Bank

ALP Arm's-Length Principle

APA Advance Pricing Agreement/Arrangement

ATAF African Tax Administration Forum BEPS Base Erosion and Profit Shifting

CEMAC Central African Economic and Monetary Community

CET Common External TariffCGI General Tax Code CSO Civil Society Organization

CT Corporate tax

DGID Direction Générale des Impôts et Domaines - Senegal's Tax administration

DITA Directorate of Investigations and Tax Audits

DTA Double Tax Agreement (DTA)

EAC East African Community

ECOWAS Economic Community of West African States

EITI Extractive Industries Transparency Initiative

EIU Economic Intelligence Unit

EPZ Export Processing Zone

FCFA Franc de la Communauté Financière Africaine - African financial community franc

FDI Foreign Direct Investment

FIRS Federal Inland Revenue ServiceGDP Gross Domestic Product GFI Global Financial Integrity

IFAC International Federation of AccountantsIFFs Illicit Financial FlowsIMF International Monetary Fund

ISO International Organization for Standardization

KRA Kenya Revenue Authority

MENA Middle East and North AfricaMERCOSURMercado Común del Sur (Common Market of the South)

MTT Multilateral Tax Treaty

ODA Official Development Aid

OECD Organisation for Economic Co-operation and Development

ABBREVIATIONS


ABBREVIATIONS

WBIC World Bank Investment Climate

WBG World Bank Group

WAEMU West African Economic and Monetary UnionVAT Value-Added Tax USA United States of AmericaUS United StatesUNECA United Nations Economic Commission for Africa

UNCTAD United Nations Conference on Trade and Development

UNCTAD United Nations Conference on Trade and DevelopmentUN United Nations

TPA Transfer Pricing Associates

TPA Transfer Pricing Associates

TIWG Tax Incentives Working Group

TIWB Tax Inspectors Without Borders

SYSCOA West African Accounting System (Système Comptable Ouest African or SYSCOA)

SADC Southern African Development Community

RPRSP ECOWAS Regional Poverty Reduction Strategy Paper

OSIWA Open Society Initiative for West Africa

ONECCA - Senegal Senegalese Accountancy Body (Ordre National des Experts Comptables et Comptables Agréés - Senegal

WTO World Trade Organization


Abusive Transfer Pricing

GLOSSARY

Advance Pricing Agreement (APA)

Advance Pricing Agreement Arrangement (APA)

This takes place when prices are manipulated to maximize profits or reduce losses when two

companies that are part of the same multinational group trade with each other. Abusive

transfer pricing is sometimes referred to as “profit shifting” or “transfer pricing manipulation”

or “transfer mispricing”.Source: Tax Justice Network

An APA is an arrangement in respect of certain specified transactions that determines in

advance the appropriate criteria for determining transfer pricing. The agreement may be made

by the taxpayer unilaterally with the tax administration or may be a bilateral or multilateral

agreement involving the tax administrations of other countries.Source: United Nations Practical Manual on Transfer Pricing for Developing Countries

See Advance Pricing Agreement (APA)

Arm's-Length Principle (ALP)

The ALP for transfer pricing states that the amount charged by one 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 what the price of that transaction would be on the open market. Source: United Nations Practical Manual on Transfer Pricing for Developing Countries

Automatic Tax Information Exchange requires governments to collect from financial

institutions data on income, gains, and property paid to non-resident individuals, corporations,

and trusts. It also mandates that data collected be automatically provided to the governments

where the non-resident entity is located.Source: Global Financial Integrity

Automatic Tax Information Exchange

Beneficial Ownership Disclosure requires that the control and beneficial ownership of

companies, trusts and foundations be readily available on public record to facilitate effective

due diligence. It also explicitly requires and enforces that financial institutions identify the

ultimate beneficial owners or controllers of any company, trust or foundation seeking to open

an account.Source: Tax Justice Network, Financial Secrecy Index

Beneficial Ownership Disclosure



GLOSSARY

Financial Secrecy

There is no generally agreed definition of what financial secrecy is: the phenomenon has many

different aspects and no definition captures them all. Following is a short description that takes

a broad view of the phenomenon: A secrecy jurisdiction provides facilities that enable people

or entities to escape (and frequently undermine) the laws, rules and regulations of other

jurisdictions elsewhere, using secrecy as a prime tool. Source: Tax Justice Network, Financial Secrecy Index

Formulary Appointment

Under formulary apportionment a formula is used to apportion the group's net income

between the various entities and branches in the group. The formula normally uses some

combination of factors such as property, payroll, turnover, capital invested or manufacturing

costs.Source: United Nations Practical Manual on Transfer Pricing for Developing Countries

Double Taxation

Double taxation refers to the inclusion of the same income in the taxable bases of two different

taxpayers. For example, assume that a subsidiary located in Nigeria (Company A) is subject to a

transfer pricing adjustment (by means of the application of Regulations No 1, 2012 in October

2012) in relation to a transaction with an associated enterprise (Company B) located in the US; if

Nigeria increases Company A's tax burden through such an adjustment and the US fail to

reduce (relieve) this amount from the tax base of Company B, then the same income will be

subjected to tax in both countries, hence double taxationSource: World Bank Investment Climate, 2013

Capital flight refers to unrecorded movement of funds between a country and the rest of the

world. Source: World Bank, 1985

Capital Flight

Country-by-Country Reporting

The concept is to require the inclusion in annual audited financial statements of a profit and

loss account for each jurisdiction in which a multinational corporation had operations during

the year. These profit and loss accounts would include disclosure of both third party and intra-

group transactions, which for these purposes are those trades that take place across national

boundaries but between companies under common ownership or control. They would be

required to be reconciled with the overall group results. In addition, limited cash flow and

balance sheet data would also be required to be published. Source: Murphy, Benefits of Country-by-Country Reporting

Transfer Pricing Manipulation

See Abusive Transfer Pricing.

Tax Expenditure

The amount of revenues lost by a government after granting of tax incentives and exemptions.Source: Tax Policy Center, Tax Expenditures: What are they and how are they structured

Profit Shifting


Tax Incentives

Tax incentives – also known as tax preferences – grant preferential tax treatment to specific

taxpayer groups, investment expenditures or returns, through targeted tax deductions, credits,

exclusions or exemptions. Source: African Development Bank, Domestic Resource Mobilization across Africa:

Trends, Challenges and Policy Options

Thin Capitalization

When the capital of a company is made up of a much greater contribution of debt than of

equity, it is said to be “thinly capitalized”. This is because it may sometimes be more

advantageous from a taxation viewpoint to finance a company by way of debt (i.e., leveraging)

rather than by way of equity contributions as typically the payment of interest on the debts may

be deducted for tax purposes whereas distributions are non-deductible dividends. Source: United Nations Practical Manual on Transfer Pricing for Developing Countries

Trade Mispricing

Trade misinvoicing – also referred to as trade mispricing - is a method for moving money illicitly

across borders, which involves deliberately misreporting the value of a commercial transaction

on an invoice submitted to customsSource: Global Financial Integrity

Transfer Mispricing


Transfer Pricing

The general term for the pricing of cross-border, intra-group transactions in goods, intangibles

or services. Source: United Nations Practical Manual on Transfer Pricing for Developing Countries


GLOSSARY


GLOSSARY

Illicit Financial Flows (IFFs)

IFFs generally refer to movements of money that is illegally earned, transferred or used. Source: Global Financial Integrity

Unitary Taxation/Tax System

Under a unitary tax system, the profits of the various branches of an enterprise or the various

corporations of a group are calculated as if the entire group is a unity. A formula, such as

Formulary Apportionment, is used to allocate the global profits of a multinational group

among the associated enterprises on the basis of a combination of multiple factors such as

property, payroll, sales, capital invested, and manufacturing costsSource: Organisation for Economic Co-operation and Development, International Tax Terms

FOREWORDest Africa is at a critical juncture in its development. Crucial decisions need to be

made to reduce dependency on foreign aid, increase public investment in Wdevelopment initiatives and reduce extreme poverty. There are gargantuan

numbers floating around regarding the magnitude of capital flight from the region. Though

these numbers are often debated, they are telling. The debate about the magnitude of the

problem, whilst important, should not distract from the real issue - it is imperative for our

governments to shift the current paradigm which sees Africa losing billions, if not trillion, of

dollars in illicit financial flows.

There are many reports that have been published on this subject matter. While this report

cannot address all the nuances and complexity of tax policy reform in the region, it addresses

two key aspects, which if taken together, represent opportunities for West African

governments to raise capital, and ensure that the private sector profits from its natural

resources and its growing markets plays a just and fair role in providing resources to support

endogenous socio-economic and development programmes.

We chose to focus on tax incentives and transfer mispricing because as a Foundation we focus

primarily on governance. We believe that the enactment and effective implementation of

comprehensive regulations provides the best immediate returns. Some issues that need to be

urgently addressed include abuse of discretionary powers, lack of parliamentary oversight,

opaque or non-existent cost benefit analysis, weakness of tax and revenue agency capacity, as

well as corruption in all its forms. We do understand that there will be a strong focus on the

assumptions behind the numerical projections this report provides, and we welcome any

constructive ideas on how to improve that methodology. The key issue that the report

addresses nonetheless is the importance of taxation to work for West Africa's developmental

prospects.

Taxation is a concrete manifestation of leadership and future planning – or lack thereof. It is

extremely complex and technical in its implementation, but quintessentially human at its core.

Adequate tax systems are undoubtedly one of the most sustainable sources of financing

development for West African countries. Governments have a duty to its citizens to ensure that

the exploitation of natural resources, be they mineral or agricultural, is done subject to

adequate and fair compensation. This is why governance is such a key part of this process.


FOREWARD

We should all care about it because it affects the State's ability to define its developmental

policies. For instance, it dictates how much a government will put towards supporting

agriculture and tackling food insecurity and how much will be set aside to provide wide

ranging and better education and medical coverage, particularly to those traditionally

marginalized.

Our region is replete with examples of a dearth of leadership, short-sightedness and

inefficiency in the management of state resources and revenues. Continued pressure and

increased demands from inter alia local communities and civil society can lead to the kind of

transformative reforms that will benefit our populations. We hope that this report

commissioned by OSIWA and prepared by Dalberg will meaningfully contribute to this

conversation.

Abdul Tejan-cole

Executive Director

Open Society Initiative for West Africa

EXECUTIVE SUMMARY

1

1 2010 report by the African Development Bank (AfDB) identified abusive transfer

pricing and excessive granting of tax incentives as the main challenges eroding the 2Aalready shallow tax base in most African countries . In the Economic Community of

West African States (ECOWAS), these two factors represent real missed opportunities for

member states to generate badly needed domestic resources for potentially transformative

social and economic projects. Over the last decade, illicit financial flows (IFFs)—i.e., movements 3

of money that is illegally earned, transferred or used —have grown at an annual rate of 23

percent within ECOWAS, rising from less than 3 billion US dollars in 2002 to more than 18 billion 4US dollars in 2011. Although estimates vary greatly and are heavily debated, a general

consensus among economic observers is that IFFs from Africa likely exceed aid flows and

investment in volume. In 2011, for example, official development assistance (ODA) totaled 12 5billion US dollars. The United Nations Economic Commission for Africa (UNECA) estimates

6that 60 percent of IFFs derive from abusive transfer pricing, and sub-Saharan Africa countries 7

still mobilize less than 17 percent of their gross domestic product (GDP) in tax revenues.

Transfer mispricing occurs when multinational companies take advantage of their

organizational structure to shift profit out of higher-tax jurisdictions into lower-tax 8

jurisdictions, primarily by means of under-invoicing and over-invoicing. Unlike abusive

transfer pricing, which erodes the tax base as a result of fraudulent manipulation of prices of

intragroup transactions, tax incentives grant targeted tax deductions, credits, exclusions, or

exemptions to specific taxpayer groups, investment expenditures, or investment returns.

However, tax incentives can create significant tax revenue losses and other unforeseen effects,

such as harmful tax competition among ECOWAS countries, and do not necessary achieve their

stated purpose of attracting foreign direct investment (FDI).

1. AfDB, Domestic Resource Mobilization across Africa: Trends, Challenges and Policy Options, 2010.2. Tax incentives—also known as tax preferences—grant preferential tax treatment to specific taxpayer groups, investment expenditures, or returns,

through targeted tax deductions, credits, exclusions or exemptions. (AfDB, 2010) 3. Global Financial Integrity. 4. Global Financial Integrity, IFF Data By Country: http://wwwgfintegrity.org/issues/data-by-country/, 2002-2012.5. World Bank, WDI – Net official development assistance received (current US$), 2011.6. UNECA, The Dimension of Illicit Financial Flows as a Governance Challenge, 2013.7. OECD, Illicit Financial Flows from Developing Countries, 2014.8. ATAF, Transfer Pricing in the Extractives Industry: A taxing exercise for Sub-Saharan Africa, 2014.


EXECUTIVE SUMMARY

Foregone tax revenue due to transfer mispricing represents the loss of a significant

opportunity for West African governments to define their development priorities with a

degree of agency difficult to achieve when financing is levied from international aid or debt.

The following assumptions underlie our estimation of the extent of revenue losses over the

next five years due to transfer mispricing:

Trends will hold steady for FDI, imports, and exports, over the next five years.9IFFs will continue to grow at 23 percent annually over the next five years. This is the

annual growth rate calculated based on the Global Financial Integrity (GFI) estimates.10

Transfer mispricing will make up about 60 percent of IFFs, as per UNECA estimates,

which are based on GFI data. These estimates consider that 60 percent of IFFs derive

from “commercial transactions through multinational companies.” These are global

estimates, but the hypothesis is that they are of about the same order of magnitude (if

not higher) for West Africa. Also of note, these estimates are questioned by some

experts in this space. Regardless, they provide for an estimated base of calculation of

transfer mispricing volumes, in a field where data is lacking for the reasons this report

aims to uncover.

If IFFs stemming from transfer mispricing were retained in ECOWAS and duly declared

to tax authorities, they would be taxed at the corporate income tax (CIT) rate,

generating additional tax revenues for governments.

CIT rates in the ECOWAS countries will remain the same, resulting in an average rate of 11

29 percent for ECOWAS as a whole.

Based on these assumptions, we estimate that global capital leakage from transfer pricing will 12

increase from 11 billion US dollars in 2011 (60 percent of the total of IFFs in 2011) to 78 billion

US dollars in 2018, leading to losses in government revenues from 3 billion US dollars in 2011

to 14 billion US dollars in 2018. The figure below presents the estimated future trends of

transfer mispricing and their implied losses in government revenues from 2012 to 2018.

1.1.1 WHAT IS A STAKE?

1.1 CHALLENGES AND IMPLICATIONS OF TRANSFER MISPRICING IN WEST AFRICA

9. This is the annual growth rate calculated for the GFI estimates.

10 UNECA, Third Meeting of the Committee on Governance and Popular Participation, 2013.

11 Dalberg calculation, 2014; This is the average of individual country CIT rates as indicated in the Heritage Foundation's 2014 Index of

Economic Freedom.

12 This is based on GFI estimates for the main components of IFFs.


13. Dalberg estimates (cf. the above figure “Estimates of future trends of IFFs and implied government revenue losses due to transfer

mispricing”).

14 The Borgen Project, ECOWAS Adopts New Strategy For Reducing Poverty, 2011 available at http://borgenproject.org/ecowas-adopts-new-

strategy-for-reducing-poverty/.

15 World Bank, International Transfer Pricing and Developing Economies: From Implementation to Application, 2013.

EXECUTIVE SUMMARY

Estimated IFFs in ECOWAS from 2012 to 2018 at an annual growth rate of 23 percent (billion US dollars)

9 23

14 34

17 42

21 52

25 64

31 78

2811

2012

2013

2014

2015

2016

2017

2018 14

11

9

7

6

5

4

Estimated losses in government revenues due to transfer mispricing for ECOWAS countries from 2012 to 2018 (billion USD

2012

2013

2014

2015

2016

2017

2018

+23.0%

+23.0%

IFFs from other proceeds IFFs from transfer mispricing Governement revenue losses from transfer mispricing

Assumptions:

• Baseline IFF data is estimated at 18 billion US dollars in

2011 (GFI) including 9 billion US dollars from transfer mispricing

• Annual growth rate of IFF is 23 percent

• Transfer mispricing represents 60 percent of IFF

• The average CIT rate is 29 percent

• Baseline net tax revenue losses is

3 billion US dollars in 2011 (29 percent of the amount from transfer mispricing - 9 billion US dollars)

Source: Dalberg analysis

To put this lost tax revenue in perspective, if measures had been taken to effectively curb

transfer mispricing (and assuming that the captured transfer mispricing would be subject to

tax), ECOWAS would have collected an additional 15 billion US dollars between 2012 and 132013, more than enough to cover the financing gap of the ECOWAS Regional Poverty

14Reduction Strategy Paper (RPRSP).

A sound transfer pricing regime—one that achieves the dual objective of protecting a country's 15tax base while at the same time maintaining an attractive investment climate —can contribute

to effectively curbing IFFs stemming from transfer mispricing and can mobilize more tax

revenues to fill the funding gaps in developing both national and regional projects. However,

there are obstacles to immediately putting such a regime in place, including the lack of a

comprehensive and harmonized transfer pricing legal framework in the region, the limited

capacity of tax administrators, and the inherent risk of capital flight from the region as a result

of stricter tax policies.

EXECUTIVE SUMMARY

Lack of a comprehensive and harmonized transfer pricing legal framework in ECOWAS

The level of sophistication of the legal frameworks for monitoring cross-border related-party

transactions varies considerably across ECOWAS countries. Only Ghana and Nigeria have

developed dedicated policies on transfer pricing, while nine other member states have

“emerging regimes”; meanwhile, four member states (Niger, Togo, Guinea-Bissau, and Cape

Verde) do not yet have transfer pricing policies in place.

Limited capacity of tax administrators

A recent study by the African Tax Administration Forum (ATAF) found that transfer pricing

remains a serious issue in most countries in West Africa. According to the study, the lack of tax

professionals who specialize in transfer pricing poses a major challenge to monitoring the

practice. Those who do have expertise are in need of ongoing and specialized training in

transfer pricing in sectors such as mining, oil and gas, information and communications

technology, intellectual property industries, and on particular issues such as the treatment of

assets and the branding and sales of companies.

Inherent risk of decreased FDI in the region as a result of stricter tax policies

The compliance burden of a transfer pricing regime tends to be high, particularly at the

beginning of implementation. A 2011 survey by Deloitte conducted for the European

Commission estimated that transfer pricing compliance costs (transfer pricing documentation,

clearances and rulings, and mutual agreement procedures) directly or indirectly account for

about 60 percent of all corporate tax-related compliance costs for a new subsidiary in the 16European Union of a multinational enterprise with a large parent. The compliance costs would

be on the same order of magnitude for a subsidiary in ECOWAS within existing transfer pricing 17

regimes in West Africa as all of these are based on the arm's-length principle (ALP). In some

cases, the compliance burden for multinationals could be significantly higher in the context of

West Africa, especially when the lack of necessary capacity or experience by the tax

administration leads to what could be perceived by taxpayers as untargeted transfer pricing 18

audits, unnecessarily protracted disputes, and/or inadequate documentation and disclosure

requirements.

OBSTACLES AGAINST SOUND TRANSFER PRICING REGIME

16 World Bank Investment Climate (WBIC), International Transfer Pricing and Developing Economies: From Implementation to Application,

2013.

17. There is a fundamental consistency between the UN Manual (for developing countries) and the OECD Transfer Pricing Guidelines (for

developed countries), in applying the ALP found in Article 9 of both the UN Model Convention and the OECD Model Convention.

While there are some differences between the two, those tend to reflect differences in perspective and emphasis, rather than

differences in the principles to be applied (Source: Deloitte, Arm's Length Standard, 2013).

18 For example, when tax administrators impose informational requirements on taxpayers that exceed the needs and capacity of the tax

administration (Source: WB Investment Climate, 2013).


EXECUTIVE SUMMARY

The risk of double taxation also increases for multinationals as a result of transfer pricing

adjustments. Ernst & Young's 2003 Global Transfer Pricing Survey reports that 40 percent of 19transfer pricing adjustments resulted in double taxation. As such, double taxation imposes an

additional transactional cost on multinational enterprise groups, which hampers international

trade and foreign investment.

In the framework of the regional common market, disparities in transfer pricing rules create

loopholes that companies can exploit. For instance, in 2008 the West African Economic and 20Monetary Union (WAEMU) adopted a multilateral tax treaty (MTT) that distributes the taxing

21rights of WAEMU states with respect to intra-community investments. The MTT covers taxes

on income, including those collected by the central governments on behalf of sub-national 22governments. Multinationals that have subsidiaries in various countries in WAEMU may

decide to use the subsidiary (Company A) based in a WAEMU country with no or weak transfer

pricing rules as their entry point into the zone. Such a multinational will benefit from an

unintended tax advantage over other multinationals that locate their subsidiaries in WAEMU

countries with transfer pricing regimes. Operations between Company A and its subsidiaries

could be considered by the tax authorities as part of intra-regional trade and therefore apply

the MTT rules. A regional approach would make it possible to harmonize legislation and

eliminate loopholes.

ECOWAS member states highlighted both the lack of staff that specialize in transfer pricing and

capacity gaps that hinder the development and application of transfer pricing regulations.

Regional efforts should therefore also focus on identifying common needs across ECOWAS

countries and designing programs to address those needs centrally. The ECOWAS Commission

is best positioned to play this role. Examples of new programs include pooling the pricing and

transaction data available in each country to establish regionally meaningful comparables (i.e.,

databases on independent transactions that are used to assess whether transactions between

related parties are priced based on the market value).

Regional interests should also be protected at the global level, and for this, a resolutely

regional approach is required. ECOWAS countries have not been parties to the Action Plan on

Base Erosion and Profit Shifting (BEPS), an initiative of the Organization for Economic Co-

operation and Development (OECD) aimed at redefining international tax rules to fight tax

evasion. The consultation process is still ongoing, and ECOWAS should make efforts to serve as

the region's voice on this issue.

1.1.2 Call to action

19 WBIC, International Transfer Pricing and Developing Economies: From Implementation to Application, 2013.

20 WAEMU, Règlement 08/2008/CM/UEMOA and Application Rules 005/COM/2010/UEMOA.

21 Mario Mansour and Grégoire Rota-Graziosi; WAEMU, Tax Coordination, Tax Competition, and Revenue. Mobilization in the West African

Economic and Monetary Union, 2013.

22 Ibid.


EXECUTIVE SUMMARY

1.2 LOSSES OF GOVERNMENT REVENUE AND HARMFUL TAX COMPETITION BETWEEN COUNTRIES AS A RESULT OF TAX INCENTIVES

1.2.1 What is at stake?

1.2.2 Call to action

Tax incentives are simply too costly in West Africa, eroding the tax base for public resource

mobilization. Further, tax incentives can create competition between ECOWAS countries, 23

leading to a net loss at the regional level. A recent International Monetary Fund (IMF) study

showed that tax incentives in a given country can, to a large extent, have negative spillovers on

policies implemented in other countries. A one-point reduction in the corporate tax (CT) rate

globally causes a 3.7 percent reduction in the corporate tax base in a given country over the 24short term. In the agriculture and manufacturing sectors, the granting of tax incentives has

also resulted in harmful tax competition that has effectively reduced corporate tax rates across

the ECOWAS region.

Yet, despite their high cost, tax incentives are not always a key factor in attracting FDI and ,25,26

driving economic growth. A study by Stefan Van Parys and Sebastian James concludes that

tax changes in the CFA Franc zone did not have significant impact on flows of FDI or fixed

capital formation. The study shows that other factors—such as increasing investor confidence

by broadening legal guarantees and simplifying the tax system—were, however, successful in

drawing more foreign investment.

ECOWAS and WAEMU have issued directives and guidelines that include more coherent tax

policies among member countries. These initiatives include the adoption of a common

external tariff (CET) within ECOWAS, which implies that all goods entering the customs territory

of any ECOWAS country will be assessed at the same rate of customs duty (0 percent, 5 percent, 27

10 percent, 20 percent, and 35 percent). The CET is expected to go into effect in 2015 within

the ECOWAS region. WAEMU has also issued directives that limit tax rates. However, a recent

review of harmonization efforts at the WAEMU level has shown that policies other than tax

legislation, such as investment codes, may be used by member states as a means of 28circumventing regional guidelines.

29All WAEMU states depart from the tax treatment under their general tax laws by providing

preferential tax regimes, often as part of investment codes at the national level, some of which

have been established after (and despite) the release of WAEMU guidelines.

23 IMF, Spillovers in international corporate taxation, 2014.

24 This study was conducted for the period 1980-2013 on a sample of 173 countries, including all ECOWAS countries (Source: IMF, Spillovers

in international corporate taxation, 2014).

25 Stefan Van Parys and Sebastian James, Why Tax Incentives May be an Ineffective Tool to Encouraging Investment? – The Role of

Investment Climate, 2009.

26 They sought to analyze theoretically how the investment climate affects the impact of the corporate tax rate on investment using a model

where the tax revenues are used to improve the investment climate.

27 ECOWAS, 2014; Gret-Iram, Etude prospective sur les mesures de protection nécessaires pour le développement du secteur agricole en

Afrique de l'Ouest (illustration sur quelques filières stratégiques).

28 Mario Mansour and Grégoire Rota-Graziosi; WAEMU, Tax Coordination, Tax Competition, and Revenue Mobilization in the West African


29 Ibid.

1.3 RECOMMENDATIONS


EXECUTIVE SUMMARY

Overall, there is a strong need to develop and implement a West Africa regional initiative

focused on transfer pricing and to harmonize and rationalize tax incentives. Political will is an

essential underpinning of any such initiative; national governments, working with the ECOWAS

Commission, must be committed to jointly engaging in fiscal policy reforms. Below we offer our

specific recommendations for transfer pricing and tax incentives, respectively.

Regional reform of transfer pricing policy is a large undertaking, but we believe the

following are three key initial steps: (i) choosing between the ALP approach and

alternative methods—such as formulary apportionment—as the most appropriate

transfer pricing regime for the region; (ii) improving information exchange among

ECOWAS states; and (iii) advocating for and influencing change at the international

level.

ECOWAS should make a strategic decision either to adapt the OECD ALP or to develop

alternative methods, such as formulary apportionment (FA). As a starting point, ECOWAS

should examine the advantages and limitations of each method, taking into account the

regional context. What follows are brief presentations of the ALP and formulary apportionment

methods, as well as what we believe to be the key steps for the implementation and

enforcement of a transfer pricing regime in the region. These serve simply as starting points

and would require further analysis and adjustment, alongside careful consideration of other

methods.

· ALP standards. ALP is the OECD standard for determining for tax purposes the

conditions of commercial and financial transactions between associated enterprises.

However, there are some practical difficulties in its application: i) it requires

considerable documentation on the part of taxpayers; (ii) it is time- and resource-

intensive to implement and enforce; and (iii) it requires comparables, which are lacking

in the ECOWAS region.

1.3.1 Recommendations on transfer pricing

A. Choosing an appropriate transfer pricing regime for the region

30 Murphy, Benefits of Country-by-Country Reporting, 2012.

31 UN Practical Manual on Transfer Pricing for Developing Countries, 2012.

32 Ibid.

33 EuropeAid, Transfer pricing and developing countries, year of publication not provided.


34 UEMOA, Règlement N° 08/CM/UEMOA.

35 TNJ, Financial Secrecy Index – next steps.

36 Sebastian James, Tax and Non-Tax Incentives and Investments: Evidence and Policy Implications, 2013.

EXECUTIVE SUMMARY

· Formulary apportionment. One alternative to the ALP approach is a formulary

apportionment (FA) method, also referred to as unitary taxation. Under unitary

taxation, the profits of the various branches of an enterprise or the various 30corporations of a group are calculated by treating the entire group as a unit. The FA

method is used to allocate the global profits of a multinational group among the

associated enterprises on the basis of a combination of multiple factors such as 31

property, payroll, sales, capital invested, and manufacturing costs. This method is not

without its limitations: (i) the arbitrariness of predetermined formulas makes it difficult

to reflect the particular circumstances of each multinational enterprise; (ii) FA relies

heavily on foreign-based information; (iii) implementation is difficult as it requires 32

substantial international coordination and consensus; and (iv) FA runs the risk of

creating disagreements among countries as each may wish to emphasize or include

different factors in the apportionment formula based on the activities or factors that

predominate in its jurisdiction.

The ECOWAS Commission should consider creating an “adapted” Transfer Pricing Advisory

Body, bringing together representatives of tax administrators, accounting and tax advisors,

and multinationals. The body would serve as a platform for consultation, experience sharing,

and discussion on transfer pricing issues in West Africa. The European Union (EU) has brought

together a group of experts from the public and private sectors to form an “EU Joint Transfer

Pricing Forum” (EU JTPF); ECOWAS could use this example to set up its own advisory body to

reinforce its collaboration with other groups specializing in tax matters, such as the

Association of Accountancy Bodies in West Africa (ABWA).

Through a collaboration with the Transfer Pricing Advisory Body, ATAF could support the

ECOWAS Commission in establishing guidelines for a harmonized transfer pricing regime. The

guidelines should focus on providing comprehensive details on different steps to be taken at

the local level toward the adoption of a transfer pricing regime, valuation methods of cross-

border related-party transactions, documentation requirements, and dispute resolution

mechanisms.

Setting up a regional coordination and advisory unit on transfer pricing

Issuing a comprehensive regional transfer pricing regulation framework


EXECUTIVE SUMMARY

37 The draft code proposes only weak enforcement mechanisms and emphasizes tax harmonization more than regional cooperation. Also, it

does not oblige EAC states to undertake tax expenditure analyses to better assess the efficacy of tax incentives in realizing development

objectives. (Source: Tax Justice Network-Africa & ActionAid International, Tax competition in East Africa: A race to the bottom?, 2011).


Strengthening the capacity of national tax administrators to enforce transfer pricing

policies

B. Improving information exchange

Tax administrators need to build up transfer pricing capacity and expertise, with a particular 33

focus on sectors and transactions that pose the greatest transfer mispricing risks. Equally

important will be for governments to retain newly trained and specialized talent since the

private sector will require the same skills in order to comply with regulations—and typically has

more resources than governments to attract and retain skilled financial professionals. Instilling

the necessary capabilities within the appropriate government departments of member states

will require long-term assistance and effort, and will demand that tax administrations undergo

significant changes, such as rapidly developing specific expertise on sectors and transactions

that pose the greatest transfer mispricing risks.

There is a potential to leverage capacity-building initiatives such as the ATAF Transfer Pricing

Working Group (TPWG), which aims to develop strategies and products for, and give direction

to, the work of the Transfer Pricing Project with regard to (i) mechanisms for the sharing of best

practices in identifying key transfer pricing risks in respective members' countries; (ii) the

processes of developing effective transfer pricing legislation; (iii) products to enable ATAF

members to build the technical capacity to effectively implement their transfer pricing rules;

and (iv) the assessment of transfer pricing risk.

In order to provide tax administrators with alternatives to information self-reported by

taxpayers, ECOWAS member states must cooperate more effectively on information exchange. 34This can build on existing frameworks such as (i) the WAEMU legal framework for avoiding

double taxation within the WAEMU space and providing assistance in the exchange of

information and tax collection; (ii) the ATAF Agreement on Mutual Assistance in Tax Matters;

and (iii) the ATAF Practical Guide on Exchange of Information for Developing Countries. As tax

cooperation should extend beyond the boundaries of economic communities, it will be

important for ECOWAS and other African economic unions (Southern African Development

Community [SADC], East African Community [EAC], Central African Economic and Monetary

Community [CEMAC], etc.) to work jointly on this initiative with support from ATAF and the UN

Tax Committee. The result would be that the vast majority of African countries would have the

administrative capacity and appropriate data standards (such as the OECD automatic

information exchange framework) to share data with others.


EXECUTIVE SUMMARY

In addition, governments should make beneficial ownership disclosure compulsory at least for

the sectors with high risk of abusive transfer pricing. Beneficial ownership disclosure requires

that the control and beneficial ownership of companies, trusts, and foundations be readily 35available in the public record to facilitate effective due diligence.

To more effectively influence change, civil society should endeavor to find a creative way to

incentivize multinationals by demonstrating that they have much to gain from adopting the

country-by-country reporting system. An example could be to create a "transparency label" for

multinationals that comply with country-by-country reporting standards. Regardless of

whether or not country-by-country reporting becomes international law, the idea is to develop

voluntary international standards on tax and financial transparency within multinationals. A

"transparency label" would be similar to what the International Organization for

Standardization (ISO) is doing to provide world-class specifications for products, services, and

systems in order to ensure quality, safety and efficiency.

Finally, we recommend that the Commission take an active role in global talks and

consultations conducted with a view to drawing up international standards, such as the BEPS

action plan aimed at redefining international tax rules and combating tax evasion. Civil society

should also work closely with ATAF and the UN Tax Committee in tax policy design and

administration.

To broaden the tax base through tax incentives reform, priority interventions should focus on

(I) setting region-wide guidelines for tax exemptions, (ii) improving transparency in the

governance of tax incentives, and (ii) advocating for and influencing change at the

international level.

The ECOWAS Commission should strive for the rationalization and coordination of tax

incentives by working in close collaboration with the WAEMU Commission. Both organizations

should come together through a joint committee, such as the ECOWAS-WAEMU Joint CET

Management Committee, to stop the region's race to the bottom on tax incentives. To that

end, ECOWAS and WAEMU can learn from the successes and challenges of other regional

C. Advocating for and influencing change

A. Setting guidelines for tax exemptions

1.3 .2 Recommendations on tax incentives


EXECUTIVE SUMMARY

communities that have undertaken the tax incentive regime harmonization process. For

example, the East African Community (EAC) recently made significant progress toward a

system of harmonizing their tax incentive regime through the use of a “Code of Conduct,” 36 37though it has yet to be adopted. The Code of Conduct, despite some limitations, aims to

formalize an existing arrangement whereby each year the Finance Ministers of the five

countries that make up the EAC meet before their budget speeches are made and discuss their

budget proposals. This provides the opportunity for Finance Ministers to dissuade other 38

members from proposing any new tax incentive that puts other countries at a disadvantage.

Governments should systematically carry out cost-benefit analyses and subject tax exemption

measures to oversight by parliament—existing in all ECOWAS member states —and the

citizenry. Tax incentives should be reviewed and approved by parliament before they are

definitively granted, and only after an objective study of the expected costs and benefits have

been presented to parliament, through annual tax expenditure analysis, as part of the budget

process. Morocco is one of the few African countries that are currently reporting their tax 39incentives in their tax expenditure reports. These reports aim to guide the allocation of

resources, strengthen public financial management, and contribute to fiscal transparency by

providing information for the comparison of the cost and effectiveness of direct spending and

tax expenditure programs.

Through advocacy, civil society should ensure that tax incentives are granted transparently and

are in the best interests of the ECOWAS countries.

B. Improving transparency in the governance of tax incentives

C. Advocating for and influencing change

39 OECD, Tax Incentives for Investment – A Global Perspective: experiences in MENA and non-MENA countries, 2007.

OBJECTIVES AND GENERAL CONTEXT

2

1

The Open Society Initiative for West Africa (OSIWA) aims to promote inclusive democratic

governance, transparency, and the sense of responsibility in the management of institutions as

well as active citizenship in West Africa (www.osiwa.org). As part of its push to produce

evidence-based research to help the Economic Community of West African States (ECOWAS)

to refine its regional integration agenda, OSIWA contracted Dalberg Global Development

Advisors (www.dalberg.com) to conduct two studies, one of which explores missed

opportunities to increase the tax base in West Africa by addressing challenges posed by

transfer mispricing and tax incentives. The study aims to identify policy changes that are

required to curb transfer mispricing and to ensure that tax incentives are beneficial to the

region, with a particular focus on engaging the West African civil society and the private sector

in the process of formulating, implementing, and monitoring these policies. The second study

aims to promote the formulation and implementation of more effective agricultural and

industrial policies for integrated development in West Africa.

40A 2010 report by the African Development Bank (AfDB) identified abusive transfer pricing and

excessive granting of tax incentives as the main challenges eroding the already shallow tax

base in most African countries. These two challenges result in missed opportunities to mobilize

badly needed public resources in the ECOWAS region. Over the last decade, illicit financial

flows (IFFs) have grown at an annual rate of 23 percent within ECOWAS, rising from less than 3 41

billion US dollars in 2002 to more than 18 billion US dollars in 2011. Although estimates vary

greatly and are heavily debated, there is a general consensus that IFFs from Africa likely exceed

aid flows and investment in volume. In 2011, for example, official development assistance 42 43(ODA) totaled 12 billion US dollars. UNECA estimates that 60 percent of IFFs derive from

abusive transfer pricing, and that sub-Saharan Africa countries still mobilize less than 17 44

percent of their gross domestic Product (GDP) in tax revenues.

40 AfDB, Domestic Resource Mobilization across Africa: Trends, Challenges and Policy Options, 2010.

41 Global Financial Integrity (GFI), IFF Data By Country: http://wwwgfintegrity.org/issues/data-by-country/, 2002-2012.

42 World Bank, WDI – Net official development assistance received (current US$), 2011.


44 OECD, Illicit Financial Flows from Developing Countries, 2014.


Evolution of IFFs within the ECOWAS region between 2002 and 2011 (million USD)

Million USD

IFFs and ODA within the ECOWAS region in 2011 (billion USD)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

+23%

20082003 2005 200720062002 20092004 20112010

Figure 1 : Magnitude of Illicit Financial Flows in West Africa

Source: GFI, IFF Data by Coun try: http: / / wwwgfintegrity. org/ issues/ data- by- coun try/ , 2002- 2011; GFI, Illicit Financial Flows

from Africa: Hidden Resource for Development, 2010; World Bank, WDI – Net official development assistance received

( current US dollars) , 2011; Dalberg analysis

$18bn$12bn { Illicit Financial Flows

Official Development Assistance

Côte d'Ivoire, Nigeria, and Togo are the most affected West African countries in terms of total

volume, contributing up to 87 percent of total IFFs in ECOWAS between 2002 and 2011. During

that period, IFFs were estimated at over 23 billion US dollars for Côte d'Ivoire, 142 billion for

Nigeria, and 18 billion for Togo.



Nigeria

Guinea

Sierra Leone

Liberia

Senegal

Guinea Bisau

Ghana

Benin

Cape Verde

Gambia

IvoryCoast

Mali Niger

Togo

Burkina-Faso

11

387

557

587

714

1,129

2,963

3,128

3,754

10,256

18,467

142,274

23,138

3,164

413

45Estimates by Global Financial Integrity (GFI) break down IFFs, at a global level, as follows:46

· 60 to 65 percent from private business practices such as trade misinvoicing.

· 30 to 35 percent from criminal activities such as money laundering, drug trafficking and

human trafficking.

· 3 percent from corruption.

Trade misinvoicing moves more illicit money across borders than any other conduit of IFFs. GFI

estimates the average annual loss to Sub-Saharan Africa associated with trade misinvoicing at 4738.4 billion US dollars between 2008 and 2010. In Guinea, Mali, and Togo, the average annual

loss from trade misinvoicing was estimated respectively at 16 percent, 25 percent, and 13 48

percent of government revenues between 2002 and 2006.


45. United Nations Economic Commission for Africa (UNECA), Third Meeting of the Committee on Governance and Popular Participation,

2013.

46 Transfer pricing—defined as the price an entity of a company charges to a different entity of the same company for a good or service

(Farlex Financial Dictionary, 2012)—is not, in itself, illegal or necessarily abusive. It becomes illegal or abusive when it involves

manipulating prices to minimizing the tax burden or increasing apparent losses to make profits look as small as possible also known as

transfer mispricing, transfer pricing manipulation, or abusive transfer pricing (Tax Justice Network).

47 The Africa Center, Africa Rising? From resource potential to shared prosperity, 2014,

48 GFI, Implied Tax Revenue Loss from Trade Mispricing, 2010.


Unlike abusive transfer pricing, which erodes the tax base as a result of fraudulent manipulation

of prices of intragroup transactions, tax incentives are concessions by governments on

potential additional tax revenues. Tax incentives—also known as tax preferences—grant

preferential tax treatment to specific taxpayer groups, investment expenditures, or investment

returns, through targeted tax deductions, credits, exclusions, or exemptions. Governments cite

various arguments for the use of tax incentives, ranging from addressing different types of 49

market failures to attracting foreign firms to stimulating exports.

In Sierra Leone, international companies were granted tax exemptions amounting to 224

million US dollars in 2012, equivalent to 55 percent of government revenues, eight times the 50

health budget, and seven times the education budget. In Ghana, these tax expenditures 51

accounted for 42 percent of government tax revenue in 2011, equaling 6 percent of GDP. In

Senegal, tax exemptions were estimated at 20 percent of total tax revenues in 2009, equating to 523 percent of the country's GDP. Nigeria lost over 425 million US dollars in 2006 through tax

53incentives, while the tax losses generated by tax preferences in Côte d'Ivoire reached 160

54million US dollars in 2013.


49 AfDB, Domestic Resource Mobilization across Africa: Trends, Challenges and Policy Options, 2010.

50 Christian Aid, Losing Out: Sierra Leone's massive revenue losses from tax incentives, 2014.

51 OECD, Analysis of Tax Expenditures in Ghana, 2013.

52 DGID – Sénégal, incitations fiscales à l'investissement: Coût et efficacité, 2014.

53 Fakile, Adeniran Samuel Adegbie, Festus Faboyede, Olusola Samuel, Tax Expenditure in Sub Saharan Africa: The Nigerian Experience,

2012.

54 IMF, Côte d'Ivoire - Technical Assistance Report, 2014.

TRANSFER MISPRICINGIN WEST AFRICA

3

3.1 Scale, impact and trajectory of transfer mispricing in

West Africa

Transfer mispricing occurs when multinational companies take advantage of their

organizational structure to shift profit out of high-tax jurisdictions into lower-tax jurisdictions 55

using different vehicles, including

· under-invoicing: selling goods, services, or intangibles to a related company at a

below-market rate. For example, under-invoicing can occur when an ECOWAS-based

subsidiary sells raw materials to its parent company based out of the ECOWAS zone.

· over-invoicing: buying goods, services, or intangibles from a related company at a

higher-than-market rate. For example, over-invoicing can occur when an ECOWAS-

based subsidiary buys goods or services from its parent company based out of

ECOWAS at an abnormally high price, in such a way as to artificially lower its profits.

The risk of transfer mispricing is likely to increase as multinationals become more active in the

region, particularly through subsidiaries. The analysis below seeks to estimate the magnitude

of the potential risk of transfer mispricing in the ECOWAS region. The study does recognize the

critical importance of foreign direct investment (FDI) in ECOWAS, and does not conclude that

the increased activity of multinationals in West Africa automatically leads to increased transfer 56

mispricing. However, the risk is real and calls for policy that strikes the right balance between

FDI and tax losses.

The dominant role of multinationals in West Africa makes the region particularly vulnerable to

transfer pricing manipulation. UNECA estimates that 60 percent of global IFFs stem from the 57

commercial transactions of multinational corporations. Country profiles issued by the United

Nations Conference on Trade and Development (UNCTAD) in 2004 revealed that the 90 largest

55 ATAF, Transfer Pricing in the Extractives Industry: A taxing exercise for Sub-Saharan Africa, 2014.

56 The analysis did not identify any correlation between IFFs and FDI.



2,250

2,331

1,633

3,678

16

16

15

15

15

14 737

Largest affiliates of multinationals in select countries in 2004 in the tertiary* and industrial sectors (#)

Sales of largest affiliates of multinationals in select countries in 2004 in the tertiary* and industrial sectors (million US dollars)

3,883

6,009

31

31

29 847

110

(*) Not inclusive of the financial sector

(**) GDP, current prices, billion US dollars in 2004 Tertiary Industrial

Source: UNCTAD, FDI/TNC database, Country Profiles, 2004; AfDB, Open Data for Africa database, 2004; Dalberg analysis

Figure 3 : Importance of multinational activity in West Africa

COTE D’IVORE

NIGERIA

SENEGAL

27 7

Magnitude of sales of largest affiliates of multinationals in select countries in 2004 (% of GDP**)

COTE D’IVORE NIGERIA SENEGAL

11

61Foreign investments continue to increase in ECOWAS, from 38 billion US dollars in 2002 to

62over 110 billion US dollars in 2011 , with an average annual growth rate of 13 percent, as

shown by the figure below.

TRANSFER MISPRICING IN WEST AFRICA

58subsidiaries of foreign firms operating in the industrial and tertiary sectors in Côte d'Ivoire, 59Nigeria, and Senegal reported 11 billion US dollars in net sales. Figure 3 highlights, for 2004,

the number and net sales of foreign subsidiaries based in Côte d'Ivoire, Nigeria, and Senegal

and the respective magnitude of their net sales compared to the countries' GDP. For Côte

d'Ivoire, for example, net sales of the 31 largest foreign subsidiaries represented 27 percent of 60the country's GDP in 2004. This trend is likely to continue throughout ECOWAS as FDI

continues to increase.

58 Not inclusive of companies operating in the financial sector.

59 UNCTAD, FDI/TNC database, Country Profiles, 2004; Dalberg analysis.

60 More recent data not available

61 CNUCED, UNCTADstat, Stock of Inward and Outward Foreign Direct Investment, 2002-2011; Dalberg analysis

62 Ibid


110,265

93,85883,871

68,678

57,93047,734

40,33345,295

41,75937,826

+1 .2 6%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: CNUCED, UNCTADstat, Stock of Inward and Outward Foreign Direct Investment, 2002-2011; Dalberg analysis

Figure 4 : Trends in FDI in West Africa (billion US dollar)

FDI inflows in West Africa are expected to continue to grow, mainly driven by the projected

increase in foreign investments in Nigeria, Ghana, and Côte d'Ivoire, which contributed

respectively up to 77 percent, 7 percent, and 5 percent of the ECOWAS GDP in 2013. For

Nigeria, the Economist Intelligence Unit (EIU) has estimated an annual net direct investment of 63 64

11 billion US dollars by 2016, from its 2013 value of 4 billion US dollars. Investment in Ghana

is expected to continue to increase over the medium term driven by the country's stable 65

political environment and investment opportunities in the oil and gas industry. Real GDP was

expected to grow at 7.6 percent in 2012 followed by an annual average of 10.7 percent over 662013-2016. This growth is predicated on the expectation that the oil and gas boom will

67continue and will attract foreign participation. In Côte d'Ivoire, 20 billion US dollars in 68investments in infrastructure are expected to support rapid economic growth. Also, the

discovery of light crude oil offshore in June 2012 is expected to trigger foreign investments in 69the near to mid-term.

ECOWAS countries authorize relatively high levels of foreign ownership in key sectors, which

contribute, among other reasons, to attracting FDI and foreign subsidiaries to the region.

Figure 5 illustrates that, compared to other regions, ECOWAS countries allow a large

percentage of foreign ownership across multiple sectors.


63 KPMG, Foreign Direct Investment in Africa, 2013 available at http://www.blog.kpmgafrica.com/foreign-direct-investment-in-africa/.

64 UNCTAD, Word Investment Report, 2014; Dalberg analysis.

65 KPMG, Foreign Direct Investment in Africa, 2013.

66 Ibid.

67 Ibid.

68 Ibid.

69 Ibid.


Source: World Bank Invest Across Borders database, Analysis by Dalberg (2010)

ECOWAS SUB-SAHARA AFRICA MIDDLE EAST AND NORTH AFRICA

95%

79%

98% 96%

85% 82%

94%

70% 70%

100%

84% 84%

100% 98% 100% 100%

87%

63%

Mining Banking Media Telecom Agriculture Transport

Figure 5 : Average level of foreign participation authorized in different regions and sectors

70Since 100 percent of net profits can be repatriated, full foreign ownership in key sectors

(mining, telecommunications, etc.) may be facilitating resource drain from the region. For

instance, between 2000 and 2008, Nigeria received 40.7 billion US dollars in FDI, while over the 71

same period, profits transferred totaled 51.9 billion US dollars. In other words, for each new

dollar invested in Nigeria during the period, 1.27 dollar was transferred abroad in the form of

profits, for an extraction rate of 127 percent.

As a comparison, over the same period the extraction rate was 35-40 percent in China and 72approximately 38 percent in India. Full foreign ownership can increase the risk of transfer

mispricing as it allows multinationals to control their subsidiaries to the same extent as their

equity proportion (total control), compared to cases where, for example, government is a key

stakeholder of the company.

ECOWAS exports have increased significantly in recent years, from 65 billion US dollars in 2005

to 145 billion US dollars in 2013 (an annual growth of 11 percent). This increasing trend (see

Figure 6) is mostly driven by oil exports, which represented over 73 percent of total exports in

2013. For ECOWAS, the export-related risk of transfer mispricing is most pressing in terms of

potential under-invoicing.


70 Seventy-five percent in exchange for incentives in Nigeria.

71 Rosa Luxemburg Foundation West Africa, Les économies de l'Afrique de l'Ouest: un portrait statistique, 2014.

72 Ibid.


50

14

60

16

68

18

88

23

58

23

78

29

96

34

103

36

106

39

2005 2006 2007 2008 2009 2010 2011 2012 2013

+10 6. %

6576

86

111

82

106

130139

145

Figure 6: Aggregate value of ECOWAS exports between 2005 and 2014 ( billion USD)

Export of Non-Oil products Oil Exports

Source: AfDB, Open Data for Africa database, 2014; Dalberg analysis

During the same period (2005-2013), ECOWAS imports grew by 14 percent per annum. In value

terms, total imports tripled from 43 billion US dollars in 2005 to 124 billion in 2013. This rapid

growth (see Figure 7) is particularly due to imports of non-oil products, which represented 73

percent of total imports in 2013. From a regional perspective, the import-related risk of transfer

mispricing is due to potential over-invoicing.

Figure 7 : Aggregate value of ECOWAS imports

between 2005 and 2014 (billion US dollars)

Import of Non-Oil products Oil Imports

Source: AfDB, Open Data for Africa database, 2014; Dalberg analysis

34

20

57

13

49

19

64

29

78

31

88

33

91

45

13

35

119

43 46

58

77

62

84

107

120124

2005 2006 2007 2008 2009 2010 2011 2012 2013



These increasing trends related to FDI, foreign firm activities in the region, exports, and imports

are illustrative of the improving integration of West Africa in the global economy. However

they can further expose the region to the risk of transfer mispricing. For instance, assuming that 73about 60 percent of international trade happens within, rather than between, multinationals,

we estimate that in 2013, 161 billion US dollars were transacted between ECOWAS-based

subsidiaries and their parent companies, or roughly 87 billion US dollars for exports and 74 74billion US dollars for imports. These amounts are subject to the risk of under-invoicing

through exports and overpricing through imports.

The extent of revenue losses due to transfer mispricing can be estimated based on the

following assumptions:

· Trends will be the same for FDI, imports, and exports, over the next five years.75· IFFs will continue to grow at 23 percent annually over the next five years.

76· Transfer mispricing will make up about 60 percent of IFFs.

· If IFFs stemming from transfer mispricing were retained in ECOWAS and duly declared

to tax authorities, they would be taxed at the corporate income tax (CIT) rate,

generating additional tax revenues for governments.

· CIT rates in the ECOWAS countries will remain the same, resulting in an average rate of .77

29 percent for ECOWAS as a whole

Based on these assumptions, it is estimated that global capital leakage from transfer pricing will 78

increase from 11 billion US dollars in 2011 (60 percent of the total of IFFs in 2011) to 78 billion

US dollars in 2018 leading to losses in government revenues from 3 billion US dollars in 2011 to

14 billion US dollars in 2013. Figure 8 presents the estimated future trends of transfer

mispricing and the implied losses in government revenues from 2012 to 2018.

73 GFI; Illicit Financial Flows from Africa: Hidden Resource for Development, 201274 Dalberg calculation based on exports/imports for ECOWAS data from AfDB, 201475 This is the annual growth rate calculated for the GFI estimates, as per Figure 1.76 UNECA, Third Meeting of the Committee on Governance and Popular Participation, 2013.

77 Dalberg calculation, 2014; This is the average of individual country CIT rates as indicated in the Heritage Foundations's 2014 Index of

Economic Freedom.

78 This is based on GFI estimates for the main components of IFFs.



79 Thin capitalization refers to securing debt financing through a holding company located in a low-tax jurisdiction. Specifically, the

subsidiary in the high-tax jurisdiction borrows from the holding company and gets to subtract the interest paid to the holding company

from its profits. This method is sometimes considered as one form of transfer pricing, but it can be abused in similar ways. (ATAF, Transfer

Pricing in the Extractives Industry: A taxing exercise for Sub-Saharan Africa, 2014).

80 GFI's data, however constructed, remain extremely conservative, as we still do not capture the misinvoicing of trade in services (rather

than the trade in goods), same-invoice trade mispricing (such as transfer mispricing), hawala transactions, and dealings conducted in bulk

cash. This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities that are often settled in

cash are not included in these estimates. It also means that much of abusive transfer pricing conducted between arms of the same

multinational corporation are not captured in our figures. (Raymond W. Baker, President Global Financial Integrity, December 11, 2013).

81 Dalberg estimates.


Figure 8 : Estimates of future trends of IFFs and implied government revenue losses due to transfer mispricing

Estimated IFFs in ECOWAS from

2012 to 2018 at an annual growth

rate of 23 percent (billion US dollars)

9 23

14 34

17 42

21 52

25 64

31 78

2811

2012

2013

2014

2015

2016

2017

2018 14

11

9

7

6

5

4

Estimated losses in government revenues due to transfer mispricing for ECOWAS countries from 2012 to 2018 (billion USD

2012

2013

2014

2015

2016

2017

2018

+2

03.

%

+2

.3 0%

IFFs from other proceeds IFFs from transfer mispricing Governement revenue losses from transfer mispricing

Assumptions:

• Baseline IFF data is estimated at 18 billion US dollars in

2011 (GFI) including 9 billion US dollars from transfer mispricing

• Annual growth rate of IFF is 23 percent

• Transfer mispricing represents 60 percent of IFF

• The average CIT rate is 29 percent

• Baseline net tax revenue losses is

3 billion US dollars in 2011 (29 percent of the amount from transfer mispricing - 9 billion US dollars)

ESTIMATED TOTAL GOVERNMENT

REVENUE LOSSES BETWEEN

2012 AND 2018

$56bn


The above estimates remain conservative, as they do not consider possible higher growth rates

of FDI, imports and exports for ECOWAS, and their implications on the trajectory of IFFs and 79

transfer mispricing. Further, they do not capture other IFF circuits such as thin capitalization. 80

The conservative nature of the figures is also reflective of the limits of GFI's methodology.

Regardless of limitations, these estimates highlight the magnitude and extent of the transfer

mispricing issue on the mobilization of government revenues in ECOWAS. For example, if

required measures had been taken to effectively curb transfer mispricing, additional tax

revenues that would have been collected between 2012 and 2014 (totaling 15 billion US dollars 81

as per our estimates ), would have been sufficient to cover the financing gap (11.3 billion US

dollars in 2011) for implementing the ECOWAS Regional Poverty Reduction Strategy Paper 82

(RPRSP), and thereby would have contributed to regional integration as a means of ensuring

poverty eradication and the well-being, peace, and security of the entire population, as per the 83

stated objectives of RPRSP (see Figure 9).



Potential additional tax revenues in 2012-2018 from a more effective transfer pricing regime

Additional funding needed by ECOWAS to implement the RPRSP (2011)

Available funding for ECOWAS to implement the RPRSP (2011)

$56bn

$11.3bn

$3.7bn


As another illustration of the missed opportunity, it's worth noting that a basic ECOWAS regional

infrastructure package that would enable additional electricity supply, complete a regional road

network, and lay down fiber optic links connecting all countries to submarine cables would cost 84

1.6 billion US dollars annually if implemented over a decade.

This, too, is less than potential additional revenues from adequate transfer pricing policies and

their implementation.

A sound transfer pricing regime can contribute to effectively curbing transfer mispricing and

can mobilize additional tax revenues to fill the funding gaps for transformational projects, both

at the ECOWAS regional and national levels. However, there are challenges to establishing such

a regime and ensuring its efficacy—among them, the lack of a comprehensive and harmonized

transfer pricing legal framework in the region and the limited capacity of tax administrators.

82 The Borgen Project, ECOWAS Adopts New Strategy For Reducing Poverty, 2011 available at http://borgenproject.org/ecowas-adopts-

new-strategy-for-reducing-poverty/.

83 Ibid.

84 The International Bank for Reconstruction and Development / The World Bank, ECOWAS's Infrastructure:

A Regional Perspective, 2011.



3.2 MAIN DRIVERS OF ABUSIVE TRANSFER PRICING IN WEST AFRICA

This section aims to identify the factors that support and challenge the establishment of a

regional approach to curbing transfer mispricing. Our analysis starts by first reviewing existing

transfer pricing policies in select countries in order to identify harmonization challenges across

transfer pricing regimes and incentives for implementing such policies throughout the

ECOWAS region. This section aims to also demonstrate how the lack of a regional approach to

transfer pricing policies and implementation is a net loss to ECOWAS as a whole.

Several ECOWAS countries have in place a legal framework to monitor cross-border related-

party transactions, but the level of sophistication of such frameworks varies across countries.

The 2011 United Nations Practical Manual on Transfer Pricing for Developing Countries listed

nine ECOWAS member states out of 15 under “Countries with Emerging Regimes”: Burkina

Faso, Côte d'Ivoire, Ghana, Liberia, Mali, Nigeria, Senegal, Sierra Leone, and The Gambia. The

figure below highlights the diversity in the level of sophistication of transfer pricing regimes in

ECOWAS.

3.2.1 Assessment of transfer pricing regimes in ECOWAS

Figure 10 : Highlights of transfer

pricing regimes in ECOWAS

Guinea

Sierra Leone

Liberia

Senegal

Guinea Bisau

Cape Verde

Gambia

IvoryCoast

MaliNiger

Nigeria

Ghana

Beni

nT

ogo

Burkina Faso

Source: United Nations, United Nations Practical Manual on Transfer Pricing for Developing Countries, 2011; Transfer Pricing

Associates (TPA), Country summaries, 2013-2014; Dalberg analysis

Countries with specific legal framework and on TP and dedicated institutional mechanism

Countries with specific provisions related to TP or general anti-avoidance rules in their tax codesor revenue acts

Countries not listed amongst those with “merging Regime”


The following observations stand out:

· Only Ghana and Nigeria have developed dedicated policies on transfer pricing:

Transfer Pricing Regulations, 2012 (L.I.2188) in Ghana and Income Tax (Transfer Pricing)

Regulations No. 1 in Nigeria. The justification for these policies may stem from the

relative importance of the oil sector in government revenue, estimated at 79 percent for 85Nigeria in 2012, and the strong political will to monitor capital outflows in the oil

86sector. UNECA estimates that the oil sector contributed to over 30 percent (equivalent

87to 70 billion US dollars) of total transfer mispricing in Africa between 2000 and 2009.

Nigeria claims that it loses 5 billion US dollars in annual tax revenue due to offshore oil 88contracts. Besides Nigeria, Ghana is the only other country in ECOWAS that is

beginning to see oil contribute to government revenue, accounting for 1 percent in 89

2012. The oil sector and other extractives have also drawn particular attention from

civil society and the international community for their lack of transparency. For

example, Ghana and Nigeria were among the four countries (and the only two in Africa) 90

that piloted the Extractive Industries Transparency Initiative (EITI) in 2003. EITI focuses

on informing debates on windfall taxes, transfer pricing, production figures, and anti-91corruption. It is possible that the EITI process incentivized governments to address

related issues such as transfer pricing. This is likely to have contributed to the setting up

of dedicated transfer pricing policies in these two countries, in addition to a strong

incentive to curb the effect of transfer mispricing on government revenue. Transfer

mispricing, as a form of tax avoidance, has been recognized as an area of concern in 92

Nigeria prior to the adoption of specific transfer pricing regulations. The anti-

avoidance provisions in the Principal Tax Laws (i.e., Companies Income Tax Act,

Petroleum Profit Tax Act, Personal Income Tax Act, and Capital Gains Tax Act) empower

the relevant tax authorities to make adjustments to any transaction they consider 93

artificial or fictitious.

· Ghana and Nigeria are also more flexible in their ability to develop national fiscal

policies, contrary to West African Economic and Monetary Union (WAEMU) member

countries, where most fiscal policies are often of a regional nature and therefore subject

to more constraints. Some WAEMU fiscal guidelines provide less flexibility for any one

country in the Union to develop its own fiscal policies. For example, in addition to

coordinating the setting of tax rates and bases for major taxes through regional

directives, WAEMU mandates that the tax-revenue-to-GDP ratio of its member states

85 ADfD, African Economic Outlook, Regional Edition: West Africa, 2014; Dalberg analysis

86 United Nations Economic Commission For Africa, Third Meeting of the Committee on Governance and Popular Participation, 2013;

Dalberg analysis.

87 Ibid.

88 The Economist, Wish you were mine, 2012 available at http://www.economist.com/node/21547285

89 ADfD, African Economic Outlook, Regional Edition: West Africa, 2014; Dalberg analysis

90 EITI, History of EITI, available at https://eiti.org/eiti/history

91 EITI, EITI Countries: Zambia.

92 Deloitte, Issue 8 - Transfer Pricing Rules in Nigeria - An Overview, 2013.

93 Ibid.



94be at least 17 percent. The fact that transfer pricing is not yet distinctly on the WAEMU

95agenda, may prevent member countries from conducting reforms relevant to the

issue. While this analysis does not aim to engage in the debate around the existence of

WAEMU in parallel to ECOWAS, it does highlight the need to include transfer pricing as

a theme for WAEMU member states, alongside several other reforms that push for

convergence and harmonization, such as the West African Accounting System

(Système Comptable Ouest Africain, or SYSCOA) and the 2009 WAEMU directives that

aim to reform public financial management systems in the Union and have implications

for broader fiscal policies.

· Due to several possible reasons, Niger, Togo, Guinea-Bissau, and Cape Verde do not yet

have transfer pricing policies in place. Available data identified very few multinationals

in Niger, Togo, and Guinea-Bissau, rendering transfer pricing a low-priority issue. Less 96than 15 transnational subsidiaries were listed in 2010 for Guinea-Bissau, Niger, and

97Togo respectively, compared to more than 5,000 multinational companies in Nigeria

98spread across all sectors of the economy. For Cape Verde, Guinea-Bissau, and Niger,

the existence of bilateral tax treaties with few major foreign trading partners may be

another potential reason for the non-adoption of transfer pricing policies. For instance,

between 1995 and 2011, 33 percent of Niger's imports came from France, which has a 99

double taxation agreement with Niger. For Guinea-Bissau, Portugal is the major 100trading partner, contributing to 29 percent of the country's imports. These two

101countries ratified a bilateral tax convention in 2008. Cape Verde boasts one tax treaty 102

to date, with Portugal, the major contributor to the country's imports for the period 103

1995 to 2011 (accounting for 37 percent of total imports).

104Despite a trend toward transfer pricing regulations based on the arm's-length principle (ALP),

the profile of transfer pricing policies differs across the region. Ghana, Nigeria, and Senegal

adopted transfer pricing legislation in 2012 based on ALP, which is at the core of the

Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines

and the United Nations Practical Manual on Transfer Pricing for Developing Countries. Despite

this trend that could facilitate harmonization, the differences in transfer pricing regulations in

ECOWAS are extensive. Table 1 highlights differences among select countries.

94 IMF, WAEMU: Staff Report on Common Policies for Member Countries, 2013

95 This assertion is based on the findings from a document review and Dalberg's interview with a tax advisor. Dr. El Hadji Dialigué BA (2012)

highlighted the need to have a harmonized framework within UEMOA for standardized document requirements in order to ensure

transparency and increase certainty (for multinationals) during transfer pricing audits (Source: BA, Le Droit Fiscal à l'Epreuve de la

Mondialisation: La Réglementation des Prix de Transfert Au Sénégal, Page 240; 2012). In addition, consultations with a tax advisor

indicated that he was “not aware of the integration of transfer pricing regulation in the regional agenda.” However, he identified

improving the legal framework at the regional level to better deal with international tax evasion, including transfer pricing, as one of

WAEMU's focus areas going forward (source: Centre de rencontres et d'Études des dirigeants des administrations fiscales (CRÉDAF)).

96 Afribiz, Foreign Multinational Corporations in West African Countries, 2010 available at http://www.afribiz.info/content/2010/.

97 Information is not available for Cape Verde.



General Tax code (CGI) and

the Finance Act of 2006

(transfer pricing)

Income Tax

(Transfer Pricing)

Regulations No 1

Law N° 2012-31 of December 'Code Générale des Impôts' (General Tax Code)

Transfer Pricing Regulations,2012 (L.I.2188)

KEY ASSESSMENT

CRITERIA COTE D’IVOIRE NIGERIA SENEGAL GHANA

Policy Name

Standalone

transfer

pricing policiesNo Yes

N/A

Transfer Pricing 106Division

N/A

No Yes

If no, what is the

main policy under

which transfer

policies reside?

Article 38 of CGI and

Finance Act of 2006

Directorate of

Investigations 105and Tax Audits (DITA)

Article 17 of the CGI

107Brigade Financière Commissioner108-General

Responsibility

for application

Outline of transfer

pricing regulations

Applies to all

international transactions

carried out by resident

companies

Applies to all transactions

between taxpayers and

businesses that are legally

connected to them

Profits indirectly

transferred to non-

resident companies

are added to the tax

base and taxed

Applies to all

commercial

transactions between

partners, no matter

what their residency

status

Source: Ernest & Young, Global Tax Alert, 2013; Ghana Revenue Authorities (GRA), Transfer Pricing Regime, 2013; Transfer Pricing Associates, Transfer Pricing Country Summary, 2014

Table 1 : Profile of legislation on transfer pricing in select ECOWAS countries


A comparative analysis of key policy requirements including documentation, penalties,

advance pricing agreements (APAs), and thin capitalization rules shows a range of

requirements. These requirements, detailed below, serve to show that regional harmonization

efforts will require convergence in multiple areas. Such reforms will also require a review of

accounting rules and regulations, such as requirements pertaining to record keeping. Key

policy requirements also seem to be more stringent in Nigeria, where required documentation

needs to be filed in every case, whereas in Senegal and Côte d'Ivoire, for the most part, these

documents need only be made available upon request by the tax authorities, or must be filed

only by enterprises of a certain size (in Senegal, above 10 million US dollars in revenue.

Documentation is an important aspect of transfer pricing

legislation since it enhances fiscal transparency and enables risk assessment through

Document requirements:

98 J Bamidele, Transfer Pricing Regulations Implementation In Nigeria, 2012.

99 Droit Afrique, Niger Convention fiscale avec la France.

100 AfDB, Open Data for Africa database, 1995-2011.

101 PwC, Keeping you informed of tax changes in Africa. AfriTax – Issue 2, 2009.

102 Fortune of Africa, Double taxation agreements of Cape Verde, 2014.

103 AfDB, Open Data for Africa database, 1995-2011.

104 The "arm's-length principle" of transfer pricing states that the amount charged by one 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 what the price of that

transaction would be on the open market (source: http://www.ustransferpricing.com/arms_length_principle.html).

105 DITA has 13 Brigades of Investigation and Control and is not specifically focused on transfer pricing audits. DITA is also in charge of

fiscal and accounting audits, cross-checks, searches and investigations related to tax evasion.


Côte d'Ivoire Nigeria Senegal

Ju s t i f i c a t ion fo r a l l

intragroup transactions

should be available on

demand

Record-keeping: No

particular requirement

Deadline for the provision

of documentation: 60 days

Obligation to submit an annual

statement of transactions with

the other subsidiaries of the

group prior to reclassification

of transactions

Record-keeping: At least 6

years.

Deadline for the provision of

documentation: 21 days

Applicable when the annual

sales figure is 5 billion FCFA

or above; a detailed pricing

policy is then required.

C o m p l e m e n t a r y

documentation is required if

the transaction involves an

entity located in a country

with an attractive tax system

or a non-cooperative State

Record-keeping: at least 10

years

Deadline for the provision

of documentation: 15 days


exchanges of information between businesses and tax authorities. Requirements vary

significantly in ECOWAS. Recordkeeping obligations, for example, range from none in Côte

d'Ivoire to at least ten years in Senegal, where transfer pricing documentation only applies to

businesses with revenue above five billion CFAF (approximately 10 million US dollars).

Deadlines for submission of documents also differ, ranging from two to at least eight weeks for

Côte d'Ivoire, Nigeria and Senegal. Table 2 highlights the documents required in select

ECOWAS countries.

Penalties: Although all West African countries have tax evasion penalties in their tax codes,

most do not have penalties that apply specifically to transfer pricing manipulation. Table 3

compares the transfer pricing penalties applicable in Côte d'Ivoire, Nigeria, and Senegal. While

in Egypt, the United States, and several other countries, penalties are proportional to the

degree of manipulation, tax evasion penalties in these three West African nations are not

specific to transfer pricing, so is impossible to graduate penalties for transfer pricing

manipulation offences according to the degree of manipulation. Further, the lack of precision

in the tax codes as well as the presence of terms that are subject to broad interpretation (such

as “the taxpayer's good faith”) form loopholes that can provide opportunities for the

corruption of audit oversight services, reducing the overall capacity of the states to control the

106 Nigeria's Federal Inland Revenue Service (FIRS) has established a Transfer Pricing Division, which will be responsible for the

implementation and administration of the Income Tax Transfer Pricing Regulations No. 1 2012 (TP Regulations). (Ernest & Young, Global

Tax Alert (News from Transfer Pricing), 12 November 2013).

107 The Brigade Financière is under the Tax Administration and is in charge of controlling the banking and insurance sectors as well as

conducting transfer pricing audits (source: Dalberg interviews).

108 Transfer Pricing (provision) Section 70 of the Internal Revenue Act, 2000 (Act 592) empowers the Commissioner-General to adjust the

price of a transaction between associates to reflect the income as if the transaction had been conducted in keeping with ALP (source:

GRA, Transfer Pricing Regime, 2013).


Côte d'Ivoire Nigeria Senegal

Although it is not specific

to transfer pricing, the

following sanction applies

under the general tax code:

Interest rate of 0.75 percent

per month of delay in tax

payment

10 percent in the event of

failure to file a tax return or

late filing

40 percent if the taxpayer is

not in good faith

80 percent in the event of

fraud or rights abuses

Although it is not specific to 1 0 9t rans fer pr ic ing , the

following sanction applies

under the general tax code: 10

percent + interest at Central

Bank rate

Although it is not specific to

transfer pricing, the following

sanction applies under the

general tax code:

25 percent of the amount due

if the taxpayer is in good faith

50 percent of the amount due

if the taxpayer is not in good

faith

100 percent in the event of a

repeat offence

Other transfer pricing control mechanisms:

Advance pricing agreements

Some member states within the ECOWAS

region have adopted other mechanisms that have an impact on transfer pricing policies; these

include advance pricing agreements, limitation periods, and thin capitalization rules.

· (APAs) are agreements made between one or more

taxpayers and one or more tax administrators in order to settle potential transfer

pricing disputes in advance by establishing—prior to controlled transactions—a set of

appropriate criteria for determining arm's-length conditions for those transactions 110

over a specific period. The legislation of Côte d'Ivoire does not provide for APAs. In

Nigeria, however, companies seeking APAs can apply to the tax authorities, which may

then either accept or reject the application.

· Limitation periods define the period of time after the commission of an offense during

which charges may be brought. With the exception of Senegal, limitation periods have

not been specified in the countries studied.

· Thin capitalization rules limit the amount that a company can claim as a tax deduction


109 Income Tax (Transfer Pricing) Regulations No 1, 2012 states: “A taxable person who contravenes any of the provisions of these

Regulations shall be liable to a penalty as prescribed in the relevant provision of the applicable tax law.” (Income Tax (Transfer Pricing)

Regulations No 1, 2012)

110 OECD Transfer Pricing Legislation – A Suggested Approach June 2011.

111 KPMG, New Thin Cap and Withholding Tax Proposals Catch Commercial Lending Arrangements.


Businesses may apply for

APAs Maximum amounts

and deadlines are specified

Generally availableUnilateral or bilateral agreements may be made

CATEGORIES COTE D’IVOIRE NIGERIA SENEGAL

Advance pricing

agreements

Limitation Periods

No specific limitation period for transfer pricing

No specific limitation period

for transfer pricing

4 years running from the date of commission of the crime

No specific rules Caps are set on interest rates paid to partners

Thin capitalization

rules

Applicable thin

capitalization rules are

in place

Table 4 : Other transfer pricing mechanisms in select ECOWAS countries

No regulations on APAs

No specific rules. If loans are granted to connected parties, interest rates must be competitive

Transfer pricing documentation can be very costly and time consuming for multinational

enterprises to prepare and maintain, which can considerably affect the ease of doing business

in the region. A 2011 survey by Deloitte conducted for the European Commission estimated

that transfer pricing compliance costs (transfer pricing documentation, clearances and rulings,

and mutual agreement procedures) directly or indirectly account for about 60 percent of all

corporate tax-related compliance costs for a new subsidiary in the European Union of a 112

multinational enterprise with a large parent. For a subsidiary in ECOWAS the compliance cost

would likely be on the same order of magnitude, in that transfer pricing regimes adopted to 113date in West Africa, as in European countries, are all based on the ALP. In some cases, the

compliance burden for multinationals could be significantly higher in the context of West

Africa, especially if the tax administration's inexperience or lack of necessary capacity leads to

untargeted transfer pricing reviews and audits, unnecessarily protracted disputes, and/or 114inadequate documentation and disclosure requirements. Consultations with the Senegalese

Accountancy Body (Ordre National des Experts Comptables et Comptables Agréés, or

ONECCA) stressed the importance of striking the right balance between the tax

administration's need for information and the implications for companies in terms of cost and

time. In addition, there is value in seeking to align documentation requirements within

ECOWAS and, if possible, with those of other countries/regions, unless preserving differences

results in reducing the implied costs and time for multinationals, or complies with specific

features of local/sector legislation.

on interest paid to non-residents that are “specified shareholders” in resident 111companies. Thin capitalization rules are specified in Côte d'Ivoire only.


112 World Bank Investment Climate (WBIC), International Transfer Pricing and Developing Economies: From Implementation to Application, 2013.

113 There is a fundamental consistency between the United Nations Manual (for developing countries) and the OECD Transfer Pricing Guidelines

(for developed countries) in applying the ALP found in Article 9 of both the UN Model Convention and the OECD Model Convention. While

there are some differences between the two, those tend to reflect differences in perspective and emphasis, rather than differences in the

principles to be applied (Source: Deloitte, Arm's Length Standard, 2013).

114 For example, when tax administrators impose informational requirements on taxpayers that exceed the needs and capacity of the tax

administration (Source: WBIC, 2013).


115The risk of double taxation increases for multinationals as a result of transfer pricing

adjustments. In the context of transfer pricing, double taxation may result from a transfer

pricing adjustment by one tax administration for which a corresponding adjustment is not

granted in part or in full by the other, or from a

mismatch between two countries' transfer pricing 116regimes. Ernst & Young's 2003 Global Transfer Pricing

Survey reports that 40 percent of transfer pricing 117

adjustments resulted in double taxation. Double

taxation imposes an additional transactional cost on

multinational enterprises, which hampers international

trade and foreign investment, with negative effects on

sustainable development. The mutual agreement 118procedure (MAP) in tax treaties provides a

mechanism for the relief of double taxation from potential transfer pricing adjustments.

However, compared to countries such as South Africa, which currently has over 70 double tax 119

agreements (DTAs), ECOWAS countries have limited treaty networks: only 10 DTAs each for 120 121 122Côte d'Ivoire and Senegal, and 11 for Nigeria.

ECOWAS regulations as they relate to transfer pricing demonstrate that

· policies differ on key requirements such as documentation and penalties in cases of

non-compliance; and

· transfer pricing regulations might imply high compliance costs for multinationals or

lead to double taxation in some instances.

It will be important to harmonize transfer pricing policies in ECOWAS, particularly on the areas

related to documentation and penalties, while ensuring that such efforts do not lead to high

compliance costs and double taxation for multinationals.

A recent study by the African Tax Administration Forum (ATAF) found that trans-border taxes

are a major concern in eight ECOWAS countries: Benin, Côte d'Ivoire, Ghana, Liberia, Niger, 123

Senegal, Sierra Leone, and The Gambia. The study also highlights that most countries in West

Africa lack an understanding of transfer pricing, and that the lack of human resources

specialized in transfer pricing is a major challenge. Those tax administrators who do have

expertise lack specialized training on transfer pricing in sectors such as mining, oil and gas,

3.2.2 Assessment of capacity and resources of revenue authorities

"Multinationals may relocate to other

regions if the compliance burden

becomes a threat to the operations or

the competitiveness of the business. In

our work, we have seen cases that have

effectively led to relocations.”

Board Member, ONECCA - Senegal


115 Double taxation refers to the inclusion of the same income in the taxable bases of two different taxpayers (Source: WBIC, 2013).

116 For example, assume that a subsidiary located in Nigeria (Company A) is subject to a transfer pricing adjustment (by means of the

application of Regulations No. 1, 2012) in relation to a transaction with an associated enterprise (Company B) located in the US; if

Nigeria increases Company A's tax burden through such an adjustment and the US fails to reduce (relieve) this amount from the tax

base of Company B, then the same income will be subjected to tax in both countries.

117 WBIC, International Transfer Pricing and Developing Economies: From Implementation to Application, 2013

118 A mutual agreement procedure (MAP) is a mechanism by which the competent authorities of contracting states consult with a view to

resolving disputes over the application of double taxation treaties. This procedure may be used to eliminate double taxation arising from a

transfer pricing dispute.(Source: UN Manual)

119 Not inclusive of treaties (i) that are in the process of negotiation but have not yet been signed with Bangladesh, Cameroon, Cuba,

Estonia, Hong Kong, Isle of Man, Latvia, Lithuania, Madagascar, Malawi, Morocco, Qatar, Senegal, Serbia, Sri Lanka, Syria, the UAE 0and

Vietnam; nor those (ii) with Chile, Gabon, Kenya, and Sudan that have not yet been ratified by both parties. (Source: LowTax website:

http://www.lowtax.net/ as per September 27, 2014).


information and communications technology, treatment of assets, intellectual property

industries, branding, and sales of companies.

The United Nations Practical Manual on Transfer Pricing for Developing Countries and the

EuropeAid report “Transfer Pricing and Developing Countries” identify specific required steps

related to building up capacity for the implementation of a transfer pricing regime:

· Setting up a transfer pricing team to be fully in charge of transfer pricing audits within 124

tax administrations.

· Developing and implementing a training program that includes general tax and

accounting practices, transfer pricing, economics/statistics and related knowledge,

audit practices and effective management (e.g. data processing), tax administration

(e.g., audit procedures, internal structure, checks and balances), APA mechanisms, and 125MAP).

· Putting in place key infrastructure including IT hardware/ support, databases for 126

comparables, macroeconomic analysis tools, manuals and technical training 127materials, draft legislation, and access to databases for tax administrators.

REQUIREMENTS COTE D’IVOIRE NIGERIA SENEGAL

Assessment of team

and transfer pricing

skills

Table 5: Profile of transfer pricing capacity in select ECOWAS countries

D i r e c t o r a t e o f

Investigations and Tax

Audits (DITA), which has 13

brigades of Investigation

and Control

In charge of conducting tax

avoidance checks, fiscal and

accounting audits, cross-

checks , searches and

investigations related to tax

evasion

Transfer Pricing Division at

t h e F e d e r a l I n l a n d

Revenue Service (FIRS)

Started the review of

taxpayers' compliance

with the transfer pricing 128regulations

Brigade Financière, set

up to conduct checks

not specifically focused

on transfer pricing, but

also dealing with all tax

issues with banks and

insurance companies,

among others

Not yet an adjustment

directly related to 129transfer mispricing


120 KPMG, Côte d'Ivoire Fiscal Guide 2013/14, 2014

121 KPMG, Senegal Fiscal Guide 2012/13, 2013

122 KPMG, Nigeria Fiscal Guide 2012/13, 2013

123 ATAF, Regional Studies on Reform Priorities of African Tax administrators: West Africa; 2012.

124 UN, UN Practical Manual on Transfer Pricing for Developing Countries, 2011.


126 Comparables are data on independent transactions that are used to assess whether transactions between related parties are priced

based on the market value (Adopted from the UN Manual's definition).

127 Ibid.

128 PwC, Afritax issue 19, 2013.

129 Interview notes.


Expressed the need for 130

technical support

Was seeking funding for

additional training on

a u d i t t r a i n i n g a n d

technical support for

training on how to use 131

comparables

Took part in training

sessions related to tax

avoidance issues in

general

Held training in March

2014 on the core

elements of transfer132

pricing

Expressed the need for

o n g o i n g s k i l l s 133

building

Infrastructure N/A Lack of comparables data Lack of comparables 134

data

Training

REQUIREMENTS COTE D’IVOIRE NIGERIA SENEGAL

We observed the following trends:

in Senegal, consultations with tax authorities and tax advisors confirm that

staff regularly took part in training sessions on profit shifting issues, but recognized the 135

need for continuous skills building. Similarly, the Nigerian tax administration was

seeking funding support through the then United Nations subcommittee for capacity 136

building on how to use comparables. Ghana was also looking for further training for 137

transfer pricing specialists. A regional approach to capacity building will help achieve

economies of scale, and foster dialogue across ECOWAS towards a common agenda.

the exchange of information on transfer

pricing issues—particularly with developed countries—remains a challenge for some

ECOWAS countries, as it does for most developing countries. This is mainly due to

limited access to existing tax information exchange frameworks, which enable

automatic sharing of information between tax authorities. Currently, only four ECOWAS

countries—Burkina Faso, Liberia, Nigeria, and Senegal—are members of the OECD's

Global Forum on Transparency and Exchange of Information (Global Forum) for Tax

Purposes. ATAF has developed a practical manual providing guidance on how

developing countries can implement effective exchange of information processes.

However, administrative capacity remains a key issue within ECOWAS; international tax

cooperation is based upon reciprocity, requiring tax administrations to have robust

information systems, which currently are lacking in most member states.

Training:

Information exchange with tax authorities:


130 A recent mission conducted by the Public Finance Directorate General at the Ministry of Economy and Finance (DGFiP: Direction Générale

des Finances Publiques, Ministère de l'Économie et des Finances) in Côte d'Ivoire in March 2013 revealed that the country needed support

in several areas including accounting standards, accounting reform, the work of accounting officers, transfer pricing, user interface,

auditing, and quality control issues. (France's Technical Assistance – Assistance Technique France (ADETEF), Côte d'Ivoire / Burgeoning

technical cooperation, 2013).


Access to country-by-country reporting:

Access to comparables:

publicly available data on multinationals

does not allow tax authorities to triangulate information reported by ECOWAS-based

subsidiaries with their related parties. In fact, multinationals generally publish their

annual audited financial statements on a group-consolidated basis, since international

accounting standards do not yet require country-by-country reporting (i.e., a reporting

system that requires the inclusion in annual audited financial statements of a profit and

loss account for each jurisdiction in which a multinational corporation had operations 138during the year).

ECOWAS countries lack access to relevant comparables data

when using the ALP. Under the ALP approach, transactions between group companies

are compared with transactions between unrelated companies under comparable

circumstances. Where there are no comparable transactions, an alternative

comparison may be made with unrelated companies that perform similar functions,

own similar assets and bear similar risks to the taxpayer whose related-party

transactions are being examined, and operate under comparable circumstances. Tax

officials highlighted the lack of reliable, public information on comparables. For

instance, Nigeria was seeking sources of documentation on comparables, and 139technical support for the provision of comparables. Ghana was looking at ways to

140 subscribe to a commercial comparables database. The comparability challenge in the

ECOWAS space may be due to the fact that key sectors in the region tend to be

dominated by just a few multinational companies, such as banking and extractives,

which makes it difficult to find independent comparable transactions, given differences

in functional analysis and cost structures between companies.

Regional efforts could focus on pooling information available in each country in order

to establish a comparables database across ECOWAS to be used as a benchmark in 141

monitoring transfer pricing. The comparability challenge is not specific to ECOWAS

countries; many developing countries have faced or are still facing it, which has led

some of them to find alternative approaches. For example, Brazil has adopted an

approach to reduce reliance on direct comparables. In the Dominican Republic, APAs

have been used in the absence of comparables data, which also has helped reduce the

risk of disputes between the authorities and multinationals. Another example is the 142

adoption of a new method, popularly called the 'Sixth Method.' The box below

provides more details on these alternatives approaches.


131 FIRS, Road Map for Implementing Transfer Pricing Regulations and Structures in Nigeria, 2012

132 Senegal's tax authorities organized the training with support from the Community and Research Center for Tax Administration

Directors (Centre de Rencontres et d'Etudes des Dirigeants des Administrations Fiscales, or CREDAF) and OECD. The training focused

on ALP, transfer pricing valuation methods, comparability analysis, intergroup transactions, double taxation, and dispute resolution

(CREDAF, Formation au prix de transfert au Sénégal, March 2014).

133 Dalberg meeting notes.

134 Nigeria was seeking sources of documentation and information as well as technical support for comparables (IRS, Road Map for

implementing Transfer Pricing regulations and structures in Nigeria, 2011)

135 Interview notes.

136 FIRS, Road Map for implementing Transfer Pricing regulations and structures in Nigeria, 2012.

137 GRA, Transfer Pricing Regime – Ghana.


The “Brazilian Approach”: Fixing profit margins by law

The Brazilian approach to reduce reliance on direct comparables entails applying profit fixed

margins (by law) for gross profit and mark-up that are specified by the Ministry of Finance

across various sectors, instead of relying on independent comparable transactions. The

Brazilian report discusses the strengths and weakness of the fixed margin rules, which are

designed for simplicity and to facilitate ease of administration and compliance, not necessarily

to foster a fair and flexible system and maximum compatibility with the arm's length principle.

Use of APAs in Dominican Republic

Following enactment of its transfer pricing legislation in 2006, the Dominican Republic

conducted an investigation of the package-tour business sector, resulting in the negotiation of

benchmark rates with the National Association of Hotels and Restaurants, used as the basis for

APAs with individual hotels. Such an approach might be implemented cost-effectively by

setting up teams from several countries, on a regional basis, to focus on specific industries and

major firms, using information exchange provisions.

The Sixth Method in Argentina and other countries

The sixth method originated in Argentina, where the government sought to address raw

materials transactions that utilized an agent located in a country where significantly less tax was

paid than in the exporting country. For many developing countries, exports of commodities are

such a significant part of the economy that it is important to the governments to avoid price

manipulations that lower transfer prices and taxes collected. For developing countries with

economies heavily dependent upon commodities exports, changes to transfer pricing rules

may be viewed as a source for raising taxable income. This strategy appears to be supported by

international development organizations. Mandating use of the sixth method has been an

effective way for governments to increase the tax assessed on companies exporting

commodities.

Source: UN, Practical Manual on Transfer Pricing for Developing Countries, 2013; BEPS Monitoring Group, Transfer

Pricing Comparability Data and Developing Countries, 2014; PwC, 'Sixth method' raises transfer pricing concerns in

developing countries, 2013

BOX 1: ALTERNATIVE METHODS TO REDUCE RELIANCE ON DIRECT COMPARABLES

In summary, our assessment reveals gaps in the capacity of ECOWAS tax administrators to

effectively implement transfer pricing regulations. Countries are at different stages in the

process of adoption, implementation, and enforcement of transfer pricing regimes, and gaps

remain at each stage. The circumstances call for the development of transfer pricing, ongoing

training programs, and access to comparables or other alternative approaches for the

valuation of transfer prices.



139 FIRS, Road Map for implementing Transfer Pricing regulations and structures in Nigeria, 2011.

140 GRA, Transfer Pricing Regime – Ghana.

141141 ATAF is carrying out a feasibility study regarding database options to provide support to its members to access database

information, in collaboration with the OECD Tax and Development Programme (source: OECD, Transfer Pricing Comparability Data

and Developing Countries, 2014).


3.2.3 The harmonization value proposition

Disparities between countries in terms of their response to transfer pricing issues

weaken the ECOWAS region's overall ability to fight pricing manipulation. A regional

approach would make it possible to

· harmonize legislation and eliminate loopholes that could be exploited;

· pool regional efforts and resources invested in capacity-building, ongoing training,

shared tools (such as baseline comparables), and exchanges of tax information,

administrative assistance, and best practices; and

· put forward a strong regional view in global negotiations that serves the interests of

the region as a whole.

In the framework of the regional common market, disparities in transfer pricing rules create

loopholes that can be exploited. For instance, in 2008, WAEMU adopted a multilateral tax 143treaty (MTT), which distributes the taxing rights of WAEMU states with respect to intra-

144community investment. The MTT covers taxes on income and inheritance, registration fees,

and stamp duties, including those collected by the central governments on behalf of sub-145central governments. However, the fact that other tax policies such as transfer pricing

regimes are not yet harmonized means that multinationals that have subsidiaries in the various

countries in WAEMU may decide to use a subsidiary based in a country with no or weak transfer

pricing rules (Company A) as its entry point to the WAEMU space. Through this mechanism the

multinational can indirectly avoid paying taxes or bearing compliance costs imposed by

WAEMU countries with transfer pricing regimes. In this case, operations between Company A

and the other subsidiaries in the region could be considered by the tax authorities as intra-

regional trade and therefore apply the MTT rules. Box 2 illustrates the implications of a lack of

harmonization between common market regulations and transfer pricing rules.

Senegal revised its Tax Code in 2012 to include specific provisions on transfer pricing. Article 17 stipulates

that: “In order to determine the corporate tax owed by businesses that are dependent on or own controlling

interests in businesses located outside of Senegal, profits indirectly transferred to the latter, either by

increasing or reducing purchasing or sales prices, or through thin-capitalization, or through any other means,

shall be included in the earnings stated in the accounts of the taxpayer. The condition of dependence or

control is not required when the transfer is carried out with businesses located in a foreign State or on a

territory located outside of Senegal that has a preferential tax regime or in a non-cooperating State.”

The fact that such provisions do not exist in all ECOWAS countries makes it possible for some multinationals

to use their subsidiary based in another country in the region with less stringent transfer pricing rules to

indirectly shift profit from Senegal to a more favorable transfer pricing legislation.

Source: Senegal's Tax Code (Code Général des Impôts), 2012; Dalberg analysis

BOX 2: TRANSFER PRICING AND THE IMPORTANCE OF TAX HARMONIZATION IN THE COMMON MARKET


142 The Sixth Method adds to the five methods proposed in the OECD Guidelines and the United Nations Practical Manual on Transfer

Pricing for Developing Countries. It does not consider critical drivers in the determination of an arm's length price or reference.

Argentina first implemented the Sixth Method and a number of developing countries—primarily in Latin America, but including India,

as well—have adopted it; its expansion is expected to continue. The method generally may apply when (i) the export/import

transactions of tangible goods (classified as commodities) take place between related parties; (ii) the prices of the tangible goods are

publicly quoted in the transparent market (known public price); and (iii) in certain cases, there is a foreign intermediary in the inter-

company transaction such that goods do not reach the final consumer directly (triangular transactions).

143 WAEMU, Règlement 08/2008/CM/UEMOA and Application Rules 005/COM/2010/UEMOA.



145 Ibid.


ECOWAS member states also highlighted both human resource and capacity gaps that hinder

the development and application of transfer pricing regulations. As such, regional efforts

should also focus on identifying common needs across ECOWAS countries and designing

programs to address those needs centrally. The ECOWAS Commission is best positioned to

play this role. Examples include pooling the information available in each country to establish

comparables databases.

Regional interests should also be protected at the global level, and for this, a resolutely regional

approach is required. As Figure 11 shows, the interests of ECOWAS countries were not taken

into account in the design of international standards such as the BEPS action plan, which is

aimed at redefining international tax rules to fight tax evasion. However, the consultation

process is still ongoing and there may still be an opportunity for ECOWAS to shape the

international conversation by voicing concerns relevant to the region.

National tax laws have not kept pace with global corporations, fluidcapital, and the digital economy which leaves gaps that can be exploited by companies to avoid taxation in their

As such, there is a need to review the international tax system

home countries.

WHY IS IT RELEVANT?

ECOWAS’ INTERESTS ARE NOT YET REFLECTED IN THIS PROCESS

Figure 11 : The OECD's BEPS action plan

WHAT IS BEPS?

In July 2013, the OECD launched an Action Plan on Base Erosion and Profit Shifting (BEPS),

identifying 15 specific actions needed in order to equip governments with the needed

instruments to address this challenge

The 15 actions are planned to be finalized in three phases: September 2014, September 2015

and December 2015

BEPS is piloted by the OECD Committee on Fiscal Affairs (CFA) through its subsidiary bodies

The OECD has initiated four regional consultations on BEPS - Seoul (for Asian countries), Bogota (for Latin American and the Caribbean), Pretoria (for African Countries) and Paris for Francophone African countries

Current plans mostly address concerns from developed countries such as profit shifting in high-technology industries.

The extractive sector for instance, and important sector for ECOWAS, is not yet included.

Source: OECD, Base Erosion and Profit Shifting, http://www.oecd.org/tax/beps-about.htm, 2013; Dalberg analysis



The ECOWAS Commission could also serve as the region's voice and support transfer pricing initiatives underway. The table below identifies potential actions.

Region Transfer pricing

initiatives Mandate Potential role for ECOWAS

ATAF Transfer Pricing

Working Group (TPWG)

Develop strategies and products for, and give direction to, the work of

the ATAF Transfer Pricing Project with regard to: (i) mechanisms for

the sharing of best practice in

identifying key transfer pricing risks

in respective member countries; (ii) the processes of developing

effective transfer pricing legislation;

(iii) products to enable ATAF members to build the technical

capacity to effectively implement

their transfer pricing rules; and (iv)

the assessment of transfer pricing risk

Work with ATAF to identify country transfer pricing risk

profiles

Leverage ATAF’s expertise to

develop a regional transfer pricing framework

Elaborate capacity-building programs in relation with ATAF

OECD

BEPS Equip governments with the needed instruments to address this

challenge

Ensure that ECOWAS concerns (such as extractive industry) are

taken into account

Various donors

Multipartite

capacity-buildingprogram led by

OECD

Enable developing countries to collect the taxes that are actually

due from multinational businesses

to fight international profit shifting and to establish predictable

investment conditions

Develop capacity-building programs in relation with ATAF

Source: ATAF, Update on the Transfer Pricing Project, 2014; OECD, Base Erosion and Profit Shifting

http://www.oecd.org/tax/beps-about.htm, 2013; Dalberg analysis

Table 6 : Examples of regional initiatives on transfer pricing

Transfer pricing is increasingly gaining the attention of ECOWAS governments such as Ghana,

Nigeria, and Senegal. It can be expected that other ECOWAS countries will also review their

existing regulations in order to increase their tax revenues, whereas others may not, in the near

future, consider transfer pricing a key priority. However, unless governments have a coherent

framework within which to develop and implement these policies, the effectiveness of these

regulations may be limited by potential differences in policies given the free flow of goods and

services between ECOWAS countries.


TAX INCENTIVESIN WEST AFRICA

4

This part of the report conducts a brief analysis on another missed opportunity to increase the

tax base in ECOWAS: tax incentives. Tax incentives can induce massive losses of government

revenues, and can create tax competition. The analysis below demonstrates that tax incentives

are not necessarily a primary motivational factor for foreign investment, and yet pose a risk to

regional economic integration.

Despite their high cost, tax incentives are not necessarily a main factor for attracting FDI.

A study by Stefan Van Parys and Sebastian James concluded that tax changes in the CFA Franc

zone did not have significant impact on flows of FDI or fixed capital formation. The study shows

that other aspects such as increasing investor confidence by broadening legal guarantees and

simplifying the tax system were, however, successful in drawing more foreign investments.

Furthermore, a comparison among ECOWAS countries and between ECOWAS and other

countries shows that a higher corporate tax rate does not necessarily mean less FDI, as

illustrated by comparing Côte d'Ivoire and Nigeria, or India, in figure 12.

Net FDI (billions of USD)

70

25

20

15

10

5

0

-5

-10

0 25 26 27 28 29 30 31 32 33 34 35 36

Corporate tax rate (% of profits)

ECOWAS country Non-ECOWAS country

Sierra LeoneSenegal

Niger Benin

KenyaCote d’Ivoire

Liberia

Guinea-BissauBurkina Faso

Togo BangladeshGhana

Gambia

Nigeria

South Africa

Mali Jamaica Guinea

BrazilIndia


Source: Heritage Foundation Index 2014 data; OECD Tax and Development, Transparency, and Governance Principles; The

effectiveness of tax incentives in attracting investment: panel data evidence from the CFA Franc zone. James Sebastian and Stefan

Van Parys.

Other studies conducted in Africa have come to similar conclusions, including a study authored 146

by the Global Tax Simplification Team of the World Bank Group. Surveys of investors in four

countries in the East African Community in 2013 showed that more than 90 percent of 147respondents would still have made investments even without incentives.

The experience of Uganda and Tanzania (see Box 3) confirms that the creation or elimination of

tax incentives has little direct impact on FDI.

BOX 3 : CASE STUDY: UGANDA AND TANZANIA

The experience of Uganda and Tanzania has shown that tax incentives are not decisive factors in

attracting FDI.

Uganda:

In 1997, the Ugandan government decided to eliminate tax relief, leaving Uganda with taxes that are

generally higher than the rest of East Africa. The following graph shows that despite higher taxes and

no incentive measures, Uganda continued to attract FDI, and did so at a higher rate than the other

East African Community countries, which maintained their tax incentives.

146 WBG, Effectiveness of Tax Incentives in Attracting Investment; Evidence and Policy Implications, N/A.

147 WBG 2013.

TAX INCENTIVES IN WEST AFRICA


Figure : FDI in Tanzania between 1995 and 2002 (percent GDP)

FDI (% GDP)

2 2 2 2

55

4 4 32

7

3

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Source: IMF; Kenya, Uganda, and the United Republic of Tanzania: Selected issues. October 2008

Figure 13 : Trends in FDI in East African countries

2006 2007 2008 2009 20100

600

800

200

400

1,000

Rwanda

Kenya

Uganda

Million US dollars

Source: Tax Justice Network-Africa & ActionAid International, Tax competition in East Africa: A race to the bottom, April 2012

Source: Tax Justice Network-Africa & ActionAid International, Tax competition in East Africa: A race to the bottom, April

2012

Tanzania:

The Government of the Republic of Tanzania introduced Export Processing Zones (EPZ)

in 2002. These zones offer “attractive” tax incentives: businesses are exempted from

corporate tax and all other taxes for the first ten years. They are also exempted from

tariffs on imports of raw materials and equipment. Mining companies are exempted

from capital gains tax and tariffs on imported fuel. They pay reduced rates on stamp

duties and value-added tax (VAT).

However, the graph that follows shows that, despite the incentives introduced in 2002,

there has been no increase in FDI aside from a temporary increase in 2005.



Further, tax incentives create competition between ECOWAS countries, leading to a net loss at 148the regional level. A recent International Monetary Fund (IMF) study on 173 countries

showed that tax incentives in a given country can, to a large extent, have negative spillovers on

policies implemented in other countries. A one-point reduction in the corporate tax (CT) rate in

all 173 countries causes a 3.7 percent reduction in the corporate tax base in a given country 149

over the short term. Over the long term, the study found that, for a typical country that

maintains its corporate tax rate, a one percentage point reduction, collectively, in the CT rate in

the rest of the other countries leads to a reduction of approximately 6.5 percent of the CT base

in a typical country. The study also observed that in such cases, the typical country, rather than

maintaining its CT rate, reduces it by an average of 0.5 point. This increases its tax base by 4

percent, leaving a net loss of 2.5 percent of the tax base (the difference between the exogenous

effects – the 6.5 percent reduction of CT base – and the result of the internal adjustments – the 4

percent increase on CT base).

In West Africa, all WAEMU countries enacted their investment codes between 1989

and 2000 granting differing tax incentives (see table 7).

Development phase phase (years)

Togo 31 October 1989

Retail Exemption from tariff Exemption from CIT and minimum tax; employer payroll tax rate reduced to 2 per cent

Not specified

3 August 1995

Construction and public works, retail, transportation, financial services.

Exemption from CIT and employer payroll tax; reduction of later to 50 per cent and to 25 per cent after holiday period ends; exemption from "contribution foncière"

5 to 8 years: depends onactivities

Niger

12 July 2001

Retail, mining, and petroleum

Exemption from tariff (if no local substitute) and VAT

Exemption from CIT, minimum tax, patente, and "contribution fonci ère"

5 years

Senegal

6 February 2004

Retail


Investment allowance of 50 per cent; exemption fromemployer payroll tax

Up to 8 years: depends on invested amount and whether firm is new or established

Mali

19 August 2005

Retail, mining, and petroleum


Exemption from CIT and patente

5 to 8 years: depends on amount invested

Country DateExcluded activities

Tax incentives provided in

Tax incentives provided in Operation phase

Length of holiday during operation

Table 7 : Summary of tax incentives in WAEMU member states


148 IMF, Spillovers in international corporate taxation, 2014. This study was conducted for the period 1980-2013; the sample included all

ECOWAS countries (Source: IMF, Spillovers in international corporate taxation, 2014)

149 Ibid.


Benin 31 December 2009

Retail, reconditioning activities and polluting activities

Exemption from registration fees, tariff, and VAT

Exemption from CIT, patente, and exit tax

5 to 9 years: depends on amount invested and location

Guinea -Bissau

31 December 2009

Mining, petroleum, forestry

Tariff (Guinea Bissau does not have a VAT)

Exemption from CIT and employer payroll tax; annual reduction of CIT to 90 per cent, 80 percent, 60 per cent, 40 per cent, and 20 per cent thereafter

2 years

Burkina Faso

29 January 2010

Retail, mining, banking, telecoms (except activities for which a government agreement was signed with the investor)

Tariff reduced to 5 per cent, exemption from VAT

Longer loss carry forward period; exemption from employer payroll taxes, patente; investment tax credit; and holiday period extended by 3 years for investment in rural areas

5 to 7 years: depends on amount invested

Development phase phase (years)Country Date

Excluded activities

Tax incentives provided in

Tax incentives provided in Operation phase

Length of holiday during operation

Source: Mario Mansour and Grégoire Rota-Graziosi; WAEMU, Tax Coordination, Tax Competition, and Revenue

Mobilization in the WAEMU, 2013 – based on Investment Codes (enacted between 1989 and 2010)

The same trend applies also to the non-WAEMU countries in ECOWAS. For instance, CIT in the 150

mining sector was reduced from as high as 45 percent in 1986 to 25 percent in 2011. At the 151

same time initial capital allowances increased (from 25 percent in 1986 to 80 percent in 2011),

as well as exemptions and other expatriate employee tax incentives all in line with the attempt

to attract investment. Several other tax incentives in the agriculture and manufacturing sectors

have all conspired to create a tax competitive environment by reducing the effective tax rate.

More can be done to harmonize tax incentive policies in the region. ECOWAS and WAEMU

have made attempts at harmonizing tax policies. These initiatives include the adoption of a

Common External Tariff (CET) within ECOWAS, which implies that all goods entering into the

customs territory of any ECOWAS country will be assessed at the same rate of customs duty (0 152

percent, 5 percent, 10 percent, 20 percent, and 35 percent). The CET is expected to be

effective in 2015 within the ECOWAS region. WAEMU has also issued directives that specify the 153

tax rates that countries can apply. However, a recent review of harmonization efforts at the

150 ActionAid, Investment Incentives in Ghana: The Cost to Socioeconomic Development, 2014.

151 Ibid.

152 ECOWAS, 2014; Gret-Iram, Etude prospective sur les mesures de protection nécessaires pour le développement du secteur agricole en

Afrique de l'Ouest (illustration sur quelques filières stratégiques).



WAEMU level has shown that policies other than tax legislation, such as investment codes, may

be used by the states as a means to circumvent regional guidelines. This situation derives from

the fact that free zone laws at the national level, often part of investment codes, may contain

important preferential regimes. For example, Senegal provides income tax holidays for up to 50

years in its 2007 free zone law.

Further, special tax exemptions are sometimes authorized by the very guidelines or regulations

that are aimed at harmonizing national tax policies. Indeed, Article 37 of regulation no. 08, on

the adoption of rules to avoid double taxation within WAEMU and rules governing assistance

in tax matters, stipulates in paragraph 5 that “the provisions of the present Regulation must not

form an obstacle to the implementation of more favorable tax treatments provided under the

national legislation of the individual member states to promote investment.” This may explain

why the overall impact of harmonizing tax incentives has been very limited, as countries can

grant tax exemptions outside the tax laws even while following regional directives on

applicable tax rates.

Given the net effects of tax incentives on the economy of West Africa, we see a clear need to

work toward harmonizing and rationalizing tax incentive policies in the ECOWAS region.




RECOMMENDATIONS

5n light of the amount of badly needed vital tax revenue that ECOWAS member states

currently do not capture, there is a pressing need to develop and implement a West Africa Iregional initiative focused on monitoring transfer pricing, and ensuring a regionally

coherent, rational policy of tax incentives. Any such initiative will require considerable political

will and the commitment of national governments, working with the ECOWAS Commission, to

jointly engage in fiscal policy reforms. Here we offer our specific recommendations for transfer

pricing and tax incentives.

5.1 Recommendations on transfer pricing

Regional reform of transfer pricing policy is a large undertaking, but we believe the following

are three key initial steps: (i) choosing between the ALP approach and alternative

methods—such as formulary apportionment—as the most appropriate transfer pricing regime

for the region; (ii) improving information exchange among ECOWAS states; and (iii) advocating

for and influencing change at the international level.

5.1.1 Choosing an appropriate transfer pricing regime for the region

ECOWAS should make a strategic decision either to adapt the OECD ALP or to develop

alternative methods, such as formulary apportionment. The starting point could be to carefully

examine the advantages and limitations of each method taking into account the regional

context. Key priority actions will differ between these two methods. We provide a comparison

of the two methods below, recognizing that an in-depth study might be needed to inform

decision-making.

5.1.1.1 ALP standards

ALP is the internationally accepted standard for determining the conditions of commercial and

financial transactions between associated enterprises. Because of its wide international

acceptance, ALP provides a consensus basis for determining and evaluating the allocation of

income and expense between associated enterprises. Such consensus is essential if double

taxation and/or double non-taxation of cross-border transactions is to be avoided.

There are, however, some practical difficulties in the application of the ALP method in West

Africa: i) it requires considerable documentation on the part of taxpayers; (ii) it is time- and

resource-intensive to implement and enforce; and (iii) it requires comparables, which are

lacking in the ECOWAS region.


The following actions will be needed to implement and enforce a harmonized transfer pricing

regime in the region:

The ECOWAS Commission should create a Transfer Pricing Advisory Body, bringing together

representatives of tax administrators, accounting and tax advisors, and multinationals. The

body would serve as a platform for consultation, experience sharing, and discussion on

transfer pricing issues in West Africa. The European Union (EU) has brought together a group

of experts from the public and private sectors to form an “EU Joint Transfer Pricing Forum” (EU

JTPF); Box 4 provides an overview of the mission and the organization of the EU JTPF. ECOWAS

could use this example to set up its own advisory body to reinforce its collaboration with other

groups specializing in tax matters, such as the Association of Accountancy Bodies in West

Africa (ABWA).

Setting up a regional coordination and advisory unit on transfer pricing

Mission

· To create a platform where experts from the business and national tax

administration spheres can discuss transfer pricing problems that are obstacles to cross-

border business activities within the Community

· To advise the Commission on transfer pricing tax issues

· To assist the Commission in finding practical solutions that are compatible with the OECD

Guidelines in order to achieve more uniform application of transfer pricing rules within the

Community

Composition of representatives

· The group shall comprise up to 43 members, including:

· One representative of each member state

· Up to 15 private sector representatives

· One chairperson

Appointment of representatives

· Members representing the member states shall be appointed by the national authorities

concerned. Those members shall be civil servants dealing with transfer pricing matters

· Private sector members shall be appointed by the Commission from among specialists

with experience and skills in the area of transfer pricing

· Applicants deemed suitable for membership but not appointed may be placed on a

reserve list, which the Commission may use for the appointment of replacements

· Private sector members shall be appointed in a personal capacity and shall advise the

Commission independently of any outside influence

Source: Commission of the European Communities, Commission Decision of 22 December 2006 setting up an expert

group on transfer pricing, 2006

RECOMMEDATIONS


Issuing a comprehensive regional transfer pricing regulation framework

Through a collaboration with the Transfer Pricing Advisory Body, the ATAF could support

ECOWAS Commission in establishing guidelines for a harmonized transfer pricing regime. As

previously highlighted, a lack of harmonization may reduce the effectiveness of action against

tax evasion and avoidance. ATAF is well-positioned to support the Advisory Body, mainly

through its Transfer Pricing Working Group (TPWG). The stated objectives of TPWG include:

· Drafting transfer pricing and thin capitalization legislation

· Defining the interactions between domestic transfer pricing legislation and double

taxation agreements

· Identifying transfer pricing risks

· Reviewing the OECD Transfer Pricing Guidelines

· Defining transfer pricing methodologies and documentation requirements

· Analyzing transfer pricing reports

· Using non-domestic comparables

The guidelines should focus on providing comprehensive details on different steps to be taken

at the local level toward the adoption of a transfer pricing regime, valuation methods of

related-party transactions, documentation requirements, and dispute avoidance and

resolution mechanisms in domestic and cross-border contexts. In terms of documentation

requirements, the guidelines should represent a compromise between the country's need to

protect the tax base and the compliance burden imposed on taxpayers. Such measures

generally relate to specific transaction types (for example, high-risk transactions) or specific

classes of taxpayers (for example, small and medium enterprises); they generally provide tax 154

authorities certainty regarding treatment or exemption from the rules.

Strengthening the capacity of national tax administrators to enforce transfer pricing policies

Tax administrators need to build up transfer pricing capacity and expertise. This internal

capacity will be key to helping ECOWAS countries create the requisite skill sets while also

protecting their tax base in order to mobilize additional tax revenues. Equally important will be

for governments to retain newly trained and specialized talent since the private sector also

requires the same skills in order to comply with regulations—and typically has more resources

than governments to attract and retain skilled financial professionals. Instilling the necessary

capabilities within the appropriate government departments of member states will require

long-term assistance and effort, and will demand that tax administrations undergo significant

changes, such as rapidly developing specific expertise on sectors and transactions that pose 155the greatest transfer mispricing risks.

RECOMMEDATIONS



156EuropeAid's phased approach proposes the kind of support needed along with the

157estimated timeline for each phase. This approach identifies three types of countries:

· Countries in Stage 1 are developing countries that do not have transfer pricing

legislation in place, such as Côte d'Ivoire. For these countries, potential support could

focus on developing a transfer regulation and beginning to build skills on transfer 158pricing and related international tax issues (including tax treaties).

· Countries in Stage 2 are developing countries that are on the verge of implementing

transfer pricing legislation, such as Ghana, Nigeria, and Senegal. For these countries,

the focus should be on putting in place specific staff and providing training on risk-

based, transfer-based audits, which would require conducting in-depth country risk

assessments.

· Countries in Stage 3 have a well-established transfer pricing legislation, like South

Africa and Kenya. Countries at this stage will need to keep up with recent development

in sectors and transactions that pose high transfer mispricing risk, update their

regulations as necessary.

Figure 15 provides an initial list of interventions that would be required to fill the gaps

identified at each stage.

Figure 15: Phased approach to build the capacity of tax administrations in West Africa

Source: EuropeAid, Transfer pricing and developing countries, N/A; Analysis by Dalberg

Stage 2 Stage 3

Initial mapping exercise:

evaluation of country-specific situation

Organizational changes and IT tools

Technical assistance to foster

understanding of TP

Training and secondments

Engaging and Communicating with

the private Sector and Civil society

Drafting and testing of legislation

Introducing transfer pricing regulation

as part of a wider investment climate

reform package.

In-depth country TP risk assessment

Engaging and negotiating with policy

decisions-maker to justify

the need for a specificialised team

Identification of required skillset

Identification of anticipated number

of staff required

Hiring of required staff

Training on high risk sectors,

Economics/Statistics, audit practices,

APA mechanism/MAP

Risk-based audit approaches

Ongoing training programmes

Evaluation of the effectiveness and

efficiency of the legislation

Review and revision of existing legislation

(differentiation between legislation/circulars)

Discussion and implementation of APA

and simplified compliance procedures

Improve access to comparability data

Stage 1

The figure below provides an initial list of interventions that would be required to fill the gaps identified

at each stage.

RECOMMEDATIONS


156 Ibid.

157 Ibid.



Ongoing capacity building is required to ensure that the various tax administrators can address

and stay current on local and international developments and that the next generation of staff

is being trained. As such, there is a potential to leverage capacity-building initiatives (see box

below).

ECOWAS could take advantage of ongoing transfer pricing capacity-building

programs, including:

The ATAF Transfer Pricing Working Group (TPWG). The objective of the Working

Group is to develop strategies and products for, and give direction to, the work of the

Transfer Pricing Project with regard to: (i) mechanisms for the sharing of best practice

in identifying key transfer pricing risks in respective members' countries; (ii) the

processes of developing effective transfer pricing legislation; (iii) products to enable

ATAF members to build the technical capacity to effectively implement their t ransfer

pricing rules; and (iv) the assessment of transfer pricing risk.

The multipartite capacity-building program led by the OECD. The multilateral

program for more effective implementation of transfer pricing rules in developing

countries could benefit ECOWAS and its member states. The program is aimed at

enabling developing countries to collect the taxes that are a c tua l l y due f rom

multinational businesses, to fight international profit shifting and to establish

predictable investment conditions. Through support from this program, the Kenya

Revenue Authority (KRA) was able to able to negotiate two tax adjustments due to

transfer pricing manipulation, culminating in additional tax revenue of 12.9 million and

10.9 million US dollars. Ghana also received support to implement its new transfer

pricing regulations and to undertake a capacity- building program for its team of

specialized auditors. Where regional organizations are concerned, the program is

currently supporting the East African Community (EAC). Opportunities for extending

capacity-building to ECOWAS are being explored.

Source: ATAF, Update on the Transfer Pricing Project, 2014; OECD, Base Erosion and Profit Shifting

http://www.oecd.org/tax/beps-about.htm, 2013; Dalberg analysis

BOX 5 : RELEVANT CAPACITY-BUILDING PROGRAMS ON TRANSFER PRICING ISSUES

170 ATAF, An Overview of Existing Studies on Tax Incentives in Africa, 2012.


RECOMMEDATIONS


5.1.1.2 Alternative approach to the ALP method: Formulary Apportionment

5.1.2 Improving information exchange

An alternative to the ALP approach could be the formulary apportionment (FA) method, also

referred to as unitary taxation. Under unitary taxation, the profits of the various branches of an

enterprise or the various corporations of a group are calculated as if the entire group is a 159

unity. The FA method is used to allocate the global profits of a multinational group among

the associated enterprises on the basis of a combination of multiple factors such as property, 160payroll, sales, capital invested, and manufacturing costs. The FA method is used by some sub-

national jurisdictions, notably the provinces of Canada, the cantons of Switzerland, and some

states within the USA. It has been proposed for internal use within the North-America Free 161

Trade Agreement and the European Union (EU).

However, formulary apportionment is not without its challenges: (i) the arbitrariness of

predetermined formulas makes it difficult for FA to reflect the particular circumstances of each

MNE; (ii) FA relies heavily on foreign-based information; (iii) the method is difficult to

implement as it requires substantial international coordination and consensus; and (iv) FA runs

the risk of leading to disagreements among countries as each of government may want to

emphasize or include different factors in the formula based on the activities or factors that

predominate in its jurisdiction.

The FA method relies on the global adoption of country-by-country reporting to achieve the

desired outcome, at a lower cost. However, it appears that the prospect of adoption of country-

by-country reporting is largely dependent upon the discretion of the International Accounting 163

Standards (IAS) Board. Since 2005, the IAS Board has been creating accounting regulations

that have the effective power of law in more than 100 countries in the world, including West

African countries such as Nigeria. Civil society organizations have initiated dialogue with the

IAS Board, but it appears that persuading the Board of the merits of country-by-country

reporting still remains elusive. ECOWAS could adopt the FA method at a regional level as a way

to enhance regional integration. Support is also needed not only from investors but also from a

broader range of users, tax authorities, developing countries, and others who might benefit

from country-by-country reporting.

The ECOWAS Commission should partner with other African economic unions to develop a

database for automatic exchange of information for tax purposes, with assistance from ATAF

and the UN Tax Committee. In order to provide tax administrators with alternatives to

Considering adopting FA within ECOWAS

RECOMMEDATIONS


160 UN Practical Manual on Transfer Pricing for Developing Countries, 2012.

161 Ibid.

162 Ibid.

163 Force on Financial Integrity and Economic Development, Country-by-Country Reporting: Holding multinational corporations to

account wherever they are, 2009.


information self-reported by taxpayers, ECOWAS member states must cooperate more

effectively on information exchange. This can build on existing frameworks such as (i) the 164WAEMU legal framework to avoid double taxation within the WAEMU space and provide

assistance in exchange of information and tax collection; (ii) the ATAF Agreement on Mutual

Assistance in Tax Matters; and (iii) the ATAF Practical Guide on Exchange of Information for

Developing Countries. As tax cooperation should go beyond the boundaries of economic

communities, it will be important for ECOWAS and other African economic unions (Southern

African Development Community [SADC], East African Community [EAC], Central African

Economic and Monetary Community [CEMAC], etc.) to jointly work on this initiative with

support from ATAF and the UN Tax Committee. The result would be that the vast majority of

African countries would have the administrative capacity and appropriate data standards (such

as the OECD automatic information exchange framework) to share data with others.

In addition, government should make beneficial ownership disclosure compulsory at least for

the sectors with high risk of abusive transfer pricing. Beneficial ownership disclosure requires

that the control and beneficial ownership of companies, trusts, and foundations be readily 165available in the public record to facilitate effective due diligence. It also explicitly requires and

enforces that financial institutions identify the ultimate beneficial owners or controllers of any

company, trust, or foundation seeking to open an account. It is meant to enable national

authorities to better estimate tax revenue (and plan for its utilization), and to identify where tax

is being evaded. Additionally, it helps give current and potential investors an enhanced

understanding of the workings of the corporation in which they invest.

In West Africa, financial institutions are required to undertake customer due diligence

measures, including verifying the identity of their customers and obtaining information on the

purpose and intended nature of the business relationship, in line with the Financial Action Task 166

Force (FATF) recommendation to prevent money laundering and terrorism financing.

However, recent evaluations by ECOWAS' Inter-Governmental Action Group against Money

Laundering in West Africa (GIABA) have shown that most countries are either only partially 167compliant (like Côte d'Ivoire and Nigeria) or not compliant at all (like Senegal).

Governments should therefore implement and enforce this regulation, starting with some key

sectors or with multinational companies of a certain size. With regard to beneficial ownership

disclosure, the EU and the United Kingdom (UK) seem currently to have the most progressive

legislation. In early 2014, the European Parliament approved draft anti-money laundering rules

that would require the ultimate owners of companies and trusts to be listed in public registers in 168all EU countries. In the UK, an outline of a new registry is in the process of parliamentary

approval. If this registry is adopted, all those with a 25 percent or greater share of a company's

RECOMMEDATIONS

165 TJN, FSI – next steps.

166 FATF, FATF's 40 Recommendations, 2003.

167 GIABA, countries mutual evaluation reports, 2012-2014.

168 International Advisor, UK to go ahead with beneficial owners registry, 2014.

164 WAEMU, Règlement 08/2008/CM/UEMOA.


ownership or voting rights would be named. The list would be updated annually and publicly 169

available.

Civil society should work with accountants' associations to influence change in international

financial standards while incentivizing multinationals to adopt country-by-country reporting.

Civil society should work closely with accountants' associations at the regional and

international levels (e.g., ABWA and International Federation of Accountants, or IFAC) and

multinational companies. To more effectively influence change, civil society should endeavor

to find a creative way to incentivize multinationals by proving that they have much to gain from

adopting the country-by-country reporting system. An example could be to create a

"transparency label" for multinationals that comply with country-by-country reporting

standards. Regardless of whether or not country-by-country reporting becomes international

law, the idea is to develop voluntary international standards on tax and financial transparency

within multinationals. A "transparency label" would be similar to what the International

Organization for Standardization (ISO) is doing to provide world-class specifications for

products, services, and systems in order to ensure quality, safety and efficiency.

The ECOWAS Commission and civil society should ensure that the interests of the region are

taken into account in the formulation of international transfer pricing policies. The Commission

should seek to take an active role in the global talks and consultations conducted with a view to

drawing up international standards, such as the BEPS action plan aimed at redefining

international tax rules and combating tax evasion. Civil society should also work closely with

ATAF and the UN Tax Committee in tax policy design.

To broaden the tax base, priority interventions related to tax incentives should focus on (i)

setting guidelines for tax exemptions, (ii) improving transparency in the governance of tax

incentives, and (ii) advocating for and influencing change at the regional level.

The ECOWAS Commission should strive for the rationalization and coordination of tax

incentives by working in close collaboration with the WAEMU Commission. Through a joint

committee, such as the ECOWAS-WAEMU Joint CET Management Committee, both

organizations should work together to provide guidelines for tax incentives in the region.

5.1.3 Advocating for and influencing change

5.2.1 Setting guidelines for tax exemptions

5.2 RECOMMENDATIONS ON TAX INCENTIVES

RECOMMEDATIONS

169 Ibid.


ECOWAS can learn from the successes and challenges of other regional communities that have

undertaken the tax incentive harmonization process. For instance, SADC initiatives include the

creation of the Tax Incentives Working Group (TIWG) and the development of guidelines for 170the treatment and application of tax incentives in the region. The EAC has also recently made

significant progress toward a system of harmonizing their tax incentive regime through the 171

use of a 'Code of Conduct' (which has yet to be adopted). The Code of Conduct, despite some

limitations, aims to formalize an existing arrangement whereby each year, the finance

ministers of the five countries that make up the EAC meet to discuss their budget proposals

before delivering their budget speeches. This provides finance ministers the opportunity to

dissuade their counterparts from proposing any new tax incentive that would put other EAC 173countries at a disadvantage.

Governments should systematically carry out cost-benefit analyses and subject tax exemption

measures to oversight by parliament and the citizenry. Tax incentives should be reviewed and

approved by parliament before they are definitively granted, and only after an objective study

of the expected costs and benefits, through annual tax expenditure analysis, such as what is

being proposed in Sierra Leone. Morocco is currently reporting its tax incentives in its tax 174

expenditures reports. These reports have the dual objectives of aiding efficient resource

allocation—by providing information for the comparison of the cost and efficacy of direct

spending and tax expenditure programs—and of strengthening government finance while

contributing significantly to fiscal transparency.

Civil society should play a continuous watchdog role. Through advocacy, civil society should

ensure that tax incentives are granted and managed in a transparent manner and serve the

best interests of ECOWAS countries.

5.2.2 Improving transparency in the governance of tax incentives

5.2.3 Advocating for and influencing change

170 ATAF, An Overview of Existing Studies on Tax Incentives in Africa, 2012.


The draft code proposes only weak enforcement mechanisms and emphasizes tax harmonization more than regional cooperation. Also, it

does not oblige EAC states to undertake tax expenditure analyses to better assess the efficacy of tax incentives in realizing development

objectives. (Source: Tax Justice Network-Africa & ActionAid International, Tax competition in East Africa: A race to the bottom?, 2011).

173 Ibid.

174 OECD, Tax Incentives for Investment – A Global Perspective: experiences in MENA and non-MENA countries, 2007.

RECOMMEDATIONS

ANNEXES

ORGANISATION Transparency International Sur - Invest, Dalberg Advisory Board Cellule Nationale de Traitement des Informations Financières Citibank YZAS (accounting firm) SOS - Transparence Centre for Democracy and Development Agence Nationale de Promotion des Investissements et des Grands Travaux Cellule Nationale de Traitement des Informations Financières

Direction Générale des DouanesDirection Générale des Impôts et Domaines

ECOWAS’ Inter - Governmental Action Group against Money Laundering in West Africa - GIABA

Exco GHA Sénégal

Géni et Kébé (law firm)

Oxfam International

TrustAfrica

UNACOIS JAPPO (Employers' Association)

ONECCA- Senegal

COUNTRY

Germany Chile

Côte d’Ivoire

Côte d’Ivoire

Côte d’Ivoire

Nigeria

Senegal Senegal Senegal Senegal Senegal

Senegal

Senegal

Senegal

Senegal

Senegal

Senegal


List of institutions interviewed

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