PwC has been forced to defend a report prepared for the European Commission after critics claimed that it was ‘strongly biased’ towards the private sector and that the authors lacked development expertise. A spokesperson for the EC’s Taxation and Customs Union has told Tax Journal that it made sense for the Commission ‘to contract an expert firm such as PwC to commission a study on transfer pricing’.
About two-thirds of business transactions worldwide take place within a group of companies, and many developing countries capture only 40% of their tax potential, PwC said in Transfer pricing and developing countries.
‘The issue of transfer pricing is a central challenge to developing countries' capacity to effectively tax multinational corporations,’ the EC’s Taxation and Customs Union said as it published the report prepared by PwC Belgium. The EC envisages providing financial support in capacity building.
Eurodad, the European Network on Debt and Development, suggested that PwC and the fight against tax evasion were ‘strange bedfellows’. Eurodad is a network of 54 non-governmental organisations from 19 European countries, and its member organisations include CAFOD, Christian Aid, Save the Children UK and the New Economics Foundation.
Eurodad: ‘Once again, the EC relies on the private sector’s advice to set rules intended to curb the private sector’s tax evasion and avoidance.’ |
The PwC report overlooked the need to ‘tackle multinational companies’ illicit tax practices and to explore alternative ways to curb transfer mispricing’, Eurodad claimed, describing PwC as one of the big four accountancy firms providing advice to multinational companies, ‘including on how to minimise tax payments’.
‘Once again, the EC relies on the private sector’s advice to set rules intended to curb private sector’s tax evasion and avoidance,’ Eurodad said.
It was ‘hard to believe’ that PwC would really act in the interests of developing countries and not in that of the multinationals, their main clients, and the report focused exclusively on the implementation of the arm’s length principle promoted by the OECD.
The Tax Justice Network has claimed that the OECD ‘jealously guards and promotes rules that are favourable both to rich countries and to their multinationals, often to the detriment of developing countries’.
PwC Belgium said it was awarded the project following a rigorous selection procedure.
‘We successfully demonstrated our transfer pricing expertise and experience thanks to our global network of PwC firms and particularly the fact that we can leverage from a strong pool of TP specialists in the African region who fully grasp the region-specific economics and market dynamics,’ said Isabel Verlinden, the firm’s European Transfer Pricing Leader.
PwC’s research demonstrated that the business community ‘is interested in a transparent set of "rules of the game" on a global basis’, a view echoed by government officials interviewed for the project.
Verlinden said a ‘common level playing field’ needs to be established between developed and developing countries and between multinationals and governments. ‘To achieve this our recommendations were to further build on the work being performed by amongst others the OECD and UN and to work on a broadening of the tax treaty network, and to build up TP expertise.’
She added that the report was ‘only the start of a challenging journey’ for many developing countries.
‘We are fully committed to engage in an ongoing dialogue with all stakeholders setting the rules of the TP game. This helps us to strengthen our preventive role as advisers while facilitating tax administrations’ approaches to grasp where true tax risk lies so that further analysis can be planned and pursued in a time effective manner while minimizing potential distraction for taxpayers from their business priorities.’
A series of workshops was organised to ensure a comprehensive study, the EC spokesperson said.
‘At the workshops the ongoing study was discussed with interested parties including PwC, government experts from developing countries, experts from other international organisations, and various civil society organisations including Eurodad and the Tax Justice Network. They provided valuable contributions to the study.
‘The final report was discussed before publication at a further meeting which Eurodad attended but during which they did not criticise the choice of PwC as consultants.’
The EC has proposed to offer support in ‘adopting the internationally accepted OECD guidelines’, the PwC report said.
International donor support should aim at lifting TP legislation of developing countries to a common international standard, but reform ‘should not be framed as anti-abuse legislation’.
‘The majority of taxpayers want to comply with local TP requirements in developing countries, and seek guidance on how to apply appropriate remuneration for related-party transactions to reduce tax risks.’
There is a danger that a ‘large diversity’ in TP legislation will emerge if countries decide to introduce such legislation on their own, the authors added. The development of a uniform set of TP rules would favourably affect the environment for international trade and MNE activities, contributing to investment and growth.
‘It is for this reason that PwC decided to participate in this study and assist in verifying whether a common denominator is available in the TP field.’
Verlinden: 'Our report is only the start of a challenging journey for many developing countries.' |
The report recommended further analysis to identify what stage of reform each country has reached. It suggested a number of preconditions to be considered before pursuing TP reform in countries where tax administrations ‘lack basic understanding’ in the field’.
The authors listed 144 developing countries based on the World Bank’s classification, and found significant differences between the four countries selected by the EC for analysis.
While Kenya and Vietnam could draw upon a sufficiently large treaty network and tax administration capacities to successfully pursue and implement comprehensive TP reform, the authors considered that donor support and assistance for Ghana and Honduras should focus on improving the preconditions before embarking on TP reform.
‘In order to pave the way for TP, developing countries should ensure that they fulfil the basic economic and political preconditions (eg. infrastructure, international trade, qualified workforce) as well as legal preconditions (eg. comprehensive accounting rules, legal system allowing cross-border flows of capital and assets, tax treaty network),’ the report said.
‘Furthermore, the organisation and capacity of the current local tax administration (eg. educated staff, monitoring of revenues, training facilities) should be taken into consideration. In the absence of such preconditions, we feel that the introduction of comprehensive TP legislation could be premature and that donor support should rather focus on improving the general economic, legal and administrative conditions.’
The EC spokesperson said the PwC report represents ‘a valuable contribution’ to a fuller understanding of the problems associated with transfer pricing and developing countries.
‘PwC was requested to make a series of recommendations for action. These are currently being examined by the EC with a view to implementing a strategy for support to developing countries in tackling these difficulties.’
PwC has been forced to defend a report prepared for the European Commission after critics claimed that it was ‘strongly biased’ towards the private sector and that the authors lacked development expertise. A spokesperson for the EC’s Taxation and Customs Union has told Tax Journal that it made sense for the Commission ‘to contract an expert firm such as PwC to commission a study on transfer pricing’.
About two-thirds of business transactions worldwide take place within a group of companies, and many developing countries capture only 40% of their tax potential, PwC said in Transfer pricing and developing countries.
‘The issue of transfer pricing is a central challenge to developing countries' capacity to effectively tax multinational corporations,’ the EC’s Taxation and Customs Union said as it published the report prepared by PwC Belgium. The EC envisages providing financial support in capacity building.
Eurodad, the European Network on Debt and Development, suggested that PwC and the fight against tax evasion were ‘strange bedfellows’. Eurodad is a network of 54 non-governmental organisations from 19 European countries, and its member organisations include CAFOD, Christian Aid, Save the Children UK and the New Economics Foundation.
Eurodad: ‘Once again, the EC relies on the private sector’s advice to set rules intended to curb the private sector’s tax evasion and avoidance.’ |
The PwC report overlooked the need to ‘tackle multinational companies’ illicit tax practices and to explore alternative ways to curb transfer mispricing’, Eurodad claimed, describing PwC as one of the big four accountancy firms providing advice to multinational companies, ‘including on how to minimise tax payments’.
‘Once again, the EC relies on the private sector’s advice to set rules intended to curb private sector’s tax evasion and avoidance,’ Eurodad said.
It was ‘hard to believe’ that PwC would really act in the interests of developing countries and not in that of the multinationals, their main clients, and the report focused exclusively on the implementation of the arm’s length principle promoted by the OECD.
The Tax Justice Network has claimed that the OECD ‘jealously guards and promotes rules that are favourable both to rich countries and to their multinationals, often to the detriment of developing countries’.
PwC Belgium said it was awarded the project following a rigorous selection procedure.
‘We successfully demonstrated our transfer pricing expertise and experience thanks to our global network of PwC firms and particularly the fact that we can leverage from a strong pool of TP specialists in the African region who fully grasp the region-specific economics and market dynamics,’ said Isabel Verlinden, the firm’s European Transfer Pricing Leader.
PwC’s research demonstrated that the business community ‘is interested in a transparent set of "rules of the game" on a global basis’, a view echoed by government officials interviewed for the project.
Verlinden said a ‘common level playing field’ needs to be established between developed and developing countries and between multinationals and governments. ‘To achieve this our recommendations were to further build on the work being performed by amongst others the OECD and UN and to work on a broadening of the tax treaty network, and to build up TP expertise.’
She added that the report was ‘only the start of a challenging journey’ for many developing countries.
‘We are fully committed to engage in an ongoing dialogue with all stakeholders setting the rules of the TP game. This helps us to strengthen our preventive role as advisers while facilitating tax administrations’ approaches to grasp where true tax risk lies so that further analysis can be planned and pursued in a time effective manner while minimizing potential distraction for taxpayers from their business priorities.’
A series of workshops was organised to ensure a comprehensive study, the EC spokesperson said.
‘At the workshops the ongoing study was discussed with interested parties including PwC, government experts from developing countries, experts from other international organisations, and various civil society organisations including Eurodad and the Tax Justice Network. They provided valuable contributions to the study.
‘The final report was discussed before publication at a further meeting which Eurodad attended but during which they did not criticise the choice of PwC as consultants.’
The EC has proposed to offer support in ‘adopting the internationally accepted OECD guidelines’, the PwC report said.
International donor support should aim at lifting TP legislation of developing countries to a common international standard, but reform ‘should not be framed as anti-abuse legislation’.
‘The majority of taxpayers want to comply with local TP requirements in developing countries, and seek guidance on how to apply appropriate remuneration for related-party transactions to reduce tax risks.’
There is a danger that a ‘large diversity’ in TP legislation will emerge if countries decide to introduce such legislation on their own, the authors added. The development of a uniform set of TP rules would favourably affect the environment for international trade and MNE activities, contributing to investment and growth.
‘It is for this reason that PwC decided to participate in this study and assist in verifying whether a common denominator is available in the TP field.’
Verlinden: 'Our report is only the start of a challenging journey for many developing countries.' |
The report recommended further analysis to identify what stage of reform each country has reached. It suggested a number of preconditions to be considered before pursuing TP reform in countries where tax administrations ‘lack basic understanding’ in the field’.
The authors listed 144 developing countries based on the World Bank’s classification, and found significant differences between the four countries selected by the EC for analysis.
While Kenya and Vietnam could draw upon a sufficiently large treaty network and tax administration capacities to successfully pursue and implement comprehensive TP reform, the authors considered that donor support and assistance for Ghana and Honduras should focus on improving the preconditions before embarking on TP reform.
‘In order to pave the way for TP, developing countries should ensure that they fulfil the basic economic and political preconditions (eg. infrastructure, international trade, qualified workforce) as well as legal preconditions (eg. comprehensive accounting rules, legal system allowing cross-border flows of capital and assets, tax treaty network),’ the report said.
‘Furthermore, the organisation and capacity of the current local tax administration (eg. educated staff, monitoring of revenues, training facilities) should be taken into consideration. In the absence of such preconditions, we feel that the introduction of comprehensive TP legislation could be premature and that donor support should rather focus on improving the general economic, legal and administrative conditions.’
The EC spokesperson said the PwC report represents ‘a valuable contribution’ to a fuller understanding of the problems associated with transfer pricing and developing countries.
‘PwC was requested to make a series of recommendations for action. These are currently being examined by the EC with a view to implementing a strategy for support to developing countries in tackling these difficulties.’
