Sociopolitical difficulties threaded throughout the continent make transfer pricing regulations in Africa a lot more difficult to
Transfer pricing has become the number one method of moving capital out of Africa. Multinational corporations also use this device as a favoured way to avoid taxes. When goods or products are moved from a country with a low tax rate to one with a higher tax rate, the prices charged on the invoices are inflated to minimise the tax liability in the high tax country.
African tax administrators often do not have sufficient staff with the necessary training to tackle the very complex issue of the transfer pricing strategies of multinational companies. The result is that virtually no success has been achieved by any of the African countries involved in the fight against the practise.
According to estimate, more than $10bn of capital illegally leaves Africa every year by way of transfer pricing. This is probably only the tip of the iceberg, fake transactions result in a further $150-$200bn being channelled out of African economies each year. In effect it is estimated that up to 60 percent of African import and export transactions are mispriced. Companies like KPMG and PwC have launched investigations into reports of misreported income on numerous occasions and confirmed these suspicions.
Not only multinational companies are involved in this, governments and government leaders are also involved. During the reign of Mobutu Sese Seko of Zaire the state owned diamond company, Gecamines, exported millions of diamonds at prices way below market prices, often as low as $8.55 per carat. The difference between the ‘invoice’ price and the ‘actual’ price was then deposited into Mobutu’s various offshore bank accounts. It is estimated that he embezzled more than $5bn from his countrymen and women.
After his downfall, a UN investigation implicated no less than 54 government minister in the scam. Perhaps even more worrying, it also implicated 85 multinational companies based in the US, Europe, Asia, Africa, Canada, the Caribbean and the British Channel Islands.
During the reign of Sani Abacha, in Nigeria, similar schemes were used to transfer money to his Swiss bank account, virtually on a daily basis. According to the Economist, more than 100 banks, including HSBC, Citigroup, Credit Swisse, BNP Paribas, Deutsche Morgan Grenfell and Standard Chartered were implicated.
The EITI (Extractive Industry Transparency Initiative) is an attempt to control the situation. More than half the candidate countries are African, including Zambia, Gabon, Tanzania, Democratic Republic of the Congo, Cameroon, Mali, Chad, Sierra Leone, Mauritania, Niger, Nigeria, Burkina Faso and Liberia.