Strong transfer pricing policy ensures transparent intercompany dealings

As Rwanda continues to attract more foreign direct investments and multinational firms, the economy has seen a wave on new developments and trends in areas like taxation and licensing regime.

As Rwanda continues to attract more foreign direct investments and multinational firms, the economy has seen a wave on new developments and trends in areas like taxation and licensing regime.

On the issue of taxation, it is important for the country to implement a transfer pricing policy as matter of priority. Implementation of transfer pricing policies in Rwanda, like any other transfer pricing regime elsewhere, will pose serious challenges to companies subjected to this new regulation both at a local and global setting.

 
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When goods or services are provided by a multinational organisation to one of its subsidiary firms, the fee levied is the transfer price. Tax authorities come in to ensure that the entities involved operate at an arm’s length basis, or what could be called the market price basis. In this case, a structured tax base is applied by the involved parties.

 

As the world economy becomes more integrated, foreign income at Rwandan-based multinational companies has increased, and non-domestic operations growing more quickly. However, there is a likelihood that the firms are more profitable at a parent company level than operations at home (subsidiary).

 

It has, as a result, become common for listed companies to announce significant profits while presenting their financial statements, but at the same time reporting small or no taxable income to the tax authorities.

This disconnect poses adverse effects from a tax policy perspective, especially as far as transfer pricing is concerned. For instance, shareholders are denied a true picture of the company’s performance as they don’t have a clear grasp of its profits.

Also, the public may lose faith in corporations when companies continually report profits without paying taxes.

There is, therefore, a need for careful prior planning for transfer pricing by multinationals which will allow them to put into consideration other issues and impact on the firm beyond taxation.

Transfer pricing as a social responsibility

Corporations have become more aggressive on keeping their tax obligations to a minimum. The mobility of capital, and the keen attention paid to reported earnings catalysed by the availability of intermediaries who sometimes advocate avoidance strategies, have made tax planning a core element of financial management.

Consequently, some corporations no longer have significant domestic tax obligations.

At the same time, companies have come to embrace corporate social responsibility and frequently invest resources into social initiatives even as they pursue aggressive strategies reduce their tax obligations.

In the same spirit of commitment to the society, companies should instead feel compelled to treating their tax obligations as a responsibility which should be at par with, for example, abiding by environmental regulations.

The top management could promote this by evaluating the performance of tax officials basing it on compliance rather than solely on profit maximisation.

Furthermore, companies’ codes of ethics should be tailored to prohibit transactions that serve only to reduce tax obligations. A statement of corporate values that declares that a company will honour commitments to outside stakeholders should also go hand-in-hand with a commitment to fulfil tax obligations.

Insisting on social responsibility when a company’s tax system is out of step with global tax norms, such as transfer pricing, is perhaps impossible and unfair.

However, companies should commit to reporting accurately what their tax payments have been for the sake of their stakeholders and in compliance with the law.

Clarity over tax payments, especially on transfer pricing, will help shareholders understand properly the performance and financial soundness of businesses and ensure that strategies to reach targeted profits do not abet manipulation tax policies to reduce their obligations.

The biggest challenge in this process could probably be the need to balance conflicting goals of being fully-compliant with the rules and regulations in different jurisdictions, and management of the tax paid in a global basis, competitively.

The writer is a tax advisor with KPMG Rwanda.

The views expressed herein are personal and do not necessarily represent the views and opinion of KPMG.

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