Transfer Pricing in the Extractive Sector in Guinea
Guinea is home to some of the largest and most valuable iron ore and bauxite deposits in the world. Although yet to commence production, Simandou is Guinea’s most notable mineral asset with estimated reserves of over 1.8 million tonnes of iron ore. Guinea’s mineral sector accounted for more than 25 percent of the country’s gross domestic product (GDP) and about 95 percent of export earnings in 2011. Tax avoidance among mining companies in Guinea is yet to be quantified, however it would be safe to assume that the problem is considerable.
The Open Society Initiative for West Africa (OSIWA) estimates that illicit financial flows (IFFs) have grown at an annual rate of 23 percent within the Economic Community of West African States (ECOWAS), rising from less than USD 3 billion in 2002 to more than USD 18 billion in 2011. Despite the threat that tax avoidance, specifically transfer mispricing, poses to the tax base, the government of Guinea is only just beginning to address these issues. Comprehensive legal and administrative reform is urgently required if Guinea is to combat transfer mispricing, and secure its fair share of resource rents.
Transfer pricing is the mechanism by which prices are chosen to value transactions between related legal entities within the same multinational enterprise (MNE). These are referred to as “controlled transactions” and may include the purchase and sale of goods or intangible assets, the provision of services, the provision of financing, cost allocation, and cost sharing agreements. As long as the price that is set matches the “arm’s length” price at which a transaction would have taken place between unrelated parties, this is not problematic. However, transfer pricing may become abusive or illegal when related parties seek to distort the price as a means of reducing their overall tax bill. In these instances the practice may be referred to as “transfer mispricing.”
This case study investigates the barriers to implementation of transfer pricing rules in the mining sector in Guinea. It is available here in French.
Click to enlarge
