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“Death is certain, but paying taxes is definitely not — at least, not for everyone” – Blaufus, Bob and Otto


The payment of tax has been described as intricate and ‘planned’ rather than ‘automatic’ with complexity issues remaining unresolved (Etienne, 2011). With the increasing growth of international trade and the magnitude of transactions within MNEs, tax authorities, in a bid to protect governments’ revenue bases from erosion, are faced with the challenge of knowing about taxation and transfer pricing within such group transactions (Dharmapala, 2014). MNEs, in contrast, continue to create ways of shielding themselves from extensive scrutiny so as to protect their group profits and their competitive niches (McBarnet, 2001). Furthermore, Chapter 1 identified some contextual, methodological and theoretical gaps that exist and revealed that deficient tax systems are vulnerable to transfer pricing abuse by MNEs.
To respond to the gaps identified in the literature, this chapter narrows down transfer pricing as a tax avoidance concept (Section 2.2), discusses transfer pricing as a concept (Section 2.3), considers transfer pricing as a policy issue for tax authorities (Section 2.4) and elaborates upon the theoretical lenses underpinning this study (Section 2.5). The theories set up the basis for the researcher-generated conceptual framework on transfer pricing (Section 2.8). Transfer pricing strategies used by MNEs to avoid tax (Section 2.6) also form part of the discussion together with authorities’ reaction to exploitative rationalities (Section 2.7)

 Understanding Tax Avoidance through Transfer Pricing

International trade involving MNEs has brought “the good and the bad” (for example, analogous employment and tax avoidance), which Bateman (2007:110) refers to as the “mixed blessing”. Bateman (2007) clearly explains how the tax and employment benefits derived from the existence of MNEs in the host country are set against increasing and irreparable damages to the economy in the form of socio-environmental hazards, health hazards, low wages, tax avoidance and loss of trust in the MNEs.
Tax avoidance is arranging one’s tax affairs in order to minimise their tax liability. When transfer pricing is used for tax reduction, which is referred to by Li, Tim and Dongxian (2017) as tax-motivated transfer pricing it becomes a tax avoidance tool. Fuest et al (2011) has stressed that developing countries are vulnerable to tax avoidance through transfer pricing by MNEs as they shift income from high to low tax jurisdictions. Although previously tax avoidance might have had the blessing of the courts and the law (Hansen, Crosser, & Laufer, 1992:679), the moral conscience has since changed as courts and tax authorities now censure it. Societies argue that the resultant revenue losses have negative effects on the government’s ability to follow its economic and social goals and better people’s lives (Oguttu, 2016:8, Sikka & Willmott, 2010:27). A case which shows a departure from the previous conception of tax avoidance is in the New Zealand case of Elmiger v CIR which held that the:
Creative legal devices contrived to enable individual taxpayers to minimise or avoid their tax liabilities are often not merely sterile or unproductive in themselves (except perhaps in respect of their tax advantages for the taxpayer concerned), but that they have social consequences which are contrary to the general public interest [Elmiger v CIR [1966] NZLR 683 (SC) at 686].
A challenge for tax authorities is whether the tax planning by taxpayers is simply a conscious arrangement of one’s tax affairs to achieve a minimum tax liability; or if it is an artificial arrangement to manipulate tax laws to achieve outcomes that conflict with, or defeat the spirit of the law (Oguttu, 2016:8). Reference is made to Australia, where there is a form of tax avoidance that ironically follows the letter of the law and not the intention of the law. It is driven by the deliberate exploitation of structural loopholes in the law, such as transfer pricing. Oguttu (2016:8) also refers to what is termed ‘impermissible tax avoidance’ in South Africa, meaning tax avoidance practices that spread beyond what is legally acceptable, for instance taxpayers hiding their assets and income in low-tax and tax-haven countries. The bulk of tax avoidance has been said to be occurring through transfer pricing (Taylor and Richardson, 2012). Collier (2013) as cited in Maya (2015) describes transfer pricing as a well established method of avoiding tax.
Benari, 2009 also emphasizes how transfer pricing can be used to distort tax liability.

The Transfer Pricing Concept

Eden (1998); Borkowski (1997); Borkowski (1996); Tang (1993); Kaplan (1990); Eccles (1985); Benke and Edwards (1980); and Lall (1973); Thomas (1971) pioneered the discussions on transfer pricing. Transfer pricing relates to the pricing of transactions between associated enterprises (OECD, 2010a). An associated enterprise refers to a relative of the person, a partner, a trustee of a trust, a partnership in which the person is a partner and controls at least 50% of the rights to the partnership’s income or capital, and a company controlled by the person alone or with other associates (Section 2A of the Zimbabwe Income Tax Act (23:06). Transfer pricing facilitates trade between associated enterprises for performance evaluation, decision-making and determining group profits (Ekstrom et al, 2014:53). It allows enterprises to create a lower tax burden for the MNEs by shifting profits to a lower tax country or through other means such as inflating imports (Olivier and Honiball, 2011). Transfer pricing, in itself, is not illicit, but rather the intentional ‘mispricing’ of transactions for manipulation/shifting of profits in respect of tax. According to Oguttu (2016:8), this is an abuse and constitutes unacceptable tax avoidance.
Transfer pricing issues have been a prime concern globally since the 20th Century. The unprecedented growth of transfer pricing continued over the years to date, with some of the most recent works by Oguttu (2017), Rossing and Rohde (2014) and Holtzman and Nagel (2014). Holtzman and Nagel (2014) introduced the transfer pricing concept while Rossing and Rohde (2014) simply reviewed transfer pricing literature and Oguttu (2017) critiqued some OECD action plans from an African perspective. Although transfer pricing is not a new concept, researchers are at the nascent stages of narrowing it down to specifics such as the nature of the intra-group transfers, for example intangible transfers (Lagarden, 2014; Taylor Richardson and Lanis, 2015). Maya (2015:14) believes that transfer pricing is greatly misunderstood and Cazacu (2017:20) emphasises that it is complex for both tax authorities and for MNEs. This is an emerging area to which this study aims to contribute.
Murphy (2012) attributes the vulnerability of developing countries to the effects of the secretive nature of MNE transactions because of weak legislative frameworks, citing the instance of the top transfer pricing abuse case, Unilever Kenya Ltd vs. Commissioner of Income Tax, Kenya Income Tax Appeal 753, 2003. Murphy (2012) stressed the failure by African states to enforce their transfer pricing rules, saying in as much as the Kenyan revenue authority had a case, they failed to prove the profit-shifting by Unilever because material accounting data of the group was not made available to the court, given the requirements of protection of privileged company information.
Given that MNEs are faced with the challenge of setting transfer prices that are consistent with the host nation’s tax requirements, and that these prices will subsequently be used for performance evaluation and rewards (Adams & Drtina, 2010), finding the appropriate price is complex and challenging. This dilemma provides the opportunity for transfer prices to be manipulated by the corporate managers in order to minimise the tax liability (and maximise their group profits), which is one of the main objectives in transfer pricing decision making (Ching-Wen & Hsiao-Chen, 2010). This opportunity makes taxation matters the prime objective for transfer pricing decisions (Bernard, Jensen & Schott, 2006). However, Uyanik (2010) argues that not every transfer pricing incident results in tax avoidance and is used for substantive private sector intentions related to profitability.

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Transfer Pricing as a Policy Issue within Tax Authorities

This section makes a critical appraisal of transfer pricing as a national and international policy, and not as an organisational policy.
De Waegenaere et al (2006:106-107) reveal that there are inconsistencies regarding the treatment of transfer pricing related issues among tax authorities. Li (2006:49) acknowledges that tax systems are heterogeneous among nations and hints that there is bound to be variations on the price to be attached to the same transaction. This creates conflicting information/realities or results in double taxation or under taxing. Li (2006:49) further says that even though there are double taxation treaties, as long as the transfer pricing systems internationally continue to be un-harmonised, the total elimination of double taxation and income shifting is not guaranteed. These un-harmonised systems validate that tax authorities continue to increase their tax scrutiny on MNEs (Tully, 2012) while the MNEs remain susceptible to double taxation, and are therefore motivated to search for more complex transfer pricing schemes and tax avoidance strategies (Sikka & Haslam, 2007). As a result of the continuous cycle of tax reforms, the inconsistencies and inefficiencies of the transfer pricing system will impact on both the MNE and the tax authority, ultimately impeding foreign investment and consequently causing unintended revenue losses. Revenue losses impact again on livelihoods and other socio-economic conditions of citizens of all affected countries (Sikka & Willmott, 2010).
Ruiz and Romero (2011), drawing on the work of Bagchi, Bird and Das-Gupta (1995:63) listed the problems that come with cross-border trade. These problems include inter alia: over/under-invoicing of goods, abuse of intra-group debt-financing, misclassification of goods and use of tax havens. Bagchi et al (1995:64) identified differing tax rates, exchange rate fluctuations and information dissonance as other challenges of cross-border transactions. This myriad of factors influencing transfer prices provide national tax authorities with distinct challenges around determining the appropriate tax liability in a specific country, and downstream accountability of taxpayers to tax authorities and the people of a region (Novikovas, 2011).
To counteract these “creative compliance” (Sikka & Willmott, 2010:11) stances by taxpayers, governments revise their legislation to reduce or eliminate this behaviour and its repercussions. This can be in the form of introducing significant penalties, new documentation requirements, and increased audit procedures (Holtzman & Nagel, 2014). Therefore, the appropriateness and comprehensiveness of legislation should be considered in the light of sophistication and “creative non-compliance” schemes employed by taxpayers in the specific country (McBarnet, 2001). It is either that the tax authorities come up with transfer pricing rules to minimise the tax avoidance activities of MNEs, or MNEs come up with transfer pricing strategies to counter the rules. This leads to an adversarial approach as opposed to collaborative and productive synergies, as energies get displaced into mutually exclusive behaviours that undermine cohesive co-determination models of growth and social good (McIntosh & Buckley, 2015).
Oguttu (2016:17) iterates that the tax avoidance tendencies by MNEs provide them with an unfair competitive advantage over domestic enterprises especially Small and Medium Enterprises (SMEs). It also potentially limits countries’ revenues for economic and infrastructural development thereby leading to citizen impoverishment (Sikka & Willmott, 2010:27). Oguttu (2016:18) highlights that though there is no accurate estimate of the magnitude of profit shifting, the impact is immense and visible. She also describes profit shifting as an outcome of the lack of relevant international tax laws as well as limited tax administrative capacity to assess and audit transfer pricing risks that are exploited by MNEs.
The limited administrative capacity of tax authorities includes unskilled and inexperienced staff, redundant and out-of-support information technology. Dharmapala and Riedel (2012:3) emphasized that African states are victims of the transfer pricing phenomenon as MNEs shift profits to developed countries and low tax countries. Oguttu (2017:20) argues that there is no one size fits all anti-tax avoidance measure and encourages that each country assesses and evaluates its situation in order to come up with sound solutions relevant to it.

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1.1 Introduction
1.2 Background to the study
1.3 Problem Statement.
1.4 Purpose of the Study
1.5 Research Objectives
1.6 Research Questions
1.7 Significance of the Study
1.8 Scope of the Study
1.9 Research Methodology
1.10 Limitations of the Study
1.11 Structure of the Thesis
1.12 Summary
2.1 Introduction
2.2 Understanding Tax Avoidance through Transfer Pricing
2.3 The Transfer Pricing Concept
2.4 Transfer Pricing as a Policy Issue within Tax Authorities
2.5 The Theoretical Perspective
2.6 Transfer Pricing Strategies
2.7 Authorities’ Reaction to Exploitative Rationalities
2.8 Conceptual Framework
2.9 Summary
3.1 Introduction
3.2.1 Section 98B of the Income Tax Act Chapter (23:06)
3.3 Transfer Pricing Strategies used by MNEs in Zimbabwe
4.1 Introduction
4.2 The OECD Principles
4.3 Transfer Pricing Methods
4.4 The United Nations Transfer Pricing Guidelines
4.5 Comparison of OECD guidelines and UN guidelines on Transfer Pricing
4.6 The extent to which Zimbabwe has complied with international guidelines
4.7 Summary
5.1 Introduction
5.2 South Africa
5.3 Kenya
5.4 China
5.5 United Kingdom
5.6 Transfer Pricing Categories
5.7 Lessons to learn for Zimbabwe from other nations’ best practices
5.8 Summary
6.1 Introduction
6.2 Research Paradigm
6.3 Research Design
6.4 Research Approach
6.5 Population and Sampling
6.6 Methods: Data Gathering
6.7 Methods – Data Analysis and Presentation
6.8 Qualitative Methodological Norms
6.9 Ethical Considerations
6.10 Summary
7.1 Introduction
7.3 Objective 2: To Investigate Measures that Curtail Transfer Pricing Employed by
7.4 Objective 3: To Examine the Laws and Policy Measures in Zimbabwe that Regular Transfer Pricing
7.5 Objective 4: To Examine the Nature and Types of Transfer Pricing Strategies Utilised among MNEs in Zimbabwe
7.7 Applied Contributions: Summing up Transfer Pricing Practices
7.8 Summary
8.1 Introduction
8.2 Realisation of Research Objectives
8.3 Summary of Contributions
8.4 Contextual Contributions
8.5 Theoretical Contributions
8.6 Methodological Contribution
8.7 Overall Conclusion and Limitations
8.8 Recommendations for Zimbabwe’s Transfer Pricing Administration
8.9 Suggestions for Future Research
8.10 Conclusion

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