This
article asserts that transfer pricing is perhaps the greatest profit shifting
problem facing the international tax system. Thus, countries have historically
been keen on preventing transfer pricing and on finding effective and efficient
methods for allocating revenue that are administratively cost effective for
both taxpayers and tax administrators. However, the problem as articulated in
this article is that the comparability analysis that underpins the application
of the arm’s length principle
(ALP) which is applied internationally to curb transfer pricing, continues to
be a vexing problem for developing countries due to various conceptual, policy,
legislative, administrative and capacity challenges in finding comparable data.
Acknowledging these problems, various international bodies have recommended
alternative approaches that are considered simpler and less administratively
burdensome, that developing countries may adopt in certain cases so as not to
carry out a fully fledged comparability analysis. This article explains the
operation of some of these alternative approaches and it evaluates the
advantages and drawbacks of each of them. The article provides examples of some
African countries that have adopted the alternative approaches and the
positions of others that have not adopted these approaches. Recommendations are
then provided as regards the competing policy options that countries have to
consider when adopting the alternative approaches. It is hoped that the article
will be found useful by African tax administrations and policy makers when they
consider whether to adopt the alternative approaches.