Abstract:
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.
