Unsuccessful Implementation of the OECD Transfer Pricing Guidelines in Low Income Countries: The Case of Ethiopia

Abstract

Much international technical assistance is directed towards increasing the capacity of tax authorities in low-income countries to understand and effectively implement the OECD Transfer Pricing Guidelines, and thus retain their fair share of revenue from the transnational economic transactions of multinational enterprises. The outcome of such assistance, although varied, has been generally disappointing. Constraints on material capability are considered the main explanations for the failure of low-income countries to implement transfer pricing rules in practice. By taking Ethiopia as a case study, this article builds on the capacity explanation and shows that capacity is only a generic explanation that needs to be accompanied by context-specific explanations that are not bound to material capability. Despite more than a decade of effort, and nearly two decades since the initial introduction of transfer pricing rules in the tax system, the Ethiopian tax administration has not successfully completed a single transfer pricing audit. This article identifies three country-specific factors that explain the abysmal record of implementation of transfer pricing rules in Ethiopia: the inability of tax officers to depart from long-standing practices that run counter to OECD Guidelines; institutional ambiguity and rivalry among tax policy and enforcement organs; and the possibility of mock compliance with international standards without in practice there being any such compliance. In combination, these factors show that procedures recommended by the OECD for dealing with transfer pricing issues are so far removed from what are in fact the existing practices of the Ethiopian national tax administration that the formal adoption of OECD Guidelines has resulted in little more than organisational re-labelling.