Transfer mispricing

Transfer mispricing, also known as transfer pricing manipulation or fraudulent transfer pricing, refers to trade between related parties at prices meant to manipulate markets or to deceive tax authorities. The legality of the process varies between tax jurisdictions; most regard it as a type of fraud or tax evasion.

For example, assume company A, a multinational which produces a product in Africa and sells it in the United States, processes its produce through three subsidiary companies: X (in Africa), Y (in a tax haven, usually an offshore financial center) and Z (in the US), each of which acts under instruction from A. Company X sells its product to Company Y at an artificially low price, resulting in a low profit and a low tax for Company X in Africa. Company Y then sells the product to Company Z at an artificially high price, almost as high as the retail price at which Company Z then sells the final product in the US. As a result, Company Z also records a low profit and, therefore, a low tax. Most of the apparent profit is made by Company Y, even though it acts purely as a middleman without adding much (if any) value to the product (it is likely that the products never pass the country Y, but are shipped directly from X to Z) Because Company Y operates in a tax haven, it pays very little tax, leading to increased profits for the parent Company A. Both jurisdictions of companies X and Z are deprived of tax income, which they would have been entitled to if the product had at each stage been traded at the market rate.

About 60% of capital flight from Africa is from improper transfer pricing. Such capital flight from the developing world is estimated at ten times the size of aid it receives and twice the debt service it pays. The African Union reports estimates that about 30% of Sub-Saharan Africa's GDP has been moved to tax havens. One tax analyst believed that if the money were paid, most of the continent would be "developed" by now.

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