Transfer Pricing Audit Challenges and Dispute Resolution Effectiveness in Developing Countries with Specific Focus on Zimbabwe

2.2.1 Complexity of MNEs Ownership Structures, Transactions and Arrangements

Shongwe (2019) submits that the audit of MNEs is not an easy task, but an arduous one that requires careful consideration of how the business is structured. The researcher further explains that this calls for the appreciation of “the commercial and economic reality of business operations such as the generation of incomes, profits and which functions of the business are essential to generating the profits” (Shongwe, 2019: 3). The fact that MNEs are highly diversified and span across wide geographical areas, continents and various countries lead to them having complicated control structures (Bhat, 2009). The complexity increases as they continually build up by adding more layers of associated and related companies. These complex ownership arrangements give auditors problems when seeking to establish the origins of transactions and the relatedness between transacting parties, especially where there are issues of indirect control involved (Blouin, Krull, & Robinson, 2019). Economics and tax literature refers to the intricacy of such structures as easily exploited for cross border tax planning and avoidance. For example, an MNE can design the product in Botswana, Manufacture it in Zimbabwe, test it in South Africa, hold patents in China and assign marketing and selling rights to a subsidiary in Malaysia or any other country in a tax haven jurisdiction. The intricacy of ownership structures leads to misconceptions and weaknesses in endeavours to make corporates sustainable, accountable, transparent and responsible. Through a web of formally independent legal entities, MNEs have opportunistically avoided regulations including TP and tax legislation (Biondi, 2020).

Meier and Smith (2020) point out to the use of mergers and acquisitions across borders being a novel route for MNEs tax avoidance. The scholars estimate annual tax avoidance due to tax haven mergers and acquisitions at US$29.7 billion and non-tax mergers and acquisitions to rob the global economy of a further US$34.1 billion in annual tax avoidance. The researchers further explain that the tax haven mergers, which were the focus of their paper, take place in two ways: asset building mergers and acquisitions and haven purchases. The former being the case where the acquiring firm is located in a tax haven and the motive to acquire other firms is to increase its asset base in a low tax jurisdiction, thus exposing it to lower tax rates. The location (tax residence) of the parent is important for tax purposes. Having a tax haven parent makes, it uncomplicated to shift profits since tax has no controlled foreign entities to prevent profit shifting. In the case of double taxation, due to jurisdictional taxa rules, the income in tax havens would be exposed to lower tax rates (Meier & Smith, 2020). Haven purchases occur when the target company is in a tax haven. This can be done to build a presence in the tax haven, thus allowing for strategies such as profit shifting and manipulative TP. Relocating the firm’s tax residence to a tax haven can be another way (Karkinsky & Riedel, 2012; Meier & Smith, 2020).

Knotty and impenetrable control structures enrich tax planning for MNEs, as they generally make it difficult and at times impossible for revenue authority officers and auditors to follow company assets and liabilities or even to trace the conduits going through various jurisdictions for interest payments, dividends, royalties or others forms of profit repatriations (Reurink & Garcia-Bernardo, 2020; Torres Preciado, 2019). The global nature of MNEs presents them with opportunities for the creation of global channels for corporate tax avoidance that are embedded in their operations. Ní Chasaide (2020) states that the opaqueness of MNEs transactions, strategies and channels used for TP and their implications are not easy to pinpoint or unpack, hence these present auditors with formidable channels when trying to follow the audit trail of these transactions. Dharmapala (2020) affirms this concern and alludes to the use of tax havens (where information is not easy to get from the relevant authorities), intellectual property and intangibles (ambiguous nature of such transactions as well as the ease of transferring them with no accompanying production) including other activities involving financial transactions. It is also often difficult to measure fees such as management and technical fees and royalties of intangibles as there are often no comparable transactions in the market (Tørsløv et al., 2020).

MNEs through their complex control arrangements shape and re-shape the legal-economic structure of their transactions in a manner that allows them to achieve the desired outcomes such as tax avoidance (Avi-Yonah, 2017). Jones, Temouri, and Cobham (2018) affirm the complicatedness of MNEs structures and transactions as impediments to effective TP audits. Jones et al. (2018) further table that the complexity of TP activities and tax planning aggressiveness of MNEs is compounded by the assistance and services they get from the big accountancy firms. The researchers further state that MNEs who are clients of the big accountancy firms have intricate subsidiary arrangements when viewed in terms of depth and entropy making it easy to hide, obscure and shift wealth from the wealth creation location to a more tax favourable environment. This robs countries where the wealth was made, of their rightful tax revenues, through the “legal and financial disaggregation of activities within corporations” (Jones, Temouri, & Cobham, 2018: 3). Sikka and Willmott (2010) describe tax consultants as more of financial engineers who consider tax as a cost that can be avoided as opposed to it being an indispensable contribution to government funding and indirectly to society for health, security, education, including social investment vital for the society.

2.2.2 Subjectivity of the Arm’s Length Principle and Flexibility of Methods

The OECD has focused on providing and modifying the TP guidelines in order to respond appropriately to BEPS activities of MNEs. The imperfect alignment or incompatibility in some instances of these TP guidelines and evolving international and national tax laws have heightened the complexity and misinterpretation of these guidelines, adding to contradictory TP assessments, adjustments and taxation of these transactions as well the uncertainty in the application of the TP regulations. The conflicting assessment surrounds the application of the arm’s length principle and how to measure value creation in a transaction among related parties (Büttner & Thiemann, 2017). TP regulations have made international tax regulations and national tax regulations more complicated and at times ineffective in ensuring equitable taxation. The insistence on the application of the arm’s length principle in some cases has provided MNEs with opportunities to structure their transactions in more sophisticated ways increasing the reductions in tax payment (tax avoidance) and even heightening non-taxation of incomes for some affiliates in certain tax jurisdictions (Biondi, 2017).

As posited by the UN (2017) the determination of arms’ length price “is not an exact science”. The decision is subjective, since it is a matter of judgement influenced by knowledge, skill and experience. The proposal of TP guidelines by the OECD and their subsequent adoption by many countries was a step towards regulating manipulation of transfer pricing as well its distortionary impact on the allocation of taxing rights and unfavourable effect on revenue mobilisation. The UN and OECD prescribe the use of the arms’ length prices for intra-firm transactions to make them comparable to market transactions between a willing buyer and willing seller basis. The guidelines prescribe five methods to arrive at this unbiased price and these are the comparable uncontrolled price (CUP), cost plus method (CPM), the resale price method (RPM), transactional net margin (TNM) and the transactional profit split (Choi, Ishikawa, & Okoshi, 2020; Choi et al., 2020). These methods come with their subjectivity aspects and the fact that there is flexibility in the choice leaves room for manipulation (the individual appraisal of the methods for the benefits and challenges is not explored in detail in this paper). MNEs often go to great lengths to justify one method or the other as long as it gives them the tax advantage (Wier, 2020). To argue for TP violation or the need for an adjustment, tax authorities and auditors must provide proof of the misapplication of arm’s length principle, give evidence of specific transactions whose price would have deviated from the price charged by the MNEs if the arms’ length principle was upheld (that is between unrelated parties). Owing to the difficulties in supplying comparable information, auditors often fail to stand their ground and at times tax authorities can lose court cases or where they have won the cases, appeals can be successful and court resolutions overturned (Tørsløv et al., 2020).

Contradictory rulings in almost similar cases give an insight into the challenges faced by auditors when it comes to the burden of proof. Despite the responsibility of preparing TP documentation resting with the taxpayer, auditors have to re-compute, assess and successfully dispute the taxpayers’ submissions and computations where there are deviations from the arm’s length principle and provide reasonable grounds for doing so. This no easy task for the auditor. For example, in the case of Denmark versus Ice Machine Manufacturer, June 2020, National Court, Case No SKM200.224.VLR the Danish court ruled in favour of tax administrators, entitling them to make a discretionary assessment of the taxable income. Thus, permitting them to benchmark the manufacturer (taxpayer) as opposed to the related party sales arguing that the taxpayer had failed to furnish it with robust information concerning the sales companies to enable reliable benchmarking (Beeton, 2021). Contrarily in the case of Denmark versus ECCO A/S, October 2020, High Court, Case No SKM2020.397.VLP, the Danish Western High court judged in favour of the taxpayer (ECCO Sko A/S). The court ruled that the TP documentation provided adequate justification for the benchmarks applied, thus preventing the tax administrators from applying the TNMM method to assess the income of a company making losses. In the case of Netherlands versus Zinc Smelter B.V, March 2020, Court of Appeal, Case No ECLI: GHSE: 2020:968, the dispute was on whether the transfers that the company had made to its Swiss group entity in 2010 was at arm’s length. The court ordered the use of the profit split method as opposed to benchmarking of the toll manufacturer (taxpayer), arguing that the related party and the taxpayer conducted joint activities. In Nigeria-Prime Plastichem versus Federal Inland Revenue, Nigeria’s Tax Appeal Tribunal allowed the revenue administrators to replace the taxpayer’s CUP method with the TNM method because the comparable transaction used was a related party one, which was deemed an unreliable benchmark and not arms’ length (Beeton, 2021). The tribunal argued that the additional assessments were appropriate in terms of the Nigerian TP legislation and OECD guidelines. In a similar case, involving the Coca-Cola Company, the US tax court permitted the tax authorities to benchmark in accordance with the comparable profits method (CPM), anchoring on the argument that the intangibles in the group rendered both production and selling ordinarily routine activities (Beeton, 2021). The judge concluded that Coca-Cola was shifting profits through incorrect transfer prices applied to foreign subsidiaries in Brazil, Chile, Costa Rica, Ireland, Mexico and Swaziland, hence leading to an additional US$3 billion in tax liability for the group.

Providing a synopsis of fundamental themes that emerged from the 2020 TP cases and their resolutions that he analysed (For example, Ice Manufacturer, ECCO, A Oy, Kellog, Zinc Smelter, Addecco and Toyota among others), Beeton (2021) brings to light five important premises that became evident in the 2020 cases, including;

1. The prominence of TP activities on goods and intangibles in the extractive and manufacturing sectors as opposed to financial transactions.

2. The importance of providing detailed functional appraisals and fully supported benchmarks.

3. An opposition or refusal by the court to the re-categorisation of transactions in respect of the arm’s length principle violation except in instances where the arrangements it is obviously not commercially justifiable or it was apparent that tax avoidance was the sole motivation.

4. The flexibility in the application of TP guidelines and methods of determining arm’s length prices.

5. A consideration of what is feasible within the limitations of TP agreements, hence the need for the legal analysis of the agreements (Beeton, 2021).

These cases are evidence that the flexibility of TP methods as well as the burden to prove the tax avoidance of the economic substance of transactions impacts on audits and dispute resolutions, the challenges are even greater for developing countries where comparable data is scarce. The Covid-19 pandemic has worsened the situation due to company closures, reduced production, shrinking markets and consumer purchasing power.

2.2.3 Underdevelopment of TP Legislation in Most Developing Countries

As highlighted in Section 2.1, auditing is dependent on the availability of suitable, consistent, clear and understandable criteria. Equally, the productive accomplishment of TP audit depends of the quality and clarity of TP legislation in a country. According to Guj et al. (2017) and the UNCTAD (2020), most African countries lack appropriate TP legislative frameworks. The categorisation of developing countries by Asongu (2016), in relation to the level of adoption of TP regulation as those that have not adopted, those that have partially adopted and those that have fully adopted on its own, points to challenges for auditors. For those in the first stage, there is no suitable criteria, benchmarks or guidelines against which to evaluate TP transactions. For those in the second stage, the partial adoption is an indication of the underdevelopment of regulations. The question could be, what influenced the partial adoption, is it a matter of contextualisation, risk management and optimum resource allocation (focussing on the areas that are most prone to the risk of TP manipulation). According to Mashiri (2018) and Kabala and Ndulo (2018), even in countries where the OECD TP guidelines were wholly adopted, challenges of lack of legislative clarity, inconsistent application of the legislation, cumbersome and unclear documentation requirements and lack of comprehensive TP databases, as well as the reliance on external databases, negate the effective application of the regulation. This puts auditors in an awkward position as it becomes problematic to gauge compliance with TP legislation. In affirmation, Shongwe (2019: 2) adduces that “the availability of legislative standards poses unique opportunity to face off with aggressive taxpayers, leading to an aggressive audit process” and the lack of TP legislative clarity weakens the position of revenue authorities when it comes to TP audit and dispute resolution process. This was illustrated in the Unilever Kenya Ltd Case, where efforts by the Kenyan Revenue Authority was challenging the prices for transactions between Unilever Kenya Ltd and Unilever Uganda (both subsidiaries of Unilever United Kingdom) on the basis that they were not arm’s length based on the Kenyan Income Tax Act (Section 18 (3)). Kenya’s judge ruled in favour of Unilever UK (appellant), highlighting that Section 18 (3) that the Kenyan Revenue Authority founded their case on was an inadequate guide to the taxpayer and hence unreliable to enforce TP rules. The judge argued that in the absence of clear TP rules, the OECD guidelines applied by the taxpayer sufficed as guidance for arms’ length computations (Mashiri, 2018; Murphy, 2012).

In a contradictory landmark ruling in Malawi in 2016, the court ruled that the application of OECD regulations deviated from the domestic TP regulation in place, hence illegal. The judge ruled, “Where local legislation provides for the law, it is always imperative to apply the law and international instruments can be used to interpret the law” (UNCTAD, 2020: 114). The tax administrators should “strictly follow the dictates of the law enacted by the legislature and any slight departure from the law is not allowed”. In the same vein, the absence of clear and effective regulation and requisite audit skills can result in a confrontational strategy to the audit for both the taxpayer and revenue administrators. The battle drawn approach can resultantly fail to achieve any meaningful mutual engagement for the two parties. Sebele-Mpofu (2020a) alludes to the negative impact of the fractured relational social contract between the state (revenue authorities) and its citizens in most developing countries negatively affecting tax morale.

2.2.4 Lack of Comparable Data

The lack of comparable information or prices brings uncertainty and lack of clarity certain transactions are priced, thus affecting both the taxpayer and tax auditors (Cooper et al., 2017). Where comparable information is non-existent or where an uncontrolled price is available but has to be adjusted to make it comparable, the process may be complex, arbitrary and subjective impeding the success and effectiveness of audits (Jaffer, 2019). Biondi (2017) points to the fact revenue authorities often find it difficult to establish an arm’s length price and often resort to constructing it. The enforcement process becomes cumbersome, time-consuming and complex for both taxpayers and revenue authorities.

Audits of intra-firm transactions involving intellectual property and other intangibles are as well as enforcement of TP legislation is ineffective due to the limited applicability of the arms’ principle as at times market values cannot be observed or are not available because the property or intangible might be peculiar to that one company (Holzmann, 2017). The Covid-19 pandemic has worsened the lack of comparable information problem. The pandemic brings forward peculiar economic settings where comparable data is unavailable publicly due to company closures, reduced operating capacities, lost markets as well low consumer disposable resulting in companies selling at depressed prices. Barrogard, Calderón, de Goede, Gutierrez, and Verhelel (2018) call for political will and commitment by developing country governments to set aside funds for capacitation with subscriptions to relevant databases.

2.2.5 Inadequacies in TP Knowledge, Experience and Exposure Among Revenue Administrators and Auditors

Kabala and Ndulo (2018) allude to the fact that the understanding of TP legislation is rudimentary among tax officers and auditors in developing countries. Reiterating the TP knowledge deficiency in developing countries among the administrators and enforcers of TP legislation, Mashiri (2018) established that the TP auditors faced lack of skills and limited capacity challenges. The researcher explained that most developing countries used the general tax auditors for auditing TP transactions, yet the lack of technical expertise, skills, exposure and experience crippled their effectiveness. A number of researchers studying BEPS and transfer pricing in developing countries (Barrogard et al., 2018; Kabala & Ndulo, 2018; McNair et al., 2010; Nakayama, 2012) affirmed these shortcomings. According to Mashiri (2018) this lack of skilled personnel problem is closely connected to the challenge of shortage of financial resources. Developing countries lack enough financial means to employ, train, develop and keep competent, experienced and qualified TP auditors (UN, 2017).

MNEs on the other hand use the services of skilled tax consultants as well as their technical skilled and well-resourced tax departments (Barrogard et al., 2018; Mashiri, Dzomira, & Dzingirai, 2021). Ajdacic, Heemskerk, and Garcia-Bernardo (2020) describe the role of tax consultants in facilitating the shifting of profits by MNEs as the “Wealth defence industry”. The researchers allude to the fact that these consultants help minimise the tax that wealthy individuals and corporations pay. The consultants are exposed to continuous professional development, experienced and technically well-exposed. These often have the financial resources to follow legislative changes and use the expert knowledge to construct legitimate accounting and financial schemes to exploit legislation by situating assets and liabilities as well as income and expenses in certain jurisdictions (Ajdacic, Heemskerk, & Garcia-Bernardo, 2020). Reiterating the challenge that the advisory capacity role that tax consultants play to MNEs have on the effectiveness of TP audits, Holtzman and Naget (2014) submit that the consultants help in TP planning and implementation, compliance and documentation drafting, monitoring and lodging the TP returns with the tax authorities and other additional support services. These could be offering guidance, support in negotiations and arbitration or legal support in court cases. Affirming the upper hand that MNEs tend to have over TP auditors Sikka and Willmott (2013) and Jones et al. (2018) portend that accounting firms such as Deloitte, Ernest and Young, Price Water House Coopers, and KPMG are multi-jurisdictional and cross-disciplinary. This gives them the advantages of spanning across jurisdiction, hence insights into the tax laws of various countries and those of skills diversity respectively. The firms tend to have accountants, tax experts, lawyers and legal advisors, computer and financial analysts as well portfolio managers under one roof. This allows them the advantage of tax minimisation “innovation”. TP auditors tend to be less equipped to confront the well-advised MNEs as most revenue authorities lack the same diversity that MNEs are privileged to have (Mashiri et al., 2021). In most instances, developing countries do not have specific TP units implying that they use general tax auditors for TP audits. Kabala and Ndulo (2018) define a general auditor in tax administration as one who is “tasked with overseeing all taxes such as valued added tax (VAT), pay as you earn (PAYE), corporate income tax (CIT)”.

2.2.6 Infrequency of Audits and Lack of Resources

The diversity of MNEs, the geographical size of MNEs, the scope of TP legislation, the magnitude and intricacy of TP transactions, the expansiveness of the tax base all have an implication on the resources required to carry out an effective TP audit. UN (2017) emphasises that TP audits tend to be both resource (financial, technical and human) and time-intensive. Dispute resolutions of TP cases are prone to delays and sometimes the cases are lengthy (Kabala & Ndulo, 2018; Mashiri, 2018, Shongwe, 2019). Developing countries ordinarily have limited resources to conduct effective TP audits. Inadequacies in resource refer to lack of TP skills and expertise among revenue officers as well as tax auditors, human resources (shortage of enough human capital in revenue authorities to create separate TP units), technical and financial resources (Asongu, 2016; Mashiri, 2018; Oguttu, 2016). Due to the time and resource-intensiveness of TP audits, they tend to be less frequent in developing countries (Shongwe, 2019). UN (2017) recommends that developing countries need to increase the frequency of TP audits and strengthen TP audit sections by creating TP administration units that focus on administering the TP issues and audits and equip them accordingly. TP audits require technical and sophisticated skills and substantial resources as outlined by the United Nations Economic Commission for Africa (UNECA), (2018), yet African nations are deficient in this regard. The unit could be enhanced by including economists, lawyers, accountants, various industry experts such as geologists, finance specialist and computer-assisted audit specialists among others (Kabala & Ndulo, 2018; Kwaramba, Mahonye, & Mandishara, 2016; Mashiri, 2018).

While developing countries tend to suffer from scarcity of financial resources as well as TP skills shortages, MNEs on the other hand have a bountiful of resources. The flexibility in resource allocation enables MNEs to acquire the services of tax consultants from well-established accounting firms to advise them in drafting their TP strategies to minimise tax or shift profits, assist them in crafting their TP documentation as well as in preparing for TP audits. These tax consultants also provide support for dispute resolution and during court cases (Jones et al., 2018).

2.2.7 Information Asymmetry and Lack of Cooperation from MNEs and Counterparts Nations

Effective audits depend greatly on information-sharing, transparency, data collection as well a strengthened tax administration (UNECA, 2018). There is generally information asymmetry between the developed and developing countries, with the status quo privileging developed countries at the expense of their developing countries counterparts. Some developed countries leverage on both their financial and political muscles when it comes to TP enforcement capacities and capabilities, yet developing countries tend to find it difficult to get the necessary information required by tax authorities, tax auditors and the courts, weakening the productiveness of audits ad dispute resolution processes (Kabala & Ndulo, 2018; McNair et al., 2010). Oguttu (2016) reiterates that the information asymmetry and disproportionate power advantages taxpayers, revenue authorities, tax consultants, tax lawyers and auditors in developed countries give them more ammunition and room for aggressiveness in tax avoidance strategies and dispute resolutions, to the disadvantage of the less privileged developing countries’ tax administrators, auditors and courts. The OECD (2012) points out that MNEs are generally not forthcoming and very “economical” when requested to share information by tax authorities and auditors. They sometimes deliberately share large volumes of information in order to confuse auditors. This impedes the audit and dispute resolution process. The information-sharing challenges are further compounded by the ineffectiveness of double taxation agreements and APAs in compelling parties to the agreements to share information and to cooperate with revenue authorities and auditors of their counterparts during audits and dispute resolutions (Jaffer, 2019). The use of tax havens in TP transactions heighten the challenge of information asymmetry as these havens often refuse to cooperate with their party tax authorities and their auditors. The havens conceal information on behalf of their clients or deliberately take long to avail the information or provide one that is incomplete (OECD, 2012).

2.2.8 Poor Case Selection for Both Audits and Litigation

According to Shongwe (2019: 3), “Auditing MNEs often involves a broad range of complex technical issues”. In light of the limited resources characterising developing countries, it is fundamental that the right cases are selected for both audit and dispute resolution litigation. UN (2017) asserts that developing countries often suffer from the problems of poor case selection for both audit and judicial resolution and this often results in both audits and litigation being ineffective. The mismatch between the time and financial resources dedicated to a case and the magnitude as well as importance of the case can negatively influence the effectiveness of audits. Shongwe (2019) and the UN (2017) emphasise the importance of case selection so that the dedication of time and resources can be done appropriately to ensure that the allocation is optimal, efficient and effective. A cost and benefit analysis is essential when selecting cases for audit. Affirming the importance of good case selection that is guided by risk identification, the OECD (2012) underscores the need for commercial understanding in risk analysis, evaluation and case selection. Features that may be indicative of TP risk include consequential related party transaction in low tax jurisdictions and tax havens, transfer of intangibles to affiliates, business restructurings, mergers and acquisitions, continued loss-making and poor performance, consequential variations in effective tax rates, inadequate or non-existent TP documentation and evidence of computations among others. The OECD (2012) further submits that because developing countries’ revenue authorities strive to maximise yields in light of their meagre resources, a well-structured and systematic case selection process is vital. Three methods have been used by countries to select cases. Firstly, the application of sophisticated methods to pinpoint relevant cases as higher risk using computer systems for assessing appropriate data about the business. Secondly, the selection of cases for TP audit and enquiry yearly is an issue of routine regardless of whether the risk has been identified or not. Thirdly, choosing a case for TP audit and enquiry whenever that business’ gross value of cross border transactions surpasses a set threshold (OECD, 2012). Poor risk appraisal can lead to anticipation of legal issues early in the audit, raising legal arguments too early in the case, premature deployment of specialists, experts and other resources as well as unfocused economic analysis.

2.2.9 Tax or Fiscal Court Ineffectiveness

Mashiri (2018) contends that developing countries’ local tax courts tend to take longer periods in resolving TP cases, maybe due to a lack of knowledge and expertise among court officials and judges, considering the adoption of TP legislation is still in its infancy. In agreement, Shongwe (2019) points out that the governance process is neither effective nor robust enough in developing countries to enable TP cases to be speedily and appropriately resolved. The researcher further contends that effective dispute resolution is linked to the availability of the right skills in the courts, strong and clear TP legislation and access to information as well as strong capacity for tax administration and audits. Despite the importance of these factors being underscored, researchers continue to highlight most African countries tend to fall short in these key areas (Barrogard et al., 2018; Cooper et al., 2017; Kabala & Ndulo, 2018; Oguttu, 2016, 2017).

2.2.10 Absence and in Some Instances Effectiveness of MAPs, APAs, DTAs and Arbitration

Despite the presence of Mutual Agreement Procedures (MAPs) and Advance Pricing Agreements (APAS) and at times arbitration being considered possible ways of bringing clarity and predictability in investments and TP regulation, their effectiveness is still controversial and contested (Sundaram, 2012). Shongwe (2019) points to these agreements being probable ways to minimise lengthy and resource-intensive legal battles. APAs are agreements made by the taxpayers and the revenue authority or authorities on the right TP for some agreed future transactions. Some countries in Europe have made use of these extant pricing agreements with MNEs to securitise the tax revenue collection and solve the potential of tax dispute in advance (Avi-Yonah, 2017). Mashiri (2018) portends that most developing countries do not have these agreements in place. As highlighted by Sundaram (2012) and Beebeejaun (2019) that, far from providing clarity and predictability during arbitration based on these agreements, the arbitration process saddles the already resource-constrained developing countries with financial burdens. Sundaram (2012) further states that the arbitration process is complicated and costly (payments often in foreign currency for arbitrators, translators, facilitators and other parties involved in the process). Resource constraints for developing countries with limited financial resources impede the practicability of applying the arbitration process in the context of developing countries and may even unduly tilt the scales against them (Beebeejaun, 2019). The other challenge is the fact that due to the lack of appropriate and adequate expertise and experience of developing countries on TP issues, arbitrators could largely come from developed countries with limited understanding of the economic environments in developing countries, thus disadvantaging developing counties (Sundaram, 2012). In addition to the above concerns, Akunobela (2012) submits that some of these treaties are ineffective because they were entered into being driven by political motives with little attention given to BEPS. The researchers specifically point to Double Taxation Agreements (DTAs) and withholding taxes.

2.2.11 Institutional Corruption

Institutional corruption has been noted as a vital dimension in the discussion of constraints to the effectiveness of tax legislation enforcement and compliance (Barrogard et al., 2018; Sebele-Mpofu, 2020a, 2020b; UNCTAD, 2020). Kirchler, Hoelzl, and Wahl (2008) alludes to a negative correlation between institutional corruption and tax compliance. Mashiri and Sebele-Mpofu (2015) explain that corruption perpetuates illicit trade, constraining revenue mobilisation and undermining the socioeconomic stability of nations. Customs officials were alleged to be aiding customs duty evasion robbing governments of potential revenues and lowering the tax morale of compliant traders. UNCTAD (2020) points out corruption to be a key factor in driving illicit financial flows in the African continent. Mashiri (2018) affirms the role of corruption in tax evasion and avoidance by MNEs in Zimbabwe. The researcher points out that corruption among revenue officers is a big challenge as some revenue officers are secret advisors and informants to MNEs and their consultants.

4.2.1 Lack of Clear TP Legislation

This one of the biggest challenges denoted by many researchers on the effectiveness of enforcement of TP regulations (Beebeejaun, 2018; Kabala & Ndulo, 2018; Oguttu, 2016). This was also evident in this study as shown in Table 2. Eighty-three percent of TCs, 60% of ZIMRA and 40% of MINOFs pointed to the lack of clarity in legislation as a challenge to effective audits and dispute resolution. Ninety-two percent of TCs, 80% of ZIMRA and 60% of MINOFs concurred on the lack of comparable information as an important constraint. The challenges are even heavier for audits and dispute resolution because in order to assess compliance or build a case the standard measure or suitable criteria of evaluation must be clear. Both TCs and ZIMRA officers agreed on the challenges emanating from lack of clarity in regulations as well as the scarcity or absence of comparable databases to peg controlled transactions against as demanded by the Income Tax Act.

4.2.2 Lack of Comparable Information and Databases

All three groups concurred that the absence of comparable data brought subjectivity and abuse of TP legislation ZIMRA 2 specifically took researchers to paragraphs 10 and 11 of the ZIMRA TP practise notes (ZIMRA, 2017). The officer explained that these paragraphs prescribe that in the case where comparable information is scarce or non-existent, thus bring to doubt certainties concerning the reliability of comparables, how the arm’s length pricing is evaluated will depend on a case-by-case consideration of the nature of the transaction or TP method used (paragraph 10) (ZIMRA, 2017). Paragraph 11 on the other hand focuses on where comparable data is unavailable in the same geographic markets as those of the taxpayer, comparable information from other geographic markets can be used. The reliability of the comparable will be assessed on a case-by-case taking into account the effect of geographic variations and other distinguishing determinants such as price, market competition and profitability. It, therefore, follow that cases such the one in paragraph 10 and 11 (ZIMRA, 2017), it is unavoidable that less than perfect data is applied, hence raising doubts on the consistence, reliability and neutrality of the evaluation yardstick. This makes it difficult for auditors to assess compliance effectively and the reasonableness of estimations of the arm’s length price. The same challenges also arise on dispute resolution through negotiations arbitration or court cases as pointed out by TC10. TC5 asseverated that the lack of comparable data problem and the consideration of other factors created room for exploitation of the discretionary nature of TP by both MNEs and tax authorities, thus provided with an opportunity for corruption.

4.2.3 Subjectivity of the Arm’s Length Principle

In Table 2 all ZIMRA officers, 92% of TCs and 60% of MINOFs agreed on the fact that the subjective nature of the arm’s length computations was a constraint to effective audits and dispute resolution. Participants submitted that the arm’s length principle is subjective and that tax administrators and tax auditors often find it difficult to enforce compliance and to evaluate compliance respectively. Interviewee TC4 explained, “In theory, the principle appears to be simple and fairly straight forward but practical application is quite challenging especially for intangibles as these are mostly unique and difficult to establish their values due to complex arrangements such as setoffs and costs sharing in MNEs by their affiliates”. Interviewee ZIMRA4 in acknowledgement also pointed out to the fact that though CUP is normally the best method, “it is not always applicable due to the shortage of comparable data hence we end up considering other methods which are rather persuasive than objective”. The officer further explained that the consideration of comparability issues such as the contractual conditions of the agreements, functions being operated, features of the property, goods or services, economic conditions and strategies, was on its own a subjective assessment. This subjectivity creates problems for both tax administrators and auditors. From the ZIMRA TP manual, the outline of what is considered made the subjectivity apparent, for example, strategies include risk appetite, the scope of diversification, and an assessment of political risk, innovation and development of new products. On the other hand, economic settings involve an assessment of the size of the market, consumer purchasing power, and geographic place of operation, demand and supply considerations among other factors. Just an appraisal of these two points out challenges of objectively establishing the price as well as following an audit trail for TP justification.

4.2.4 Delays and Weak Capacity of the Fiscal Court

Participants bemoaned the ineffectiveness of the fiscal court and pointed to this as an impediment too effective dispute resolution. ZIMRA officers pointed to the unavailability of dispute resolution procedures that are specific to TP and pointed out that the general procedures for dispute resolution for tax assessments are applied. Ninety percent of ZIMRA officers (all officers except interviewee ZIMRA 2) pointed out the fiscal court was not effective leading to many tax cases including TP remaining unresolved over long periods of time. All TCs expressed dissatisfaction over the delay in the finalisation of court cases and linked the delay to the understaffing of the fiscal court. They argued that the court had one judge dedicated to hearing the various tax cases including value-added tax, income tax as well as TP cases. Interviewees TCs 4 and 8 suggested that the judge is not fully equipped to deal with tax matters considering that tax issues are dynamic and ever-changing. This supposed weakness in the capacity of the fiscal court becomes a constraint when dealing with TP issues especially MNEs with highly knowledgeable and experienced tax departments that are backed by equally strong and well-versed tax consultants. These tax specialists are often no match for the less experienced tax officers and fiscal court officials as pointed out by a number of researchers (Ajdacic et al., 2020; Jones et al., 2018; Sikka & Willmott, 2013). The delays and lengthy periods taken to conclude TP cases are not only disadvantageous to taxpayers but also prejudicial to ZIMRA as it robs the authority of the opportunity to evaluate its legislation and success in the resolution of disputes (Mashiri, 2018). Monitoring and evaluation are essential for improvements in the legislative and operational arenas.

The ineffectiveness of courts and protracted courts cases is a common occurrence in developing countries. Interviewee TC4 highlighted the absence of APAs and weaknesses in double taxation agreements as compounding the challenges faced by the courts in resolving TP cases in developing countries. Interviewee TC6 submitted that there is also a paucity in resolved TP cases to lean on as legal precedence because TP is a fairly novel area of implementation in developing countries. The fiscal court is viewed as the essential authority responsible for resolving cases and contributing to the drafting of tax legislation through setting legal precedence that courts and taxpayers can refer to in future, “so justice delayed is justice denied”. This reduces tax morale and waters down legal progress in tax matters as well as negatively affects TP legislation and tax administration.

4.2.5 Insufficient Skills, Expertise, TP Knowledge and Experience

Adequate skills, expertise, experience and knowledge are key ingredients for tax administration to be effective and more so for audits and dispute resolutions, yet most developing countries are founding lacking in these fundamental aspects. All the TCs concurred that the lack of appropriate expertise and skills, as well as experience amongst TP auditors, revenue officers in general and tax officials, crippled the effectiveness of audits and dispute resolution. The majority of TCs were of the opinion that they had an upper hand in TP matters when compared to tax administrators and auditors due to their exposure, experience and continuous professional development. Most of them were registered with institutes in South Africa, the United Kingdom and Europe to improve their knowledge and specialisation in TP. The study revealed that ZIMRA was not actively pursuing TP audits, perhaps due to the grey areas in TP legislation and lack of extensive expertise to unpack the complex MNEs transactions and ownership structures. Interviewee TC7 also attributed the delays in responses to issues raised by taxpayers on TP audits and disputes with ZIMRA by taxpayers to lack of adequate knowledge on TP legislation. In affirmation interviewees, TCs 5, 6 and 8 bemoaned the lack of expertise especially at it relates to the assessment TP transaction in the extractive sector. They explained the Revenue Officers and their investigations and audit departments are not fully equipped with appropriate and sufficient expertise to fully appraise and comprehend these mining issues with only accountants, finance persons and economists in their teams. The TCs further explained that MNEs exploit this skills and knowledge deficit to continuously report losses and maximise on tax avoidance. Similar views were raised in relations to developing countries (Barrogard et al., 2018; Nakayama, 2012), African counties (Kabala & Ndulo, 2018; Shongwe, 2019) and Zimbabwe in particular (Kwaramba et al., 2016; Mashiri, 2018). Eighty percent of MINOFs and 70% OF ZIMRA officers were in agreement regarding the negative impact of poor skills and expertise on audits and dispute resolution effectiveness and indicated that efforts were made to improve training, technical expertise and capacity building.

4.2.6 Fragile Administrative Capacity and Shortage of Financial Resources

Most developing countries and Zimbabwe included have weak administrative capacities and limited resources (Kabala & Ndulo, 2018; McNair et al., 2010), thus making auditing TP costly and engaging in lengthy resolution very difficult. Interviewee TC2 expressed that in Zimbabwe the problem is compounded by the scarcity of financial resources and lack of government commitment to allocating enough funds for the needs of tax administration. Interviewee ZIMRA9 reiterated the challenges of financial resources arguing that this led to poor remuneration ultimately resulting in a great deal of staff turnover as those with TP expertise move to MNEs and Accounting Firms. Interviewee ZIMRA8 re-affirmed this by saying “highly skilled people leave ZIMRA for better opportunities in the private sector and unfortunately due to shortage of funds even outsourcing is very difficult”. The centralised nature of TP investigations and audits at the ZIMRA head office is also problematic and can be linked to weak capacity. It is important to have regional audit offices to increase the capacity and frequency of audits”. The shortage of resources as well as the weak administrative capacity and lack of expertise are interconnected. TP audits require extensive resources, comprehensive skills, expertise and strong administrative capacity to unravel the complicated MNEs transactions and relationships that often disguised deeply in their activities yet Zimbabwe is found lacking. This was affirmed by interviewee TC6 who asserted, “Financial resources are the key to everything, but in Zimbabwe lack of resources is our biggest weakness. According to interviewee TC5 challenges of dispute resolutions and the protracted nature of audits were made worse by the nature of cases selected, the lack of preparedness on the part of ZIMRA perhaps due to lack of specialised technical expertise to guide in risk assessment and case selection for audits, arbitration and litigation.

4.2.7 Complexity of MNEs Structures and Transactions

Most MNE transactions are difficult to follow clear or do not have a clear audit trail making it difficult for auditors to assess them fully. This is worsened by the lack of cooperation among tax authorities and the general secrecy and uncooperativeness surrounding tax havens. Most developing countries do not have enough resources and expertise to audit these complex transactions and relationships (affiliates, associates, subsidiaries, permanent establishments, “invoicing companies” and others). This was affirmed by 100% of ZIMRA, 80% of MINOFs and 75% of TCs as presented in Table 2.

4.2.8 Information Asymmetry and Lack of Cooperation

Auditing is an information game, the lack of comparable data together with information asymmetry and lack of cooperation from third party tax authorities and those in tax havens make auditing difficult. It is difficult to verify ownership of assets and occurrence as well as the completeness of transactions. These are key aspects in auditing. Interviewee TC2 avowed that the two equally affect dispute resolution through arbitration and/or court cases. Interviewee ZIMRA3 pointed out that this is indeed a big problem because even where there are DTAs, these are ineffective. The officer further outlined that APAs are fairly new in Zimbabwe. The results on these two issues are also presented in Table 2. Interviewee ZIMRA9 argued that the lack of cooperation is not only on the international angle but on the domestic angle as well as MNEs are generally stingy with their information, they do not easily avail information on their transactions and at times give it in bits and pieces making audits difficult. Interviewee TC6 on a different view on the uncooperativeness argued that the badly damaged relations between taxpayers and ZIMRA account for the situation. He expressed that “ZIMRA auditors tend to be aggressive, intimidating and somewhat accusatory causing MNEs and other taxpayers to be defensive and conceal some issues”.

4.2.9 Improved Role of the OECD in Relation to TP Regulation in Developing Countries

While acknowledging the crucial role occupied by the OECD in bringing stability, transparency and accountability in international taxation, Büttner and Thiemann (2017) observe that OECD guidelines continue to provide for bilateral tax treaties, detailed and complicated systems of TP and unilateral anti-avoidance measures. The findings from the research suggest that while the OECD plays an important role in developing countries, there is a need for it to play the role in a more inclusive manner by having these developing countries being part of the construction of these guidelines. The realities on the ground for most developing countries differ from the situation in developed countries. The realities of developing countries point to lack of comparable data, minimal financial resources, weak TP legislation, inadequate capacity, lack of knowledge and expertise, thus the application of OECD guidelines in their current form in these countries is a challenging task. This signifies the need for the OECD to work with bodies such as ATAF to provide TP guidelines that are customised to say developing countries (ATAF, 2019) that require more feasible and simplified TP methods that would strike a balance between the limited resources and weak political power available to developing countries’ tax authorities in dealing with MNEs.