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

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 obtain more revenue from the transnational economic transactions of multinational enterprises. The outcome, although varied, has been disappointing. Constraints of material capability are considered the main explanations for low-income countries’ failure to implement transfer pricing rules in practice. By taking Ethiopia as a case study, this paper 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 efforts, 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. The paper identifies three country-specific factors that help 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 rules, institutional ambiguity and rivalry among tax policy and enforcement organs, and the possibility of ‘mock complying’ with international standards without in practice doing so. In combination, these factors show that procedures recommended by the OECD for dealing with transfer pricing issues are so far removed from the existing practices and capacities of the Ethiopian national tax administration that their formal adoption has resulted in little more than organisational relabelling.