This document summarizes controversies around the transfer pricing arrangements of Swiss commodities companies operating in Africa. It notes that several factors are attracting scrutiny to the commodities sector, including the role of taxes in development and public outrage against tax optimization. As expectations increase for companies to pay their "fair share" of taxes, Swiss commodities companies should carefully review their arrangements, assess the environments they operate in, and establish transparent communication with stakeholders to mitigate reputational risks from potential disputes.

1. Reproduced with permission from BNAI European Tax
Service Monthly Digest, 18 ETS, 11/30/16. Copyright ஽
2016 by The Bureau of National Affairs, Inc.
(800-372-1033) http://www.bna.com
NOVEMBER 2016

2. transfer pricing
African Transfer
Pricing
Controversies of
Swiss Commodities
Companies
Mehdy Ben Brahim and Stephen Alleway
Questro International
The commodities sector has come under wide scrutiny from tax
authorities and public society, with Switzerland attracting special
attention due to its leading position as a business hub for
commodity traders. Numerous transfer pricing (‘‘TP’’) controversies
have publicly raised questions about the contribution of Swiss
commodities companies to the public finances of the extractive
countries in which they operate, with a particular focus on Africa.
I. Executive Summary
S
everal long-term factors are attracting and will
continue to attract public attention to the
commodities sector, including the major role
of taxes in sustainable development, the influence of
natural resources on African economies, the public
outrage against tax optimized structures, and the
strengthening of TP legislation in Africa.
As the TP environment is evolving, companies are
not only expected to comply with regulations but also
to pay their ‘‘fair-share’’ of taxes. Tax authorities and
public society are exerting an intense pressure on cor-
porations to become more transparent in their TP ar-
rangements.
In order to address this changing environment,
Swiss-based commodities companies should carefully
review their intragroup transactions, assess the busi-
ness and tax environment in which they operate, and
establish a communication framework adapted to
their situation and the expectations of their stakehold-
ers.
Addressing reputational risk and stakeholder man-
agement now, within the context of a sustainable TP
model can help mitigate the reputational risks and
brand damage associated with negative media atten-
tion, as well as limit the scope for future contentious
tax audits.
II. A Sector under Scrutiny
Many multinational companies have established cen-
tralized trading companies in Switzerland to optimize
the matching of worldwide supply and demand of
commodities, taking advantage of a stable and pre-
dictable political, economic, and legal environment.
Mehdy Ben Brahim
is Transfer Pricing
Counsel and Ste-
phen Alleway is
Transfer Pricing
Partner at Questro
International
2 11/16 Copyright ஽ 2016 by The Bureau of National Affairs, Inc. TPETS ISSN 1754-1646

3. This tradition has developed to such an extent that the
commodity cluster contributes some 3.5 percent to
Switzerland’s GDP.1
Nevertheless, this ‘‘rise has been accompanied by
concerns about transparency, appropriate regulation,
and risks to resource-exporting developing coun-
tries.’’2
As this sector is operating to a significant
extent in developing countries, the involvement in
host countries’ domestic burdens is highly scrutinized
and issues such as corruption, environmental impact,
human rights, business in conflict zones or in coun-
tries with volatile political systems, and tax optimiza-
tion have attracted significant public debate. Both
governments and companies have been under attack
for their roles in the poor governance and limited
local benefits received from the exploitation of natural
resources. A call for transparency has emerged as a
clear response to this public debate. The Extractive
Industries Transparency Initiative (‘‘EITI’’), global
standard to promote the open and accountable man-
agement of natural resources, is one example of an
initiative to try to pressure the relevant actors to pub-
licly account for their actions and to disclose detailed
financial and tax information.
A key focus point within this controversy is the con-
tribution of commodities trading companies to the tax
base of developing countries which has received in-
creasing attention locally in Africa and globally from
Western governments and civil society. High profile
cases of alleged ‘‘transfer mispricing’’ related to hard
and soft commodities have emerged, attracting sig-
nificant negative media attention and renewed tax au-
thority focus. The debate has now spread beyond
Africa and commodities trading hubs are now under
attack globally. The recent release by the Australian
Taxation Office of a risk framework dedicated to off-
shore hubs3
illustrates the eagerness of governments
to assess thoroughly the risks of tax base erosion re-
lated to centralized trading models.
III. A Long Term Change to the African TP
Environment
Beyond the controversies around individual transfer
pricing (‘‘TP’’) cases, several broader trends are driv-
ing increased attention towards the commodities
sector.
First, improved taxation is considered as the main
source of financing for development in Africa. ‘‘Cur-
rently, the governments of developing countries col-
lect much lower proportions of their GDPs in tax
revenue than do the governments of the OECD coun-
tries: 10-20% rather than 30-40%.’’4
Even though esti-
mates are inherently imprecise, they all suggest a
significant loss of revenues for developing countries
due to aggressive tax planning and/or evasion. Two es-
timates to consider are:
s the revenue losses through avoidance activities as-
sociated with tax havens are estimated in the order
of something over one percent of GDP in the long
run;5
and
s the OECD estimated that developing countries lost
three times more to tax havens than they received in
international aid each year;6
the Third International Conference on Financing
for Development held in Addis Ababa represented a
key milestone to establish the mobilization and effec-
tive use of domestic resources, as central to the
common pursuit of the United Nations sustainable de-
velopment goals.7
Second, Swiss commodity companies are playing a
major role in the economies of developing countries,
with direct consequences on social, employment and
environmental factors. The Swiss trading hub sector
represents a dominant position in certain crucial
commodities, with a leading market share amongst
the world’s main trading hubs8
such as 35 percent of
crude oil; 60 percent of metals; 35 percent of grain; 50
percent of sugar; and 60 percent of coffee. This influ-
ence directly affects the level of tax revenue received
by producing countries.9
Third, transfer mispricing and/or under-taxation of
natural resources are considered by many as a key
source of base erosion profit shifting (‘‘BEPS’’) in
Africa. According to the African Development Bank,
‘‘the already shallow tax-base in most African coun-
tries is eroded further by excessive granting of tax
preferences, inefficient taxation of extractive activities
and an inability to fight abuses of transfer pricing by
multinational enterprises’’.10
A study dedicated to
West Africa estimated that ‘‘global capital leakage
from transfer pricing will increase from 11 billion US
dollars in 2011 (60% of the total of illicit financial
flows in 2011) to 78 billion US dollars in 2018, leading
to losses in government revenues from 3 billion US
dollars in 2011 to 14 billion US dollars in 2018.’’11
Activists have taken a high stakes and, at times,
unfair role in examining the TP practices of commodi-
ties companies. NGOs are robustly enquiring into the
TP structures of multinationals and their impact on
public finances. For example, Publish What You Pay
publically states that ‘‘over 110 billion USD have dis-
appeared through mispricing of crude oil in the US
and the EU between 2000 and 2010’’12
and suggests
that profits have been moved from various source
countries to countries where commodity companies
have their HQs or trading hubs.
Finally, parallel to the evolution of public aware-
ness, the legislative environment is also changing rap-
idly. Country-by-Country Reporting (‘‘CbCR’’) is
rapidly coming into force with, as of May 2016, no
fewer than 39 countries implementing domestic legis-
lation and agreeing in principle to exchange informa-
tion via the Multilateral Competent Authority
Agreement on the Exchange of Country-by-Country
Reports.13
Although Switzerland is expected to enact
the corresponding legislation with regard to fiscal
years from 2018 only, many Swiss based groups will
be subject to CbCR requirements for fiscal year 2016
via their local affiliates. TP legislation and documen-
tation requirements are also developing rapidly in
Africa, with at least 18 countries having implemented
formal transfer pricing regulations in 2014.14
A wide
range of legislative reforms and initiatives at local and
regional level, such as the EU automatic exchange of
information on tax rulings15
are boosting tax trans-
parency worldwide.
IV. TP as a Matter of Social Responsibility
The general media interest in commodities companies
had led to, and probably will see more numerous
11/16 Tax Planning International European Tax Service Bloomberg BNA ISSN 1754-1646 3

4. cases of, alleged transfer mispricing in Africa on the
front pages of newspapers. Such allegations often
originate from NGOs’ enquiries (using public avail-
able information, leaked information by company
stakeholders, disgruntled employees, journalistic re-
search, or leaked tax audit information).
How to approach or analyze these cases is a delicate
matter, particularly because certain reported facts
often appear contradictory. In addition:
s African governments are often ‘‘active participants’’
in such arrangements and have approved the inter-
national pricing mechanisms explicitly in advance;
s tax planning by businesses to optimize their overall
tax burden is both legitimate and prudent, and the
alleged mispricing is usually within the law and
signed off by Big 4 advisors;
s due to the confidential nature of these internal com-
pany affairs, the public information used is usually
incomplete, and often misleading;
s TP is a subjective and complex matter and diver-
gence of opinions are common even among special-
ists; and
s the interpretation of publicly available information
is often based on ‘‘fairness’’ rather than ‘‘legality.’’
By putting into question the morality of the multi-
nationals under scrutiny, public TP debates have a
negative impact on taxpayers’ reputation and brand
value. Stakeholders, internal and external, can have
strong reactions to allegations of tax misconduct, dis-
associating themselves from the company. Tax au-
thorities are also sensitive to such reports and are
likely to launch formal tax audits in the group’s sub-
sidiaries in and out of the country of origin of the
debate. Customers may prove reluctant to engage in
agreements with alleged ‘‘bad corporate citizens’’ or
seek additional safeguards.
Behind the public anger against abusive TP prac-
tices stands a framework of secrecy. Most accusations
relate to the ‘‘use of complex tax schemes’’, the ‘‘chan-
nelling of profits to low tax jurisdictions’’ and/or
‘‘sweetheart deals’’, concepts drawing on suspicion of
a voluntary and organized misconduct made possible
by a lack of transparency. While this may undoubtedly
prove true in some situations, it is also likely that com-
panies will be criticized for their transfer pricing
structures unfairly based on limited, partial informa-
tion that does not reflect the full reality.
The bad press around TP has become so dominant
that many news articles now define TP broadly as a
scheme used by multinational companies to avoid
taxes, rather than a legal compliance requirement.
Being compliant with the regulations in a way that
satisfies all stakeholders (accepting technical com-
plexity of the regulations, difficulties to forecast busi-
ness profitability, conflicting interpretations from
various tax authorities, etc.) provides a fertile ground
for challenge.
V. Implementing a Sustainable TP Model
Multinationals are not in the habit of disclosing infor-
mation on their TP structure. Addressing reputational
risk and stakeholder management is a new task for
many Heads of Tax. Nevertheless, transparency and
communication are useful tools to mitigate the risks
of media attention, public controversies and costly tax
audits. Increased public scrutiny and transparency re-
quirements such as CbCR or the EITI will continue to
exert pressure on companies’ TP disclosures. Refusal
to disclose information is likely to reinforce the ‘‘must
be hiding something’’ secrecy mindset and to heighten
reputational risk and its associated consequences. In
contrast, several leading groups within the commodi-
ties sector have engaged in pro-active communication
beyond their legal requirements to endeavor to inte-
grate TP into their corporate social responsibility
agenda.
Implementing a holistic TP and communication
strategy is now ‘‘best practice’’ for multinationals in
order to address the move of public opinion towards
increased public disclosure of tax strategy and tax
profile data. The associated risks and opportunities
are dependent upon a wide range of company-specific
factors, including the current TP strategy and compli-
ance approach, the risk profile, the countries of opera-
tions, and the approach to tax transparency and
sustainability of a company’s peers. To adopt a solu-
tion tailored to their own situation, Swiss-based com-
modities companies can follow a detailed action plan
within a broad three-step process:
s Assess their business and TP environment;
s Implement a sustainable transfer pricing structure;
and
s Communicate effectively on TP towards their stake-
holders.
This approach will help to balance tax risks and op-
portunities with a strong transfer pricing governance
process, to avoid unnecessary disputes with tax au-
thorities, erosion of reputation, and will help to pro-
mote your corporate social responsibility agenda. By
addressing the increased interests from investors,16
customers and governments, the implementation of a
sustainable TP strategy supports a company’s overall
operational and financial targets.
Mehdy Ben Brahim is Transfer Pricing Counsel and Stephen
Alleway is Transfer Pricing Partner at Questro International.
They can be contacted at
m.benbrahim@questro-international.com and
s.alleway@questro-international.com.
http://www.questro-international.com.
NOTES
1
FDFA, FDF, EAER, Background Report: Commodities Report of the in-
terdepartmental platform on commodities to the Federal Council, 2013
2
Swiss Academies of Arts and Science, Switzerland and the Commodi-
ties Trade Taking Stock and Looking Ahead, in Swiss Academies Fact-
sheets, vol. 11, no 1, 2016
3
Marketing hubs consultation paper; ATO compliance approach to
transfer pricing issues related to centralised operating models involving
procurement, marketing, sales and distribution functions. The purpose
of this framework is to classify offshore marketing hubs according to
their risk profile from a low risk green zone to a very high risk red zone,
the outcome triggering various regimes in terms of disclosure, APA
program, review and audit proceedings.
Additionally, ‘‘Australia’s tax office has said it is conducting audits of 15
marketing hubs in Singapore and Switzerland that it says it expects
will raise an extra $1 billion’’ (http://www.reuters.com/article/us-
singapore-tax-idUSKBN0N301T20150412).
4
European Union Directorate-General for External Policies of the
Union, Directorate B Policy Department, Tax Revenue Mobilisation in
Developing Countries: Issues and Challenges, April 2014
5
IMF Working Paper, Base Erosion and Profit Shifting and Developing
Countries, Ernesto Crivelli, Ruud de Mooji and Mickael Keen, WP/15/
118, May 2015.
6
This estimation was mentioned in an article from the OECD General
Secretary Angel Gurrı´a published by The Guardian on November 27,
4 11/16 Copyright ஽ 2016 by The Bureau of National Affairs, Inc. TPETS ISSN 1754-1646

5. 2008 (http://www.theguardian.com/commentisfree/2008/nov/27/
comment-aid-development-tax-havens).
7
United Nations, Addis Ababa Action Agenda of the Third International
Conference on Financing for Development, endorsed by the General As-
sembly in its resolution 69/313 of July 27, 2015.
8
Swiss Academies of Arts and Science, Switzerland and the Commodi-
ties Trade Taking Stock and Looking Ahead, in Swiss Academies Fact-
sheets, Vol. 11, No. 1, 2016.
9
FDFA, FDF, EAER, Background Report: Commodities Report of the in-
terdepartmental platform on commodities to the Federal Council, 2013.
10
African Development Bank, Domestic resource mobilisation across
Africa : trends, challenges and policy options, Committee of Ten, Policy
brief, No.2/2010.
11
Study by Dalberg commissioned by OSIWA, Domestic Resource Mo-
bilization in West Africa : Missed opportunities, February 2015.
12
Publish What You Pay Norway, Lost Billions, Transfer Pricing in the
Extractive Industries, Simon J. Pak, January 2012.
13
http://www.oecd.org/tax/automatic-exchange/about-automatic-
exchange/CbC-MCAA-Signatories.pdf.
14
Ernst & Young, Transfer pricing updates across Africa, EY Africa Tax
Conference, September 2014.
15
i.e. the EU automatic exchange of information on tax rulings, the EU
Accounting Directive, the corporate tax strategy disclosure in the UK,
the Open Tax lists in Denmark, Norway and Sweden, the Extractive
Sector Transparency Measures Act in Canada.
16
i.e. Dow Jones Sustainability Index at http://www.sustainability-
indices.com/.
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