Crack­down on profit-shift­ing

Com­pa­nies fac­ing trans­fer pric­ing queries should try to re­solve them with­out de­lay

Business Day - Business Law and Tax Review - - FRONT PAGE - EVAN PICK­WORTH

COM­PA­NIES that fail to take trans­fer pric­ing risks se­ri­ously face a bleak fu­ture. Trans­fer pric­ing came un­der scru­tiny in SA as far back as 1995 when the author­i­ties be­came con­cerned about multi­na­tional com­pa­nies ma­nip­u­lat­ing prices within their group of com­pa­nies to re­duce taxes by “park­ing” prof­its in favourable tax ju­ris­dic­tions. This prompted the pro­mul­ga­tion of leg­is­la­tion, which has re­cently ramped up. It is now an is­sue of such ma­jor sig­nif­i­cance com­pa­nies that flout these rules are fac­ing a firestorm of crit­i­cism in the press, by reg­u­la­tors and even in the com­mu­ni­ties in which they op­er­ate.

It is an im­por­tant is­sue for all de­vel­op­ing coun­tries due to their heavy re­liance on cor­po­rate in­come tax, par­tic­u­larly from multi­na­tional en­ter­prises. But while the com­pli­ance bur­den on taxpayers is in­creas­ing, the clar­ity of rules across ju­ris­dic­tions re­mains blurry.

Yet cries to stamp out these types of prac­tices are be­ing heard around the world as lobby groups and non­govern­ment or­gan­i­sa­tions in par­tic­u­lar rail against the very low lev­els of cor­po­rate tax some com­pa­nies have paid over the years.

The Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) sums up the ex­tent of the prob­lem well when it says shift­ing prof­its is a global prob­lem which re­quires global so­lu­tions.

The prob­lem is get­ting all gov­ern­ments singing from the same song sheet. They have cer­tainly stuck to that mantra and have started mak­ing se­ri­ous in­roads into ad­dress­ing the chal­lenges, but there is a long way to go yet. The OECD is striv­ing and driv­ing for a clear pol­icy that is im­ple­mented uni­formly by coun­tries, though this has not al­ways hap­pened as smoothly as they would have liked, es­pe­cially in Africa.

A set of mea­sures and re­ports were re­leased in Septem­ber 2014 and a work­shop for de­vel­op­ing coun­try rep­re­sen­ta­tives took place last De­cem­ber in Paris.

From Jan­uary this year de­vel­op­ing coun­try rep­re­sen­ta­tives have also been at­tend­ing the meet­ings of the rel­e­vant sub­sidiary bod­ies, such as work­ing party 1 on tax treaties, work­ing party 2 on tax pol­icy and sta­tis­tics, work­ing party 6 on trans­fer pric­ing, work­ing party 9 on con­sump­tion taxes, work­ing party 11 on ag­gres­sive tax plan­ning, the Fo­rum on Harm­ful Tax Prac­tices and the Task Force on the Dig­i­tal Econ­omy.

Ac­cord­ing to the OECD these mea­sures will give coun­tries the tools they need to en­sure that prof­its are taxed where eco­nomic ac­tiv­i­ties gen­er­at­ing the prof­its are per­formed and where value is cre­ated, while at the same time give busi­ness greater cer­tainty by re­duc­ing dis­putes over the ap­pli­ca­tion of in­ter­na­tional tax rules, and stan­dar­d­is­ing re­quire­ments.

That is to be com­mended as com­pa­nies will not want to face drawn out dis­putes and a con­flict res­o­lu­tion process that ul­ti­mately dam­ages their rep­u­ta­tion and re­la­tion­ships.

There is lit­tle doubt South African rev­enue author­i­ties are go­ing to take stronger aim at trans­fer pric­ing prac­tices, es­pe­cially as we have been one of the early adopters of the global rule changes. The South African Rev­enue Ser­vice (SARS) has also es­tab­lished a team to deal with trans­fer pric­ing.

The OECD makes the point that in an in­creas­ingly in­ter­con­nected world, na­tional tax laws have not al­ways kept pace with how global cor­po­ra­tions have de­vel­oped nor with the rise of the dig­i­tal econ­omy, leav­ing gaps that can be ex­ploited to gen­er­ate dou­ble non­tax­a­tion. This un­der­mines the fair­ness and in­tegrity of tax sys­tems. The lack of trans­fer pric­ing com­pa­ra­ble data and the grant­ing of waste­ful tax in­cen­tives have also been iden­ti­fied as ar­eas of par­tic­u­lar con­cern for de­vel­op­ing coun­tries.

How­ever, the OECD says more work will be needed in fu­ture to make progress on these ar­eas and will be an­a­lysed fur­ther by the G20.

The best ad­vice for com­pa­nies fac­ing trans­fer pric­ing queries is to act on them and try to re­solve them with­out de­lay be­fore they es­ca­late and an as­sess­ment is is­sued. By then it will be too late to pre­vent a broader fall­out and will be­come more dif­fi­cult to find a res­o­lu­tion with the author­i­ties.

But just how real are some of the num­bers be­ing bandied about? Tax di­rec­tor from Deloitte Billy Jou­bert made an im­por­tant point in an ar­ti­cle in the FM a few weeks ago. He said there is a uni­ver­sal, but very pos­si­bly untested, per­cep­tion that coun­tries (par­tic­u­larly de­vel­op­ing coun­tries) are los­ing bil­lions in tax rev­enues

be­cause of base ero­sion and profit shift­ing — the Si­amese twin of profit shift­ing. Wild num­bers are thrown around of the bil­lions of dol­lars that abu­sive trans­fer pric­ing prac­tices are al­legedly cost­ing the African con­ti­nent as a whole. Jou­bert says, how­ever, that it is very dif­fi­cult to see how any­one can pos­si­bly back up this state­ment with de­fin­i­tive ev­i­dence.

Davis Tax Com­mit­tee head Judge Dennis Davis was re­cently quoted as hav­ing said that dur­ing 2012 SARS probed about 40 cor­po­rate taxpayers on their trans­fer pric­ing prac­tices and col­lected more than R1bn in ad­di­tional tax rev­enue.

Ac­cord­ing to Jou­bert, if one con­sid­ers that to­tal cor­po­rate tax col­lec­tions for the fi­nan­cial year ended Fe­bru­ary 28 2013 was R156.3bn (ac­cord­ing to the 2013 bud­get re­view), an ex­tra R1bn of cor­po­rate tax rev­enue from a fo­cus on trans­fer pric­ing rep­re­sents about 0.64% of to­tal cor­po­rate tax col­lec­tions. “This fig­ure does not, in it­self, seem to in­di­cate trans­fer pric­ing is an area of ram­pant non­com­pli­ance by South African cor­po­rate taxpayers,” says Jou­bert.

But the OECD is right to be wor­ried and com­pa­nies them­selves need to pre­pare in ad­vance for a harder line. It is not so much about the fines than the scan­dals that erupt around an in­ves­ti­ga­tion. The con­tin­u­ing HSBC fall­out and re­ports Wal­mart may have $76bn in off­shore tax havens is go­ing to in­crease the pres­sure on cor­po­rates, in­clud­ing those in Africa, to en­sure their pric­ing prac­tices meet more uni­ver­sally strin­gent re­port­ing re­quire­ments.

The OECD is be­gin­ning to make in­roads, in­clud­ing in the de­vel­op­ing world, and those com­pa­nies that fail to take heed of these de­vel­op­ments will be caught up in a groundswell of neg­a­tive press they can well do with­out. But it will also be im­por­tant for the author­i­ties to re­alise that fo­cus­ing all their at­ten­tion on le­gal multi­na­tion­als may not re­alise the bounty they had an­tic­i­pated.


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