Ac­tion plan aims to curb global tax avoid­ance

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ferdie Sch­nei­der

Ma­jor change in in­ter­na­tional tax and trans­fer pric­ing land­scapes will have se­ri­ous im­pact on multi­na­tion­als

THE Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) re­leased its ini­tial seven pro­pos­als to com­bat in­ter­na­tional tax avoid­ance last month. The OECD an­nounce­ment, which forms part of its Base Ero­sion and Profit Shar­ing (Beps) ini­tia­tive, marks a ma­jor change in the global tax and trans­fer pric­ing land­scapes and will im­pact multi­na­tional busi­nesses world­wide.

The first seven pro­pos­als deal­ing with Beps in­clude Ac­tion 1: The tax chal­lenges of the dig­i­tal econ­omy; Ac­tion 2: Hy­brid mis­match ar­range­ments; Ac­tion 5: Harm­ful tax prac­tices; Ac­tion 6: Tax treaty abuse; Ac­tion 8: Trans­fer pric­ing and in­tan­gi­bles; Ac­tion 13: Trans­fer pric­ing doc­u­men­ta­tion and coun­tryby-coun­try re­port­ing; and Ac­tion 15: The fea­si­bil­ity of de­vel­op­ing a mul­ti­lat­eral in­stru­ment on Beps.

The OECD cur­rently has 34 mem­ber coun­tries, three can­di­date coun­tries for ac­ces­sion and five key part­ner coun­tries. Colom­bia, Latvia and the Rus­sian Fed­er­a­tion are can­di­date coun­tries for ac­ces­sion while the key part­ner coun­tries in­clude Brazil, Peo­ple’s Repub­lic of China, In­dia, In­done­sia and SA. As a key part­ner, SA par­tic­i­pates in OECD com­mit­tees, ad­heres to OECD in­stru­ments, and in­te­grates into OECD sta­tis­ti­cal re­port­ing and in­for­ma­tion sys­tems and through sec­tor-spe­cific peer reviews.

The OECD, in col­lab­o­ra­tion with the G20, adopted its 15-point ac­tion plan to ad­dress Beps, which aims to pro­vide gov­ern­ments with clear in­ter­na­tional guide­lines to fight dou­ble non-tax­a­tion and cor­po­rate tax plan­ning strate­gies that ex­ploit sys­tems to shift prof­its to lower tax rate ju­ris­dic­tions. The Beps ac­tion plan aims to en­sure prof­its are taxed where the eco­nomic ac­tiv­i­ties that gen­er­ate the prof­its are per­formed and where value is cre­ated. Th­ese pro­pos­als will be in draft for­mat un­til the fi­nal­i­sa­tion of the re­main­ing eight ac­tion points next year.

The rec­om­men­da­tions are de­signed to achieve three things: first, to achieve greater co­her­ence in in­ter­na­tional tax prin­ci­ples among coun­tries tar­get­ing spe­cific per­ceived abuses that are of­ten part of an in­ter­na­tional business’s tax plan­ning ar­range­ments. Sec­ond, to en­sure the re­port­ing of profit for tax pur­poses re­flects the eco­nomic ac­tiv­ity that gen­er­ates that profit. And third, to en­hance global trans­parency be­tween in­ter­na­tional busi­nesses and tax au­thor­i­ties with re­spect to tax.

As ex­pected, one of the most sig­nif­i­cant rec­om­men­da­tions fo­cuses on trans­fer pric­ing doc­u­men­ta­tion and coun­try-by-coun­try re­port­ing. Multi­na­tion­als are re­quired to dis­close in­for­ma­tion at a coun­try-by­coun­try level on key business met­rics which will place an in­creased fo­cus on risk as­sess­ment of global tax and trans­fer pric­ing poli­cies.

The en­hanced trans­parency will give tax au­thor­i­ties an im­por­tant risk as­sess­ment tool to bet­ter as­sess whether the tax­able prof­its de­clared in dif­fer­ent coun­tries by in­ter­na­tional busi­nesses ap­pro­pri­ately re­flect real eco­nomic ac­tiv­ity and sub­stance. The im­pli­ca­tions for business are likely to be much more com­plex. One size will no longer fit all. Multi­na­tion­als will need to pro­vide sig­nif­i­cantly more trans­ac­tional data in the var­i­ous coun­tries of op­er­a­tion.

Busi­nesses will need to adopt a tai­lored ap­proach, grounded in the in­tri­cate knowl­edge of ev­ery coun­try in which they op­er­ate. Busi­nesses will prob­a­bly also be re­quired to re­port more reg­u­larly and, in some in­stances, will need to pre­pare a clear state­ment on an an­nual ba­sis. Busi­nesses around the globe re­quire cer­tainty on their tax po­si­tions to prop­erly man­age their tax ex­penses glob­ally, which is of­ten one of the most sig­nif­i­cant business ex­penses.

The scope and speed at which coun­tries adopt the rec­om­men­da­tions can­not be fore­seen as in­di­vid­ual coun­tries may choose to im­ple­ment all, some or none of the OECD rec­om­men­da­tions, or will im­ple­ment at a dif­fer­ent pace which could cre­ate more in­con­sis­ten­cies in how coun­tries deal with tax mat­ters.

The Beps ac­tion plan will po­ten­tially cre­ate ad­di­tional tax rev­enue and re­store the cred­i­bil­ity of tax sys­tems through preven­tion of avoid­ance of tax li­a­bil­i­ties by high­pro­file tax­pay­ers and by lev­el­ling the play­ing field be­tween multi­na­tional and do­mes­tic en­ter­prises.

Although SA is not a mem­ber coun­try of the OECD and only has ob­server sta­tus, its trans­fer pric­ing leg­is­la­tion is mod­elled on the OECD guide­lines. SA will be af­fected by the pro­pos­als since it will be widely im­ple­mented in­ter­na­tion­ally; many multi­na­tional en­ter­prises con­duct business in SA; and SA has a large net­work of tax treaties which will be af­fected by the pro­pos­als.

The im­ple­men­ta­tion of the pro­pos­als aims to neu­tralise hy­brid mis­matches; ad­dresses treaty shop­ping and other forms of treaty abuse; and min­imises the abuse of trans­fer pric­ing rules re­lat­ing to in­tan­gi­bles and pro­vide in­for­ma­tion on the global al­lo­ca­tion of prof­its, eco­nomic ac­tiv­ity and taxes of multi­na­tional en­ter­prises. The pro­pos­als and in­for­ma­tion will as­sist SA to fur­ther de­velop do­mes­tic leg­is­la­tion and amend tax treaties to suc­cess­fully ad­dress Beps in SA.

The South African Rev­enue Ser­vice (SARS) will now have greater vis­i­bil­ity of off­shore op­er­a­tions since dis­clo­sure is re­quired on the coun­tryby-coun­try re­port­ing tem­plate of, among oth­ers, all group en­tity rev­enues, prof­its, in­come tax paid, in­tan­gi­ble as­sets, num­ber of em­ploy­ees, de­tails of main ac­tiv­i­ties of other en­ti­ties in the group. This could lead to a sub­stan­tial in­crease in the num­ber of trans­fer pric­ing au­dits and dis­putes. The con­cepts of sub­stance, ef­fec­tive man­age­ment or man­age­ment and con­trol, con­trolled for­eign company laws and other in­ter­na­tional prin­ci­ples will re­ceive more at­ten­tion. Com­pli­ance costs and the ad­min­is­tra­tive bur­den of SA’s tax­pay­ers will in­crease sub­stan­tially, which will in­clude ad­dress­ing SARS au­dit queries and dis­putes.

The OECD’s Beps ini­tia­tive and the ini­tial seven pro­pos­als to com­bat in­ter­na­tional tax avoid­ance marks a ma­jor change in the global tax and trans­fer pric­ing land­scapes and will have a se­ri­ous world­wide im­pact on multi­na­tional busi­nesses.

Ferdie Sch­nei­der is head of tax at BDO South Africa.

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