Action plan aims to curb global tax avoidance
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.