Pa­per trail will stop tax ‘van­ish­ing’

Busi­nesses need to jus­tify money flows — and that will mean record keep­ing

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

THE South African Rev­enue Ser­vice’s (SARS’s) lat­est draft pub­lic no­tice on trans­fer pric­ing record keep­ing re­quire­ments is an­other warning shot across the bows of multi­na­tion­als that per­sist in ar­ti­fi­cially shift­ing money to low­tax or no-tax en­vi­ron­ments.

The re­cent flurry of ac­tiv­ity on the Euro­pean Com­mis­sion’s mon­u­men­tal €13bn fine against Apple be­ing the most re­cent ex­am­ple of the sever­ity of the war against cor­po­rate tax avoid­ance means those com­pa­nies that are not pre­par­ing in ad­vance could be caught out and po­ten­tially fined.

The ap­pli­ca­tion of the changes is ex­pected to come into force for years of as­sess­ment com­menc­ing on or af­ter July 1 2016.

Ac­cord­ing to the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­velop- ment (OECD), rev­enue losses from base ero­sion and profit shift­ing (Beps) are es­ti­mated at $100bn-$240bn a year, or 4%-10% of global cor­po­rate in­come tax rev­enues.

SA tends to rely heav­ily on per­sonal in­come tax to line its Trea­sury cof­fers, but de­vel­op­ing coun­tries are look­ing to garner more in com­pany taxes to boost rev­enue.

SA is one of the lead­ing adopters of the OECD’s Beps Project aimed at de­liv­er­ing so­lu­tions for gov­ern­ments to close the gaps in ex­ist­ing in­ter­na­tional rules that al­low cor­po­rate prof­its to “dis­ap­pear”.

Bradley Pear­son, as­so­ciate di­rec­tor at Deloitte, says that while the July no­tice by SARS is in draft form — com­ments were due by Au­gust 19 and it there­fore still needs to be fi­nalised — when it does go live it will be ef­fec­tive from July 1.

“The risk for busi­nesses that are not pre­pared is that they will not be able to jus­tify their pric­ing, with SARS then mak­ing ad­just­ments to pric­ing that it thinks was not done at arm’s length,” Pear­son says.

The penal­ties for not dis­clos­ing the cor­rect amount can be up to 200% of the tax on the pric­ing ad­just­ment that should have been dis­closed plus in­ter­est on the re­sult­ing un­der­pay­ment of taxes and div­i­dends tax of 15% on the deemed div­i­dend aris­ing from the pric­ing ad­just­ment.

Ac­cord­ing to para­graph 2 of the sched­ule, a per­son must keep the records spec­i­fied in para­graph 3 and 4 if the per­son —

(a) has en­tered into a po­ten­tially af­fected trans­ac­tion; and

(b) the ag­gre­gate of the per­son’s po­ten­tially af­fected trans­ac­tions for the year of as­sess­ment ex­ceeds or is rea­son­ably ex­pected to ex­ceed the higher of —

(i) 5% of the per­son’s gross in­come; or (ii) R50m. There are, fur­ther­more, oner­ous record keep­ing re­quire­ments that will sig­nif­i­cantly add to the amount of red tape com­pa­nies need to man­age.

A per­son re­ferred to in para­graph 2, for ex­am­ple, must keep the fol­low­ing records:

(a) A de­scrip­tion of the per­son’s own­er­ship struc­ture, with de­tails of shares or own­er­ship in­ter­est in ex­cess of 10% held by the per­son or therein by other per­sons as well as a de­scrip­tion of all for­eign con­nected per­sons with which that per­son is trans­act­ing and the de­tails of the na­ture of the con­nec­tion;

(b) The name and ad­dress of the prin­ci­pal of­fice, le­gal form and ju­ris- dic­tion of tax res­i­dence of each of the con­nected per­sons with which a po­ten­tially af­fected trans­ac­tion has been en­tered into by the per­son; and

(c) The per­son’s busi­ness op­er­a­tion sum­mary, in­clud­ing —

(i) a de­scrip­tion of the busi­ness (in­clud­ing the type of busi­ness, de­tails of the spe­cific busi­ness and ex­ter­nal mar­ket con­di­tions) and the plans of the prin­ci­pal trad­ing op­er­a­tions (in­clud­ing the busi­ness strat­egy);

(ii) an organogram show­ing the ti­tle and lo­ca­tion of the se­nior man­age­ment team mem­bers;

(iii) ma­jor eco­nomic and le­gal is­sues af­fect­ing the prof­itabil­ity of the per­son and the in­dus­try;

(iv) a de­scrip­tion of any busi­ness

re­struc­tur­ings or in­tan­gi­bles trans­fers that the per­son has been af­fected by or in­volved in;

(v) the per­son’s mar­ket share within the in­dus­try, anal­y­sis of rel­e­vant mar­ket com­pe­ti­tion en­vi­ron­ment and key com­peti­tors;

(vi) the key value driv­ers iden­ti­fied by avail­able in­dus­try re­search find­ings or re­ports;

(vii) in­dus­try pol­icy or in­dus­try in­cen­tives or re­stric­tions af­fect­ing the per­son’s busi­ness;

(viii) the role of the per­son, as well as the con­nected per­sons re­ferred to in sub­para­graph (b), in the group’s sup­ply chain.

Fur­ther records, such as pric­ing pol­icy and copies of con­tracts, will be needed in re­spect of any po­ten­tially af­fected trans­ac­tion that ex­ceeds or is rea­son­ably ex­pected to ex­ceed R1m in value.

Pear­son says the changes “could po­ten­tially bring more com­pa­nies within the oblig­a­tory record keep­ing re­quire­ments by link­ing the re­quire­ments to the value of the cross­bor­der con­nected party trans­ac­tions as op­posed to the ini­tial draft no­tice which trig­gered the record keep­ing re­quire­ments at group turnover of R1bn”.

He adds: “The above record keep­ing re­quire­ments will be oblig­a­tory where the thresh­olds are met. But what must not be over­looked is that even if a com­pany is not obliged to keep th­ese records based on the var­i­ous thresh­olds, they could still have to sat­isfy tax au­thor­i­ties that trans­ac­tions took place at arm’s length. So they would still need to have the nec­es­sary sup­port­ing proof and doc­u­ments any­way.”

This fits in with a big­ger pic­ture to es­sen­tially change the na­ture of in­ter­na­tional re­port­ing on the global stage. In this re­gard, Fi­nance Min­is­ter Pravin Gord­han an­nounced in Fe­bru­ary that SA was work­ing with other coun­tries to com­bat Beps. Ac­cord­ingly, large multi­na­tion­als with head of­fices in this coun­try will be re­quired to sub­mit coun­try-by-coun­try (CbC) re­ports to SARS.

“Large multi­na­tion­als with head of­fices in SA are en­cour­aged to start de­vel­op­ing poli­cies and pro­ce­dures in prepa­ra­tion for im­ple­men­ta­tion of the CbC re­port­ing,” says tax ex­ec­u­tive at ENSafrica, Ar­naaz Ca­may.

The im­ple­men­ta­tion of the CbC re­port­ing stan­dard by SARS will be ef­fected through reg­u­la­tions is­sued by the fi­nance min­is­ter un­der sec­tion 257 of the Tax Ad­min­is­tra­tion Act. A draft ver­sion of th­ese reg­u­la­tions was pub­lished on April 11 2016 and pro­posed that where the ul­ti­mate par­ent en­tity of a multi­na­tional en­ter­prise is a South African tax res­i­dent and has a con­sol­i­dated group turnover of more than R10bn, it must file a CbC report with SARS.

Ac­cord­ing to Ca­may, the CbC report must be filed with SARS by no later than 12 months af­ter the fi­nan­cial year end of the multi­na­tional en­ter­prise group. The draft reg­u­la­tions are ef­fec­tive for fi­nan­cial year ends com­menc­ing on or af­ter Jan­uary 1 2016 and, ac­cord­ingly, the first CbC re­ports will need to be filed with SARS from De­cem­ber 31 2017.

Once filed with SARS, the CbC re­ports will be au­to­mat­i­cally ex­changed in elec­tronic for­mat be­tween SARS and tax au­thor­i­ties in dif­fer­ent ju­ris­dic­tions.

“The CbC re­port­ing re­quire­ment is al­ready in play for com­pa­nies that have had year ends from De­cem­ber last year to date even though the fi­nal ver­sion of the reg­u­la­tions have not yet been pub­lished. The in­for­ma­tion re­quire­ments for large multi­na­tion­als are quite daunt­ing. Some com­pa­nies are more pre­pared than oth­ers but a lot are yet to fully un­der­stand whether they will be able to ex­tract and pro­vide all the re­quired in­for­ma­tion,” says Pear­son.

Teething prob­lems can be ex­pected as th­ese pro­cesses un­fold.

Any com­pany that does not be­lieve th­ese moves are se­ri­ous should think again. Rep­re­sen­ta­tives of more than 80 coun­tries and ju­ris­dic­tions re­cently gath­ered in Ky­oto, Ja­pan, to push for­ward ef­forts to up­date in­ter­na­tional tax rules for the 21st cen­tury.

The June 30 and July 1 meet­ing marked the first time that a broad range of coun­tries — rep­re­sent­ing vary­ing lev­els of devel­op­ment — came to­gether on an equal foot­ing in the OECD’s Com­mit­tee on Fis­cal Af­fairs and in­au­gu­rated the new in­clu­sive frame­work on Beps im­ple­men­ta­tion.

Thirty-six coun­tries and ju­ris­dic­tions have al­ready for­mally joined the new in­clu­sive frame­work on Beps and have com­mit­ted to im­ple­ment the Beps pack­age, bring­ing to 82 the to­tal num­ber of coun­tries and ju­ris­dic­tions par­tic­i­pat­ing on an equal foot­ing in the project.

The other 21 coun­tries and ju­ris­dic­tions at­tend­ing the Ky­oto meet­ing are likely to join the in­clu­sive frame­work in the com­ing months, ac­cord­ing to the OECD.

Per­sonal tax­pay­ers have borne the brunt of the tax bur­den in this coun­try, in­clud­ing via VAT — that could change with the im­ple­men­ta­tion of the Beps rules. But it is also im­por­tant le­git­i­mate com­pa­nies are given enough room to man­age their cross­bor­der af­fairs with­out be­ing mired in un­nec­es­sary red tape and in­ves­ti­ga­tions.

Pic­ture: iSTOCK

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