Paper trail will stop tax ‘vanishing’
Businesses need to justify money flows — and that will mean record keeping
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.