Further tax crackdowns as multinationals, BEPS tackled

Hiding tax money is becoming a lot more difficult given the international crackdown on tax avoidance – which will have a substantial impact on multinational companies who do so using transfer pricing.

This is according to Okkie Kellerman, tax specialist at law firm ENSafrica, which specialises in tax law, antitrust, banking and corporate law.

South Africa, together with over 100 other countries, is working to implement measures that will tackle tax avoidance through base erosion and profit shifting (BEPS) measures.

On June 7, 2017, South Africa was one of more than 70 countries that signed the Multilateral BEPS Convention, aimed at creating coordinated efforts aimed at preventing base erosion and profit shifting. Since then, several other countries have signed.

The treaty aims to prevent multinationals using BEPS to avoid taxes and exploit gaps and mismatches in tax rules to shift profits artificially to low- or no-tax countries such as Mauritius, the Cayman Islands or the British Virgin Islands, all popular tax havens.

Tackling IFFs

This move comes as the South African government is tightening tax laws and policies to tackle Illicit Financial Flows (IFFs).

In May, Fin24 reported that Yunus Carrim, chair of the standing committee on finance in Parliament, admitted the country was failing to tackle IFFs – losing billions in potential tax revenue in the process.

• READ: Carrim calls on FIC, Hawks, SARS and NPA to stem tax losses for SA

Carrim said South African laws were adequate and sophisticated enough to combat IFFs, but the challenge was in the implementation.

IFFs are by nature complex, and the only way to combat illicit trade and IFFs is with efficient cooperation between multiple local and international agencies, Carrim said.

South Africa has a desperate need for economic growth, job creation and additional revenue to meet the country’s developmental needs, he added. "We simply cannot afford to lose these large amounts of money."

Master files

According to Kellerman, country-by-country reporting legislation would make it a lot more difficult for South Africa and other multinational companies to shift their profits to low income tax countries. Multi-national companies with a turnover of over R100m must declare all their statements for every country that they operate in, and all the figures must match.

Tax authorities in every country will also be able to share information. Companies will have to declare a master file documenting a detailed value chain analysis of their company, as well as a local file analysing the local function performed, the risk assumed and the assets employed for every country in which they are active to the South African Revenue Service (SARS).

All layers of documentation disclosing the same information are to be submitted to revenue authorities, providing them with a complete picture of the multinational’s value chain. The information on the country-by-country reporting must be the same as the information on the corporate tax return.

Taxes go where economic activity is

What this means, said Kellerman, is that multi-nationals can no longer show profits of millions of dollars in a country where they have a small office with three lawyers and a couple of patent of intellectual property registrations, but low profits in a country where they have mining or manufacturing plants employing thousands of people.

The new BEPS legislation would ensure that the company's taxes go to the country where the economic activity takes place.

Companies used to think of their tax department as a kind of "profit centre", where costs were minimised. Under BEPS this is no longer so, said Kellerman.

A rise in prices?

Multinationals currently have to invest in substantial tax compliance software to ensure that their country-by-country reporting figures match. Tax officials will be able to quickly pick up if there is a discrepancy between revenue, capital and profits, said Kellerman.

Most illicit financial flows happen when there is transfer pricing, essentially when companies lie to tax authorities about the value of goods being imported or exported to avoid tax.

Other companies resort to creative accounting by inflating their expenses to reduce reported profit and avoid tax, according to the Organisation for Economic Co-operation and Development (OECD). 

However, the overhaul of their tax compliance systems will be costly, and it would be interesting to see how companies absorb the cost. They might have to minimise profits, but it could also lead to a rise in prices, said Kellerman.

* This story was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation.

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