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News & Press: Transfer Pricing & International Tax

Growth oriented tax system for multinationals can boost Africa’s development

19 September 2012   (0 Comments)
Posted by: SAIT Technical
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By Evan Pickworth (Business Day)

Multinational companies will play a hugely important role in Africa's development, but only if legal and regulatory certainty catches up to the pace of investment, say tax experts and regulators.

The answer lies in a "growth oriented” tax system rather than in the incentives and exemptions being demanded by companies, says The Africa Tax Administration Forum (ATAF).

Estimates for 2012 by Ernst & Young point to a reversal of the 20% decline in foreign direct investment (FDI) inflows into Africa since the global crisis, where FDI peaked in 2008 at $72bn but then dropped to just 4.5% of global investment. This is despite predictions the global crisis could continue for a lot longer elsewhere in the world. A survey of over 500 international business leaders in 38 countries showed a 73% improvement in Africa's attractiveness three years from now.

Senior tax policy adviser at Ernst & Young and former director at the Organisation for Economic Co-operation and Development (OECD), Jeffrey Owens, says the balance between providing a business friendly tax environment for investors and ensuring foreign investors pay their "fair share” must be found.

Logan Wort, secretary of ATAF, which is trying to harmonise tax policies in Africa, told the Ernst & Young Africa Tax Conference yesterday where over 30 countries are represented, that a tax system that is complex, unpredictable and inconsistent is "an impediment to everyone”.

This comes as the taxation of multinationals becomes an important feature of tax authorities' work across the continent, including in SA. But emerging countries are reluctant to apply the same transfer pricing rules — which kick in when divisions of a company transact with each other — adopted by developed countries and would rather have rules moulded to suit them better.

Mr Wort said debates were taking place under the auspices of the United Nations and in collaboration with the OECD about the development of transfer pricing rules that took into account the particular needs and expectations of developing countries.

"Tax is not a driving factor in a deal, but can be a tipping point and adds to the risk element. Companies are looking for stability and also want an opportunity to react and plan accordingly,” said James Deiotte, Ernst & Young's Africa leader for tax.

Mr Wort says while incentives or exemptions may attract a measure of investment, they erode the tax base and ATAF has found that levels of bribery and corruption could be increasing in the wake of these concessions.

He said the key was to create an attractive business environment, facilitated by a growth-oriented tax system, which focused on automating its systems, up-skilling staff and creating good taxpayer experiences.

Mr Owens said the number one focus now should be on transparency, while better policies would also reduce capital flight — projected at over $700bn since 1970.

Getting business and government to work together will be critical.

Wayne Fuller, Old Mutual's senior international tax manager for emerging markets, said it was important not to get tied up arguing tax matters in courts, so the key was to forge relationships. Old Mutual has decided to in-source tax service centres to help its numerous businesses on the continent run smoothly.

Head of tax for Africa for brewer SABMiller, which has brewing and beverage operations in over 30 countries on the continent, Lazelle Terblanche, said the tax function needed to align with the company's business strategy. "You must determine where the stakeholders are and how powerful they are,” she said. SABMiller was accused in 2010 of potentially avoiding millions of pounds in tax by allegedly routing profits through a "web” of tax haven subsidiaries. This was, however, before global transfer pricing rules started tightening up.


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