Multinationals Try to Shake Tax Dodge Label
05 September 2013
Posted by: Author: Evan Pickworth
Author: Evan Pickworth (BusinessDay)
Multinational companies operating in Africa are hitting back at claims that government coffers are being eroded by deliberate intragroup mispricing and shifting of profits across borders to pay significantly less tax.
Apart from a lack of clarity on what guidelines to use, reports of bribes to resolve tax disputes, poorly educated tax officials focusing only on their bonuses, and a lack of will to follow global guidelines are emerging. Governments are concerned that money they should be receiving is being diverted to other countries, which then receive the tax revenue.
This is leading to major moves by tax authorities to ensure transactions between related companies or parties, such as employers and employees, are done at arm’s length. This means these deals should be no different than they would have been if they had been done with an unrelated and unbiased third party.
Prices charged between enterprises within multinational groups need to be priced at market value, or the same price as if parties were not related, according to new Organisation for Economic Co-Operation and Development (OECD) rules, to which South Africa subscribes. The Group of 20 (G-20) finance ministers meeting in January laid down the gauntlet from governments, as it was agreed regulations will be devised to stop multinational corporations from legally avoiding tax.
This is a significant shift, and separate multi-country audits are now becoming more commonplace as governments begin to share information and documents.
A lawyer for the African business of the largest container shipping company in the world, Maersk, Mariette Cruywagen-Louw, says many tax authorities in Africa are not even following the OECD guidelines. She says they fail to provide sufficient legal arguments as to why they are claiming the tax, and take the stance that a company "is simply out there not to pay tax".
She says that is untrue — companies just want to know what is required of them to be compliant.
The Africa Progress Panel, which is chaired by former United Nations secretary-general Kofi Annan and advocates sustainable and equitable development in Africa, said on Wednesday it had urged the G-20 leaders meeting in Russia to ensure that international tax reforms benefit Africa too.
The group says that in Africa, tax avoidance and evasion cost billions of dollars every year. One single technique — transfer mispricing — costs Africa more than it receives in either international aid or foreign direct investment.
Transfer mispricing includes the undervaluation of exports to understate tax liability..
"Accepted for too long, tax avoidance has reached a level that is unconscionable today. Our international tax system is broken and in need of reform. Those G-20 countries that host multinational companies must take responsibility for tax avoidance and evasion," Mr Annan said.
RoyaltyStat MD Ednaldo Silva says a problem is there are not a lot of listed companies in Africa.
One solution, albeit not a global one, is to draw up a set of rules that provide clarity for specific industries as to what ratios to use in reporting to tax authorities on their transactions. RoyaltyStat provides a database of royalty rates, global company financials, and global company annual reports, and is becoming a popular choice to value arm’s length transactions.
"In Latin America they look at US comparable data, for example," he says. But the problem remains there is no consensus on the methods to use.
What could benefit the process, Mr Silva says, is for information requests to be issued at the beginning of each audit so the tax authority can ascertain if comparable transactions exist, if the taxpayer has comparable data or if the taxpayer has competitors with publicly disclosed financials that can be used. While South Africa, Ghana and Kenya received plaudits for their tax frameworks from Maersk, there was not much positive to report elsewhere. Ms Cruywagen-Louw says the company had still not been able to complete a transfer pricing audit in Nigeria which began in 2011. While the initial charge has come down 70% during the negotiations and Nigeria has since set up a dedicated office for these matters, officials are refusing to hand the case over for resolution.
According to Maersk, matters are particularly bad in Morocco, as no express transfer guidelines are followed and "someone spoken to wanted payment ahead of a bonus at the end of the year".
DLA Cliffe Dekker Hofmeyr tax director Emil Brincker says the South African Revenue Service has "upped its game", and unless companies look at their underlying transactions they could end up settling at a price that does not necessarily suit them.
Norton Rose Fulbright head of tax Andrew Wellsted says because of a lack of rulings globally it seems like it has become "worth the tax authorities while to take a punt".
"Defending against aggressive attacks by authorities is costly, complicated and lengthy, " he says.