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Multinationals Get Wake-Up Call On Taxation

28 October 2013   (0 Comments)
Posted by: Author: Evan Pickworth
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Author: Evan Pickworth (Business Day)

Many multinational companies were forced to wake up and smell the coffee when Starbucks handed over £5m in June to the UK government after caving in to pressure on their tax affairs. Further aggressive moves are seeing the net tighten on other major players ahead of next month’s South African Tax Review Committee report on legislation as it applies to foreign companies.

Apple, which raised the ire of American authorities for only paying 2% tax in Ireland, is the latest big company to face the heat after Irish authorities relented to global pressure just more than a week ago to tighten up its tax rules for nonresidents. Local experts say the Davis Committee, as the South African review committee is known, will be taking notice ahead of their review.

After failing to pay tax for five years, Starbucks came under pressure from the UK authorities and has agreed to pay two tranches of £5m and a total of £20m by the end of next year, despite reports that it is set to close as many as 30 shops in the UK due to financial constraints.

Another major company in the glare of the taxmen is Google, with Dublin being mentioned in one of the investigations as an area where London transactions were booked specifically to minimise tax.

Pressure, particularly by the Organisation for Economic Co-operation and Development (OECD) and the Group of 20, is being brought to bear on profit shifting by large companies, with South Africa seen as one of the leading countries in employing tougher rules to curb the ability of companies to easily shift profits to lower tax jurisdictions.

The eight-member Davis Committee, headed by Judge Dennis Davis, is reviewing South African tax laws to determine, among other issues, the extent to which the tax base is being eroded by companies that shift profits across borders and so avoid paying higher tax rates. Its interim report to the finance minister is due next month when attention centres on the effect to the tax base of profit shifting, says Stiaan Klue, CE of the South African Institute of Tax Practitioners.

Ireland came under attack by the US Senate earlier this year in a report into its corporate tax regime. According to the US Senate, the Irish taxation system is used by companies such as Apple to pay an effective 2% of tax.

The director of the national tax practice at Cliffe Dekker Hofmeyr, Emil Brincker, says the Irish decision is definitely a blow for companies that have arranged their affairs "in that manner".

South Africa, he says, is at the forefront of global moves to implement new base erosion and profit-shifting rules. The taxation laws amendment bill includes numerous provisions aimed at limiting the ability of firms to reduce their tax bills while at the same time containing provisions to incentivise foreign investment. It was submitted to Parliament on Friday.

Irish Finance Minister Michael Noonan addressed the Global Tax Policy Conference in Dublin earlier this month, soon after introducing changes to company residence rules as part of the 2014 Irish budget to eliminate what he says are mismatches between tax treaty partners. He says in certain circumstances a company could end up "being stateless in terms of their place of tax residency". Levies such as the €200,000 domicile payment will now be extended to nonresidents.

Mr Noonan assures firms that the change in company residence rules will not "put an end to international tax planning" by large corporates but is "the right thing for Ireland to do now".

"The minister said ‘multilateral action from many countries working together in common purpose’ was needed to put an end to this practice," says Mr Klue, who attended the conference with the institute’s policy director, Prof Sharon Smulders, who reported on the transformation of the South African Revenue Service into one of the world’s leading tax services.

"The OECD policy is directed towards the elimination of both double taxation and double non-taxation, arising out of companies basing themselves across jurisdictions and ultimately taking advantage of a complex web of tax laws," says Mr Klue.

But Prof Smulders warns that a basic premise of sovereignty is that countries have a right to set the corporate tax rate.

Among the new proposals in South Africa’s amendment bill is a deduction of interest clause, set to come into operation on January 1 2015, to limit deductions to 40% of the taxable income of the borrower, if the lender is not taxable in South Africa.

According to Mr Brincker, the moves could affect investment decisions, but that would depend on the flexibility of the investment to be moved around. Thus, electronic service investments may be easier to move across jurisdictions — a new value-added tax provision on these services is proposed in the bill — than fixed-asset investments.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


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