The cost of companies' efforts to avoid paying tax
21 April 2015
Posted by: Author: Ann Crotty
Author: Ann Crotty (BDlive)
Shifting profits to low-tax jurisdictions not only erodes South Africa's tax base, it erodes the base for paying living wages to employees — as well as the base for creating value for black economic empowerment partners.
This is the thrust of the argument by nonprofit lobby group the Alternative Information & Development Centre (AIDC) in its submission to the Davis tax committee.
The committee, headed by Judge Dennis Davis, is examining factors that may be eroding the South African tax base, including how profits are being moved from South Africa to low-tax countries. Davis's recommendations will be handed to Finance Minister Nhlanhla Nene, who will decide whether the tax laws need to be altered.
The AIDC, which advised upstart Association of Mineworkers and Construction Union (Amcu) during the Farlam commission of inquiry into the 44 deaths at Marikana in 2012, says that shifting profits out of South Africa for tax reasons is causing political and social instability.
Last October, the AIDC infuriated Lonmin when it released a report detailing how mining companies use "transfer pricing" to minimise their tax liabilities.
The centre's economist, Dick Forslund, said Lonmin transferred hundreds of millions of rands a year from its South African operations, which limited the mining company's ability to pay decent wages and invest in social programmes.
In its submission to Davis, the AIDC referred to Lonmin's claim to the Farlam commission that it could not afford to meet workers' wage demands or its social investment obligations under the mining charter. For example, instead of providing homes for miners, Lonmin has built only three "show" houses.
The AIDC said Lonmin — as with many mining companies — has used sales commissions, legal services and management fees to erode its South African profits. These fees and commissions are paid to entities outside South Africa.
This strategy has increased tension between mining companies and their BEE partners, who believe these cross-border payments are reducing their dividends and making it difficult to generate any returns on their deals, the AIDC said.
Concerns about aggressive "tax management" among South African firms are not new.
A 2013 report by Global Financial Integrity ranked South Africa 11th among the 15 developing countries with the highest illicit capital export. That research estimated that illicit capital outflows reached a peak in 2012, with more than R300-billion — or close to 10% of GDP — illicitly leaving the country.
It is not just a South African or African problem either.
The Australian Taxation Office is pursuing BHP Billiton and Rio Tinto for allegedly channelling billions of dollars in profits from iron-ore sales through companies that pay almost no tax in Singapore. The two companies, which have been in dispute with the Australian authority for years, are the country's largest taxpayers.
Australian media reports say the two companies run marketing hubs in Singapore, enabling them to save more than A$750-million (about R6.9-billion) a year in tax.
The AIDC has called on the Davis committee to enforce tougher reporting standards on companies operating in South Africa and to beef up the resources available to the Companies and Intellectual Property Commission, so that it can process all the annual financial statements of profit-making entities operating in South Africa.
It said that the low levels of disclosure enabled companies to shift their profits and evade tax without being detected in South Africa.
The AIDC also urged the Davis committee to ignore warnings that a tougher stance would scare foreign investors away. It described as "unacceptable" the notion that South Africa should not do anything to protect itself from aggressive tax planning.
This article first appeared on bdlive.co.za.