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Fight transfer pricing abuses, says Judge Dennis Davis

23 April 2015   (0 Comments)
Posted by: Author: Linda Ensor
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Author: Linda Ensor (BDlive)

The South African Revenue Service (SARS) lacks the capacity to deal effectively with the abuse of transfer pricing, which drains billions of rand from the economy, Judge Dennis Davis, who heads a tax review committee, said in Parliament on Wednesday.

The tax authority is also not provided with sufficient information by taxpayers to allow it to probe cross-border transactions to determine whether they involved the illicit transfer of profits from high-tax to low-tax regimes.

The abuse of transfer pricing is of concern to governments worldwide. It has enabled multinational corporations, including Google and Starbucks, to pay little tax in some countries in which they operate.

Judge Davis told members of Parliament’s trade and industry committee during a hearing on transfer pricing that there is "considerable haemorrhaging of money" out of SA as a result of transfer pricing abuse. His committee, however, did not have accurate figures of the sums involved.

Multinational corporations under close scrutiny by tax authorities globally might not be the main culprits, but rather second-tier companies involved in cross-border trading.

"I can assure you that we are going to do something about that," Judge Davies said.

The tax review committee had recommended to the Treasury that the special unit in SARS dedicated to base erosion and profit shifting be strengthened, he told MPs. The law was good but it was not implemented effectively.

The unit has about 20 people, including clerical staff, whereas the UK’s unit has more than 200 people. "It is ridiculous that we have so few people," he said.

In its report on base erosion and profit-shifting, the tax review committee has recommended to the Treasury that this capacity be beefed up significantly and SARS be given more information by taxpayers.

The committee has proposed that all companies should have to state in their tax returns whether they have firms in tax havens or low-tax jurisdictions. This would enable SARS officials to dig deeper in the companies’ affairs.

Judge Davis noted that it was not only companies involved in taking money illegally out of the country. Individuals had also siphoned off money abroad as the recent disclosures of money channelled through British bank HSBC had demonstrated. Of this about R23bn was South African money, which SARS is investigating.

There was also the disclosure during the Marikana inquiry that mining company Lonmin had saved itself R280m in tax through its relationship with a Bermuda company.

The judge said the World Bank and International Monetary Fund had used their econometric models to run data for the committee to ascertain the average effective tax rate, as well as the marginal effective tax of companies in SA.

They found that the lowest marginal effective tax rate was in the tourism sector (because of depreciation allowances) and not mining, which was close to the corporate tax rate of 28%.

Deloitte director Billy Joubert and University of Cape Town law professor Johann Hattingh both agree there is a need to bolster SARS’ capacity.

Prof Hattingh said SA had "more than enough legislative armoury to effectively combat intercompany mispricing or tax abusive behaviour.

"But SARS is understaffed and outnumbered to effectively implement the transfer pricing legislation on a broad spectrum."

He said the lack of capacity was likely to become more severe when the exchange of international taxpayer information took place online.

Both Judge Davis and Prof Hattingh were puzzled why SA was not part of the extractive industries transparency initiative.

Forty-eight countries joined the initiative (18 in Africa), which aims to highlight the economic role and contributions of these industries.

This article first appeared on bdlive.co.za.


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