Missing billions a taxing matter
18 August 2015
Posted by: Author: Peter Dachs
Author: Peter Dachs (BDlive)
At last, it’s cool to be a tax lawyer. After years of answering the inevitable dinner party question: "What do you do?", only to be met with an uncomfortable silence or, even worse, "isn’t that very boring?", we are now part of the hip crowd.
Governments are talking about our profession. The Group of 20 developed countries meetings rarely leave tax off the agenda and tax cases across the world make headlines. Everyone has a view on whether multinationals are "paying the right amount of tax" in the "right country".
Soon after the financial crisis, as many countries headed towards recession, tax revenues fell. No government, particularly in a weak economic climate, wants to raise tax rates, so revenue authorities went searching for additional tax revenues.
The concept of base erosion and profit shifting (BEPS) was born. It means shifting profits from the country where the value was created, thereby eroding its tax base. This is done in a variety of ways, some legitimate and in accordance with a jurisdiction’s tax laws. But there is concern about compliance with the "spirit" of tax laws and an accusation that taxpayers fail in this regard.
Recent attention focused on the tax planning strategies of Starbucks, eBay, HP, Amazon, Pfizer, Walgreens and Burger King.
It is difficult to quantify the effects of BEPS because there is no monitoring of global data, and obtaining an accurate picture of the problem is near impossible. Some nongovernmental organisations have tried to provide a proxy for its scale. The Tax Justice Network report, The Missing Billions, estimates that £12bn in corporate tax is lost annually due to tax avoidance by the UK’s 700 largest firms. Oxfam attributes $50bn in lost revenue to developing countries through tax avoidance by multinationals.
The liberalisation of trade and capital markets led to increased competition and encouraged multinationals to move capital to where profitability is greatest. Tax planning often uses differences and asymmetries in domestic legal and tax systems to reduce or defer multinationals’ total tax liability.
The BEPS Action Plan is a 15-part multi-lateral bid to address corporate tax planning concerns expressed by the G20 and the Organisation for Economic Co-operation and Development (OECD), which fears that member states’ transfer pricing rules allow for the allocation of taxable income to locations other than where the business activity takes place. The signatories declared that BEPS "constitutes a serious risk to tax revenues, tax sovereignty and the trust in the integrity of tax systems of all countries that may have a negative impact on investment, services and competition, and thus on growth and employment globally".
The action plans require co-ordination and information sharing between governments, and potentially the amendment of tax treaties, relying heavily on the participation of all major economies.
Countries not represented by OECD and G20 are also involved — Argentina, Brazil, India, Indonesia, Russia, Saudi Arabia and SA are participating in the BEPS efforts. The idea is that the measures will apply as adopted by nations and implemented through domestic laws or multilateral treaties and treaty renegotiations.
The OECD’s action items include the digital economy, hybrid mismatches, controlled foreign corporation rules, interest deductions, permanent establishment status, harmful tax practices, treaty abuse, transfer pricing (intangibles and risks capital), transfer pricing documentation and dispute resolution mechanisms.
A potential hypocrisy at the heart of the debate is the claim that there are taxpayers who pay too little tax and/or in the wrong jurisdictions without acknowledging that this is because some countries do not impose an appropriate amount of tax on them.
With few exceptions, there are no bad multinationals, simply taxpayers who wish to minimise — legitimately — the tax they pay. There are also no bad countries, simply jurisdictions that choose to impose a low rate of tax to attract more investment.
So what is the correct amount of tax? Is it the 35% imposed in the US or the mid-20% levied in many European jurisdictions?
And in which country should it be paid? For Starbucks, is it where the coffee is sold in retail stores or is it the jurisdiction that holds the intellectual property? The UK criticised Starbucks for the royalties paid by it from the UK to a company in the Netherlands.
Another BEPS myth is that there should be global tax symmetry. For example, in this tax utopia, it is only when one jurisdiction grants a deduction for a payment that the recipient country can tax such payment.
To suggest that a country first needs to ask whether another jurisdiction grants a tax deduction before it is permitted to tax a payment does not make sense. Provided appropriate tax credits are granted for foreign taxes suffered, it should not matter how another country applies its tax law.
In SA, the Davis Tax Committee set up a subcommittee to address BEPS concerns. Its interim report released last December notes that while SA has a vested interest in combating BEPS, it should not adopt OECD measures without considering the need to encourage foreign direct investment as urged in the National Development Plan.
The committee notes the need to preserve SA’s international competitiveness by providing a tax environment conducive to economic growth. It says protection against BEPS must occur at a policy level by "strengthening the source basis of taxation to effectively deal with inbound investments".
It must ensure effective withholding of taxes, account for the effect of double tax treaties, consider the effect of exchange controls, and consider the Treasury’s intended phase-out of exchange controls.
The committee warns that SA should not pre-empt or unilaterally respond to the OECD’s plan until its member states have reached consensus on BEPS measures and clear guidance is issued.
Perhaps it is because the concept of BEPS has been so politicised that there is a contradiction at its very heart. Instead of setting a moral framework to the debate — by attempting to create a moral compass that requires multinationals to "pay the right amount of tax" in "the right jurisdiction" — countries should acknowledge that they are trying to increase tax revenue without increasing tax rates and will amend their law in a manner that achieves this objective.
The countries that oppose BEPS engage in the practice. SA established the concept of a headquarter-company regime, aimed at ensuring that multinational companies invest in Africa through SA to reduce the tax paid in the African jurisdictions.
This means the tax bases of the African jurisdictions are eroded and profits are shifted to SA, where they are taxed at a low effective rate and then remitted from SA to the multinational, even those in tax havens.
A free market economy is about being competitive, and tax is part of that. Let’s compete for the worldwide tax base, but let us not cover the BEPS debate in a moral cloth that it does not deserve.
What we should be doing is protecting our tax base — which is what we do. Our tax law provides the South African Revenue Service with all the weapons it needs to ensure that, if profits are paid to another jurisdiction, they must be justifiably earned by such jurisdiction.
These rules include transfer pricing provisions that ensure that, if a non-arm’s length payment is made to another jurisdiction, an adjustment can be made to the tax bill of the South African entity that made such payment.
We also have complex controlled foreign company rules developed since 1997 in terms of which, even if profits are justifiably earned by a firm in another jurisdiction, an allocation of income is made to South African shareholders and tax is paid by the shareholders with a credit for any foreign tax suffered.
So let us rather frame the debate as a competition for an increasingly scarce resource — tax revenues — even if that means tax lawyers go back to being seen as bean counters and are no longer invited to trendy dinner parties to discuss the latest development in the Starbucks case.
- Dachs is a director and joint head of ENSafrica’s tax department. The views expressed are his own.
This article first appeared on bdlive.co.za.