Transfer pricing overhaul will rally investment
05 October 2015
Posted by: Author: Karen Miller
Author: Karen Miller (BDlive)
Transfer pricing, a key tax risk facing multinationals in SA and the rest of Africa, has again reared its head as a tax problem and source of leakage from the continent. But is there a real incidence of transfer mispricing in Africa?
Transfer pricing continues to be a hurdle for multinationals, especially those who wish to use SA as a springboard into Africa and was a hot topic at the recent transfer pricing summit in Johannesburg and the inaugural Africa Tax Research Network in Cape Town.
The international conference on financing for development held in Addis Ababa recently discussed the Africa Tax Administration Forum’s focus on effective tax policy for the continent, referring to transfer pricing abuse in Africa as "illicit flows through trade misinvoicing".
The tax community is already facing possible policy changes through the base erosion and profit shifting initiative under way at the Organisation for Economic Co-operation and Development, which is being considered in many African countries.
In SA, the Davis Committee has issued several recommendations for measures needed, many of which seek to review and possibly tighten transfer pricing rules.
The South African Revenue Service has also extended the level of information needing to be disclosed in its IT14 returns and there is an aggressive audit environment to combat this perceived area of tax avoidance.
But how easy is it for multinational companies to shift profits from Africa through transfer pricing?
Many African countries rely on a source basis of taxation and high withholding taxes are attributed to this. This ensures that not only are payments effectively taxed in the jurisdiction in which they arise, but often at rates higher than the final tax liability. For instance, a withholding tax is often levied on the gross payment without consideration of expenses incurred in achieving that amount, which inevitably reduces the actual taxable income to a lower amount. This leads to increased effective tax rates for many multinational companies operating in Africa.
Further impediments are often in place through regulatory restrictions, which limit the amount of payments that can be made from certain African jurisdictions. This creates pressure on multinational companies in effectively implementing global pricing policies.
In addition, they run the real risk of double taxation if their home tax authority requires these policies to be implemented and seeks to make an adjustment irrespective of the impediments.
Many multinational companies would argue there isn’t a real incidence of transfer mispricing in Africa, and that certain countries are getting more than their fair share of the tax take.
It is hoped that policy makers will soon recognise this and focus on aligning withholding taxes and regulatory restrictions with effective transfer pricing rules based on global precedent and creating an improved taxpayer experience across the continent.
This is critical for foreign investment in Africa. Multinational companies looking to invest want two key things: low reputational risk and tax certainty.
Accusing multinationals of stripping profits without substantiated facts creates a real reputational risk for any major multinational looking to expand into Africa.
Tax certainty is also of high importance as most multinationals have shareholders to answer to and need to manage the effective tax rate to ensure shareholder value.
All too often disputes with tax authorities in certain countries result in multinational companies disinvesting as the tax authorities are aggressive and unreasonable.
The recent spotlight on transfer pricing is a step in the right direction and will hopefully lead to recommendations for change.
- Miller is the transfer pricing leader at Deloitte Western Cape. She was a speaker at the transfer pricing summit
This article first appeared on bdlive.co.za.