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Demands on multinationals to be financially transparent continue to grow

14 October 2016   (0 Comments)
Posted by: Adel Marx
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Author: Amanda Visser (Business Live)

The global drive for corporate transparency has cost multinational companies and financial institutions millions of rand — and it is not over.

Large, multinational companies are scrambling to get to grips with the new country-by-country reporting requirement.

This essentially means multinational companies have to report details including revenue, profit, income tax paid and taxes accrued separately for each jurisdiction where they operate.

It is part of the initiative by the Organisation for Economic Co-operation and Development (OECD) to combat base erosion through the shifting of taxable profits to low-tax jurisdictions.

JP Borman, PwC’s transfer pricing leader in Johannesburg, says revenue authorities are of the view that they do not have sufficient visibility into the affairs of multinationals to correctly assess them.

"Many (tax authorities) feel that profit shifting is happening under their noses," he says.

The base erosion profit shifting (BEPS) initiative started in 2012 at the behest of the Group of 20 (G-20) countries to enhance transparency for tax administrations.

The action plans are intended to provide "adequate information" to assess high-level transfer pricing and other base erosion-related risks.

The country-by-country reporting action plan is effective for multinational companies with financial year-ends beginning on or after January 1 2016.

Charles Makola, EY tax partner and member of the South African Institute of Tax Professionals’ international tax committee, says governments across the world are catching up to the "information age".

"It is a move towards having an almost real-time view of corporate and individual financial transactions. Capacity building exercises are also rolled out in the field of international tax and transfer pricing."

Not every multinational will have to comply with the country-by-country reporting requirements; they apply to the movers and shakers in the global economy: the threshold is €750m. However, for South African companies, the threshold in draft legislation was set at R10bn.

Borman says despite the huge costs in money and time to get the right system in place, there is an intangible benefit in all these transparency requirements.

"When the veil of secrecy is lifted, revenue authorities may see that there is no mischief, or in some cases they may be surprised by the amount of mischief."

Emil Brincker, head of Cliffe Dekker Hofmeyr tax practice, says the European Commission’s investigation of Apple’s affairs demonstrates the drive for total transparency.

According to the commission’s investigation, Apple has paid as little as 0.005% in 2014 on its European profits due to an arrangement with the Irish government. Ireland’s current corporate tax rate is 12.7%.

The commission has ordered Ireland to collect $14.5bn in outstanding taxes over a decade from Apple. However, the jury is still out since both Ireland and Apple have decided to appeal the decision.

The cost associated with this transparency drive is significant, and it does not seem as if a cost analysis has been done to determine whether the benefit will justify the costs.

According to Brincker, there is also a legitimate concern about the capacity of government agencies to handle this amount of information.

"As it is there are huge delays with the processing of existing information. Many compliant companies are going to incur huge costs to assemble and disseminate information, but those who want to remain under the radar have already started restructuring the affairs."

Makola says the information requested is quite "intrusive and disruptive" of the tax operating model and data capturing.

The country-by-country reporting template requires multinationals to report revenue, profit, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets annually for each tax jurisdiction in which they do business.

In addition, they must identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities each entity conducts.

The costs extend beyond the operational direct costs such as building compatible information technology systems and hiring skilled workers who know how to extract the correct information and to compile reports that comply with tax, legal and accounting requirements.

"The unforeseen indirect costs of potential reputational damage arising from noncompliance may be exponential," says Makola.

Borman says the new requirements will force large companies to re-evaluate their operating models to ensure the tax tail is not wagging the business dog.

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