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Developing countries ‘lose taxes to profit shifting’

Wednesday, 19 March 2014   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

Studies show multinationals shift profits of $365bn a year from developing to developed countries through transfer pricing mechanisms, the South African Revenue Service (SARS) said on Tuesday.

Over three years South Africa has seen "hundreds of billions of rand" leaving in royalties, management and service fees and intellectual property payments, SARS said.

The global economic crisis has awakened developed countries to the importance of tax revenue and effects on the sovereignty of a state if it loses income through base erosion and profit shifting to low tax jurisdictions. The issue for years has been a thorn in the side of African and other developing economies.

Measures to ensure that Africa has a voice in the development of new rules and methods to prevent base erosion and profit shifting are being debated at the consultative conference of the African Tax Administration Forum.

Sunita Manik, head of SARS’s Large Business Centre, said money lost to the fiscus because of base erosion affected the sustainability of a country’s tax base.

Ms Manik told delegates from 29 African countries and representatives of the Organisation for Economic Cooperation and Development (OECD) that some multinational companies in certain sectors had an effective tax rate of 3%-5%, while the average for the rest of the sector was 11%.

Forum chairman Ivan Pillay cited a recent study stating that tax systems across Africa remained "opaque" to large majorities.

"Moreover, perceived corruption among tax authorities remains significant, and evidence suggests these perceptions undermine public commitment to the integrity of the tax system and increase the likelihood of noncompliance," Mr Pillay said.

African tax revenue averaged 24% of gross domestic product (GDP) from 2000 to 2010, with peak performance at 28% in 2008, he added. Compared with the tax to GDP ratio of 33.8% in OECD countries in 2010, there was room for African countries to expand tax revenue.

OECD head of global relations Richard Parry said international tax rules were more than 100 years old. The global economic crisis had made governments step back and revisit their sustainability.

Lee Corrick, special adviser to the OECD on transfer pricing, said the challenge facing Africa was a lack of appropriate legislation for tax administrators to deal with base erosion and profit shifting.

Low-income countries were dependent on corporate tax for 20% of their tax income, compared to 8%-10% for developed countries.

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