Profit shifting ‘just a part’ of Africa tax loss

MULTINATIONAL companies shifting their profits from Africa to low-tax jurisdictions are only partly responsible for the erosion of the continent’s tax revenue bases.

The African Tax Administration Forum (Ataf) believes some countries have signed away their tax revenue because of weak domestic policies, and ill-conceived tax incentives and mining contracts.

For two years the Organisation for Economic Co-operation and Development (OECD) has been on a drive to address profit shifting and base erosion. Developed countries, traditionally receivers of the shifted profits, have had enough of tax havens trumping them in the flow of investments and funds. Profit shifting and base erosion relate chiefly to multinationals’ attempts to avoid tax in their home countries by pushing activities abroad to low-tax or no-tax jurisdictions.

The OECD last year published a 15-point plan aimed at stemming this. Discussion papers on the implementation and time lines of the plans have been published and others are expected. By December next year, the final phase of the plan, relating to harmful tax practices, should be in place.

Mazars senior tax consultant Albertus Marais says implementation of the plan will force multinational s to make more informed decisions on where to base their operations, through which countries funds will flow to shareholders, and what funds will be allowed to flow. “I think we are going to see more honest company structures in future. There are many companies engaged in aggressive tax planning that are not caught out,” Mr Marais says. “Dishonest taxpayers will be caught out much more easily, mainly because of greater transparency and the exchange of information between countries that are party to the plan.”

Honest taxpayers will probably create more “conservative structures” due to closer international scrutiny, he says. “This has unfortunately become necessary since complicated structures require complicated legislation to counter the design of aggressive schemes.”

Global executives participating in a recent survey by Grant Thornton on profit shifting and base erosion were sceptical about the successful implementation of the OECD plans, mainly because of the complexity and tight time lines.

Ataf agrees with the need for an action plan and has embarked on a drive to address problems that cause base erosion in Africa but are not on the OECD’s agenda.

Ataf executive secretary Logan Wort says the organisation is quantifying the cost of “ill-conceived tax incentives” that erode tax bases even when there is no profit shifting. He says domestic policies and, often, badly written mining contracts erode tax bases in Africa.

“We grew up with the notion that incentives drive investment choices, but we need to ask ourselves whether the business will exist without it. Businesspeople are not in Africa for charity. They are here to make money,” he says.

Ataf will address the tax challenges of e-commerce, hybrid mismatch arrangements, abuse of double tax treaties, the establishment of dummy headquarters and the requirement to disclose aggressive tax-planning arrangements.

The OECD says in its plan that domestic law and double tax treaty rules governing the taxation of cross-border profits produce the correct results in most instances.

Mr Marais says it is ironic that the Group of 20 asked the OECD, representing 34 of the wealthiest countries, to drive the move against base erosion and profit shifting.

He says South Africa introduced many of the strategies long before the OECD published its plans. It has been ahead of the curve in terms of tightening transfer pricing rules (the way payments are made between related companies for services or goods), signing exchange of information agreements with other tax jurisdictions and tax havens, the treatment of hybrid mismatches (what is interest and what are dividend payments), and the creation of a reportable regime where aggressive structures must be reported to the tax authorities.

Mr Marais says there is a danger that countries will continue to compete with each other to make themselves more attractive as investment destinations.

Grant Thornton tax partner AJ Jansen van Nieuwenhuizen says OECD members may be compelled to adopt the new tax model through the implementation of the action plan, but nonmembers may decide to adopt only some of the plan.

“This could create a situation where there are different rules in different jurisdictions, leaving us in exactly the same position we are currently in,” he says.