Transfer pricing drains us of tax blood

taxation 6Author: Xolani Mbanjwa (Fin24)

Transfer pricing by multinationals has cost South Africa an estimated R250 billion over three years and, with it, lost tax revenue.

This is according to Sunia Manik, group executive for the large business centre at the SA Revenue Service (SARS), adding that it was being done through “service payments” made to overseas businesses, and was eroding the country’s tax base.

Speaking about the new transfer pricing guidelines from the Organisation for Economic Cooperation and Development (OECD) at a seminar in Johannesburg this week, Manik said the figure included almost R80 billion in so-called management fees paid overseas from South Africa.

Last month, SARS participated in the OECD talks that drew up measures to reform international tax rules to deal with such base erosion and profit shifting, which were given the thumbs up by G20 finance ministers at their meeting in Lima, Peru.

Manik said that profit shifting was one of the most common means of eroding the tax base, adding that addressing base-erosion and profit-shifting developments was crucial because international tax, which was more than a century old, needed to be revised.

“International tax rules have not kept apace. It was conceived at a time when we had largely a bricks-and-mortar type of business and environment of trade.

“Today, we live in a digital, globalised world. You can move money [and] goods all over the world. Even physically, the goods may not move, but it’s easy to move from one jurisdiction to the next. That’s been part of the disconnect, that you now have an international tax system that’s pretty much out of date,” said Manik.

She said although multinationals derived real value in their operations in South Africa, the country was not seeing that value, as business was driven by profit making and the bottom line, and tax practitioners were under constant pressure to lower costs and increase revenues.

“That’s a challenge because the reality is if, in South Africa, there’s been a lot of activity taking place, you utilise the resources of this country, significant work is happening in this country – value-adding work – but you’re not paying any taxes … after a while, it’s going to significantly distort South Africa’s tax base.

“In the old days, you’d complete most of the supply chain in South Africa and didn’t even focus on the rest of the world. Today, most of the supply chain is fragmented around the world. That’s the reality of why there’s a need [among companies] for base erosion and profit shifting.

“Tax practitioners see an opportunity and they’re going to take advantage of that opportunity. There’s a disconnect between where real value and creativity is created versus where profits are being paid. So you end up with the situation where you have a cash box sitting in Bermuda funding the whole multinational and profits being paid to Bermuda, but all we have in Bermuda is a man and a dog, possibly on a nice beach,” said Manik.

With increased demands and pressure on the country’s coffers for infrastructure, service delivery and recent demands for free education, South Africa could no longer afford to allow multinationals to erode the tax base by shifting profits, said Manik.

“People demand and expect more. That is a reality. Where are you going to get this ‘more’ if you’re bleeding billions? It is a serious problem,” said Manik.

Annet Oguttu, chairperson of the base-erosion and profit-shifting subcommittee of the Davis Tax Commission, told the conference that multinationals required clear tax policies, but tax laws were not sufficiently developed to counter base erosion and profit shifting in a tax-treaty context.

This article first appeared on fin24.com.

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