by Ingé Lamprecht
Managing tax base erosion and profit shifting in a new world order.
What do Apple, Google and Starbucks have in common?
The US? Right. Adored by many South Africans? Right again.
Moreover, these companies have all recently been under fire for not “paying their fair share” of taxes, especially in the UK. Yet they have all emphasised that they are following the tax laws to the letter.
The issue here is base erosion and profit shifting (BEPS). The OECD Centre for Tax Policy and Administration’s website explains that this “refers to tax planning strategies that exploit loopholes in tax rules to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where they are lightly taxed, resulting in little or no overall corporate tax being paid.”
The centre stresses that while BEPS is legal in most cases, it is relevant because it distorts competition, may lead to an inefficient distribution of resources and raises questions about fairness.
Speaking at PwC’s tax dialogue, Cor Kraamwinkel, associate director corporate international tax at PwC, says fundamentally, there is a deficiency in the modern tax system – it is not capable of adequately dealing with an industry largely based on intangibles such as brand names and trademarks.
Kraamwinkel says this leads to a situation where the layman might question the tax result of a company, as it “seems strange” at first glance. However, from a technical tax perspective, there is nothing wrong with the tax paid.
Managing the reputational damage
Marcus Botha, senior manager, Johannesburg at PwC, says the interesting thing is that politicians and the public, who do not necessarily have a tax technical background, are mainly the ones asking questions about the fairness of the amount of tax that companies are paying.
Botha says there is now a reputational risk that companies that are paying taxes in different countries will have to manage, even though they have been compliant with tax laws.
He says in assessing the tax risk, there are a whole host of questions that come into play – one of which is a company’s tax policy.
Botha says asking these kind of questions brings about a complete shift around tax thinking, “because it is not just a compliance issue any longer – it now turns into an ethical debate in looking at how do you manage your reputation and how the company is going to approach the contributions that they make around total taxes – not just corporate tax – to the jurisdictions that they operate in.”
He says because the different countries are competing against one another, they have created a shift and an imbalance between the different tax systems. Companies are now using that to their advantage to minimise their tax liability, “which is not wrong but it might not be completely fair depending on who the stakeholder is that is looking at it,” he says.
But this does not mean that corporates should be obliged to pay tax on the basis of vague concepts such as fairness and morality.
However, until the international tax regime in the different jurisdictions is adapted to create a balance, companies will have to start thinking about their tax planning and how they are going to disclose it. They will also have to examine their policy and strategy to fill the gaps between what they are doing in terms of the letter of the law and what the public is expecting, he says.
Charles de Wet, leader for indirect taxes in Southern Africa at PwC, says one wonders whether there has not been a massive failure by the tax policy-makers.
He says policy-makers should have dealt with the issue of BEPS in advance since they knew that they were going to be under pressure from a revenue perspective in the aftermath of the economic recession.
De Wet says corporates should refrain from paying taxes that are not due.
“I think directors have to be responsible and I think it is irresponsible to pay taxes that are not due.”
However, companies need to take account of other stakeholders such as the public and its perception, labour and regulatory authorities, but should not overplay the issue, he says.
De Wet says policy-makers should find efficient processes to deal with the inefficiencies in the law