Global crackdown on tax cheats
When South Africa joined the heads of tax administrations from 45 countries who met in Moscow last month, the Forum on Tax Administration's final communiqué made a strong public statement on the global effort to combat tax evasion and avoidance: "Where we detect offshore evasion we share the information with our partners …
"We have developed tools to improve the gathering of information on cross-border financial transfers, to decode banking transactions and to identify the beneficial owners of complex structures.
"Three of our members [Australia, the United Kingdom and the United States] have obtained very significant data, revealing complex offshore structures and will now use this data to share information … Given the magnitude and complexity of the data, we will work together to analyse it. We strongly encourage closer inter-agency co-operation in the fight against tax crimes and in that regard, we have identified particular synergies, in combating tax and customs evasion and avoidance that we will fully exploit."
Over the past month the Guardian newspaper in Britain has led an important initiative in reporting on disquieting tax-morality trends among multinational corporations.
At the recent meeting in Cape Town of the World Economic Forum on Africa, Oxfam International estimated that the illicit financial outflow from Africa in the form of tax evasion and trade mispricing by extractive industries was about $200-billion each year.
The Africa Progress Panel, chaired by Kofi Annan, believes that the continent loses twice as much in illicit financial outflows as it receives in international aid.
"It is unconscionable that some companies, often supported by dishonest officials, use unethical tax avoidance, transfer pricing and anonymous company ownership to maximise profits," the Guardian reported on May 10, citing the panel's work.
On May 18, the newspaper went further: "Along with Amazon and, before that, Starbucks, Topshop, Boots, Vodafone, Goldman Sachs and Greene King, Google is the latest to have become the target of grass-roots hostility towards their aggressive tax-avoidance policies.
The actions of these corporations are not illegal, nor underhand … The debate is now raging over whether these companies are the happy beneficiaries of a tax system knitted with loopholes, or the malicious purveyors of smoke-and-mirror accounting."
On May 28, the Guardian reported that Her Majesty's Revenue and Customs (HMRC) in the UK "is investigating fresh lines of inquiry into Google's tax affairs" over its business practices in Ireland and Britain: "The documents handed over to the HMRC allegedly show how Google's London sales staff would negotiate and sign contracts with British customers, and cash was paid into a UK bank account, but the deals were technically booked through its Dublin office to minimise its liabilities [in the UK] … The row revolves around Google's use of its European headquarters in Dublin to minimise its tax bill in Britain.
"By booking all UK sales through Ireland, it handed HMRC only about £10-million in corporation tax for the period 2006 to 2011. It is able to record the revenues in Ireland because the UK company is deemed to drum up new business, with sales staff in Dublin executing all deals."
The South African Revenue Service (Sars) has identified transfer pricing by large corporations as a potential risk to our fiscus.
During the 2012-2013 financial year, 16 transfer pricing cases with audit results of just over R3.2-billion were finalised. The settlement of these cases resulted in revenue of R652-million being collected by the end of March this year.
Transfer pricing-related cases with potential audit results in excess of R6-billion are now being investigated. For this financial year, our focus will be on transfer-pricing practices in the mining, automotive, pharmaceutical and financial services sectors.
Specific attention will be given to the structuring of management fees, interest payments, service fees, royalty payments and the selling or transfer of intangible assets.
With emerging international trends towards better tax compliance, increased transparency and improved exchange of information, regrettably, it appears that many of the real fiscal risks from corporate tax avoidance or evasion find little resonance in the domestic media or among analysts and commentators. It is apparent that tax advisers from big accounting and law firms have come to set the tone, the agenda and the nuance in the debates about tax morality in South Africa.
We are rightly vocal about our disapproval of corruption and fraud. Yet we remain uncomfortably silent about aggressive or even illegal business practices that erode our revenue base on a very large scale.
When news emerged this week that South Africa had renegotiated and signed a new tax treaty with Mauritius, one financial daily carried the front-page headline: "Uncertainty arises over new double tax treaty". Its report and others, based on the views of a big accounting firm, placed a great deal of emphasis on the supposed uncertainty and potential for double taxation created by one development in the new treaty with Mauritius. This was alarmist and simply incorrect.
In practice, very few companies will be affected by the change in the "tie-breaker" rule in the new treaty, which decides a company's country of residence if it is a resident of both countries under their domestic laws.
Sars's experience is that dual residence for companies is uncommon, as most companies have their place of effective management in the country in which they are incorporated. This experience is echoed in the commentaries to the Organisation for Economic Co-operation and Development and the United Nation's Model Conventions, which both note that: "It may be rare in practice for a company … to be subject to tax as a resident in more than one state, but it is ... possible."
The use of a mutual agreement between two countries to resolve the question of dual residence is by no means unique to this treaty, or even rare internationally. The approach is explicitly recognised in the commentaries, which go so far as to provide draft wording and guidance on how to apply it should countries prefer to take a case-by-case approach to dual residence in their treaties. South Africa and its partners have adopted this approach in several treaties.
Even in the unlikely event that agreement cannot be reached, South African law permits tax relief for tax paid by a resident company in another country. The spectre of double taxation raised in media reports on the new treaty thus does not arise. Far from resulting in double taxation, the mutual agreement approach is intended to counter abuses of treaties that may result in double non-taxation. The new treaty with Mauritius takes an internationally recognised step in this regard and aligns the exchange of information between countries with current international best practice.
This latest experience emphasises that it is time for local media, analysts and commentators to reflect on the impact tax avoidance and tax evasion has on ordinary South Africans, the growing international outcry over this behaviour, and on the appropriateness of their approach.
Oupa Magashula is the South African Revenue Service commissioner