Nations around the world are putting plans in place to rein in tax-avoiding multinationals and the South African Revenue Service (Sars) has published draft rules for transfer pricing documentation.
But some industry stakeholders say South Africa is asking too much.
The requirements for transfer pricing documentation are part of 15 measures put forward by the Organisation for Economic Co-operation and Development (OECD) and the G20 in October as part of its base erosion and profit-shifting (Beps) project to zero in on tax avoidance by multinational corporations and super-rich individuals. Several nations, including South Africa, are committed to implementing the plan.
Transfer price abuse is when a price is adopted for bookkeeping purposes to value transactions between affiliated enterprises at artificially high or low levels, according to the OECD.
Tax avoidance has come under the global spotlight and several multi-nationals have been harshly criticised for avoiding tax. Most recently making headlines is Google. The United Kingdom’s revenue and customs services, following a long investigation into the company’s tax affairs, agreed on a £130-million settlement in back taxes on a decade of profits made in the country by the multinational tech company. But the British government will still allow Google to continue booking £5-billion in British sales through a controversial Irish tax structure.
The arrangement has been described as a sweetheart deal. The Guardian this week reported that pressure is now mounting on the European Commission to launch a full investigation of it.
But developing countries are thought to suffer more because of tax avoidance. About $1.1-trillion flowed illicitly out of developing and emerging economies in 2013, according to Global Financial Integrity. GFI ranks South Africa as seventh in the world when it comes to the highest average illicit outflows between 2004 and 2013.
But signatory nations must now put plans into action as a number of deadlines loom. The draft notice issued by Sars on December 15 last year set out record-keeping requirements for transfer pricing transactions and invited comments to be submitted by February 5 this year.
But as three of the big four auditing firms put the finishing touches on their comments to the taxman this week, they noted some concerns about the requirements in their current form.
The draft notice proposes an extensive list of compulsory record-keeping requirements relating to cross-border transactions carried out by South African multinational companies with a consolidated turnover of R1-billion or more.
David Lermer, the global tax network leader of PwC Africa, said the draft notice should be aligned with international best practice but, in this case, it has gone too far.
“There is cause for concern in the detail required. To keep extensive records of a potentially affected transaction is distinctly uncommercial, economically unsound in the current market climate and costly for multinationals to comply with in the proposed form. There needs to be a more commercial balanced approach,” he said.
For example, Lermer said, the draft notice requires South African taxpayers to provide information regarding key value drivers supported by independent industry research findings or reports.
“For large South African outbound companies, this represents a significant problem as independent industry research findings or reports may not necessarily exist for certain countries and industries, especially in Africa.”
Because the notice does not contain materiality thresholds, it means extensive supporting documents and information would be needed for every transaction regardless of value or importance.
Lermer said, in terms of the reporting requirements, the OECD itself has said it is important to balance the usefulness of the data with any increased compliance burdens.
In a report written by Billy Joubert, the tax director of Deloitte, he said full compliance with some of the requirements will be a significant burden on taxpayers. “It is also questionable whether this information is always necessary or helpful.”
Joubert said one particularly onerous compliance requirement requires extensive documentation for cross-border loans or other financial assistance.
“Intragroup financial assistance can arise merely because the South African head office gives the foreign group company a small amount of working capital or slightly extended credit terms,” Joubert said. “This would typically be during a start-up phase. In such a case, the reasons for the financial assistance are usually easily explainable and the value of the transaction simply may not justify such extensive analysis.”
Another requirement when financial assistance is involved is to prepare contemporaneous financial forecasts for the mere purpose of an intercompany loan, which may be considered unreasonable by some taxpayers, said Justin Liebenberg, the international tax director of EY Africa.
Lermer agreed: “The information requested in the context of financial assistance is also onerous, and, in certain instances, for example, where there are frequent movements in outstanding loan balances, it will be very difficult, if not impossible, to retain and provide the information set out in the draft notice.”
South African taxpayers who choose to prepare transfer pricing documentation typically do so in accordance with the 2010 edition of the OECD transfer pricing guidelines. These cover most of the “topics” listed in the draft notice issued by Sars, Liebenberg said.
“However, the level of detail that is required as per the draft notice may exceed the level of detail that is observed in a ‘typical’ transfer pricing documentation report, depending on how you interpret some of the items in the draft notice.”
Among the many requirements, the draft notice asks that, where a tested party (the party to a cross-border transaction that has been selected for the application of a transfer pricing method) is tax resident outside the country, it must provide documentation of its contracts and commercial invoices, with customers and suppliers, and segmented financial information for such transactions. This, Liebenberg said, can be cumbersome for South African taxpayers and also raises questions about confidentiality and other practical challenges.
The nonprofit African Tax Administration Forum said it could not comment on the domestic tax matters of its member states.
“If you can’t implement a law or requirement, then it’s a bad law,” Lermer said. “You have to be able to police it and people have to be able to comply with it. If you can’t comply with it without significant cost, or at all, it will undermine the whole objective.”
Action 13 of the Beps deals with guidance on the implementation of transfer pricing documentation and country-by-country reporting.
The October report described a three-tiered standardised approach to transfer pricing documentation, which consist of a “master file” containing standardised information relevant for all multinational entity group members, a “local file” referring specifically to material transactions of the local taxpayer, and a country-by-country report containing information relating to the global allocation of the multinational entity group’s income and taxes paid, together with indicators of its location of economic activity.
But the firms have noted that the draft notice does not make mention of the master or local file and does not detail how country-by-country reporting will be implemented in South Africa.