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Debate on base erosion and profit shifting heats up

Sep 19 2016 18:27
Carin Smith

Cape Town - Base erosion and profit shifting (Beps) will be one of the hot debates at the upcoming World CFO Congress taking place in Cape Town in November.

The event is organised by the global body for chief financial officers (OFSs), the International Association for Finance Executives (IAFEI), in response to the pressures faced by CFOs in the face of heightened government scrutiny on the tax affairs of multinational companies.

Speakers will discuss how to improve the implementation of international standards on transparency, for instance. The recent European Union ruling against Apple - which allegedly benefitted from €13bn of tax benefits in Ireland - is an example of the kind of situations to be dealt with.

Nicolaas van Wyk, CEO of the Southern African Institute for Business Accountants (SAIBA) and also a board member of IAFEI, told Fin24 that governments around the globe are fiercely competing to increase their share of the taxes that can be generated from corporate profits.

“This is causing extreme challenges for the world’s CFOs. They are accountable to the shareholders and obviously are interested in building their business in environments with the most favourable tax codes. However, governments do not always see it this way. The World Congress in Cape Town will seek to build an understanding between governments and multinationals to ensure a fair tax system that can drive economic growth,” said Van Wyk.

“What has become clear is that, as competition among governments to claim resources increases, multinational CFPs have to negotiate a myriad of complex tax codes to ensure compliance. This takes away from their ability to navigate their way through the global recession.”

He said that, from a corporate perspective, there is a significant difference between legitimate tax planning and tax evasion. However, what is allowed in one country is frowned upon in another.

"What needs to happen is that governments should agree on clear tax policies and allow corporates to work in this framework unhindered. Corporates are still the main employers in the world. We should give them the benefit so they can produce and deliver,” he said.

He added that base erosion and profit shifting are significant issues that are affecting developing nations more severely. It is not that corporates stand aloof to the plight of these nations, but they are faced by pressures from across the globe for the same tax resource.

“We would like to see – from an accounting perspective – more clear rules on financial reporting to enhance disclosure on where revenues are generated, where the profits are made and where the taxes are paid,” he said.

“We have made submissions to the local Financial Reporting Standards Commission (FRSC). The FRSC is taking up the baton with the global standard setting authorities in order to clarify this issue. They have submitted our request to the International Accounting Standards Board (IASB)."

He said the summit this November provides an opportunity for the Brics nations and developing countries especially in Africa to have their voices heard and shape the current tax policy discussion.

“Then we can submit a CFO perspective to the current debate rather than continue to play the blame game as that does not help anyone. We need clarity and less government competition for the same tax dollars. That is why we want to add our voice to the debate,” said Van Wyk.

Keith Engel, CEO of the SA Institute of Tax Professionals (Sait), will be one of the speakers at the congress. He told Fin24 that the reason why Beps has become such an important topic, is that governments are short of revenue and, therefore, trying to find leakages rather than raising tax rates.

"It is a turbulent landscape and on top of that the US is now becoming more distant about Beps as it is afraid Europe will take tax from them," explained Engel.

He added that in Africa leakages are very different to that in Europe. The biggest problem regarding South Africa's situation in this regard, is that there are still a few remaining "generous" tax treaties with countries like Switzerland, Luxemburg, and Netherlands.

"Some companies are complying and some are not so the key is for the SA Revenue Service (Sars) to pick the right ones to audit. There is no one size fits all regarding Beps. It is not a legislative problem. You just have to find it on an enforcement level," said Engel.

"The question is the level of enforcement. So-called transfer pricing is difficult to enforce and need a lot of special skill and training."

Transfer pricing is defined by Wikipedia as "the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise".

In Engel's view, SA could be focusing on elements such as how to improve the implementation of international standards on corporate transparency and compliance. It essentially relates to how much money a company made in a particular country and how many employees they have there, for instance.

Apart from addressing transfer pricing, which in his view SA should be building much more expertise in detecting, the other gap to address is so-called leakage by high net worth individuals (HNWIs), family groups and individuals.

"They try to park their money in a safe place and use shell companies so governments cannot see the trace. It is basically hiding ownership. Multinationals cannot hide ownerships, on the other hand. They can only create disparity between what they report to government and what they report to shareholders," explained Engel.

Engel said CFOs need to be more mindful of how they do things. They have to ask if something will pass the public perception test. Secondly they have to get much better regarding the compliance system.

"Yes, pay the tax, but figure out who it belongs to and that is the headache many multi-nationals now face as well as facing the headache of potential double taxation," said Engel.

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brics  |  taxes

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