Speaking at the African Tax and Business Symposium, Kyle Mandy, head of national tax technical at PwC South Africa, said this week multinationals with companies operating in Africa have probably already experienced evidence of the new regime, especially with regards to transfer pricing.
The transformation follows efforts by the Organisation for Economic Co-operation and Development (OECD) to counter base erosion and profit shifting (BEPS), which resulted in an ambitious action plan in July this year.
Base erosion and profit shifting (BEPS) has been in the spotlight following accusations that large multinationals such as Google, Apple and Starbucks have not been paying their “fair share” of taxes.
Mandy says BEPS is the shift of profits – by multinationals and during cross-border transactions – from high-tax countries to low-tax countries by exploiting loopholes and mismatches between them.
BEPS is not illegal, but results from the fact that many businesses are now truly global and their tax strategies are aligned with their global operations.
There has also been significant changes in technology. Businesses no longer need a physical presence in an economy in order to operate there. Google and Apple are examples of this. Moreover, the most valuable assets of the multinational are not necessarily fixed in one location – assets such as intellectual property and even people can be moved between jurisdictions relatively easily.
Additionally, business cycles have become more complex which makes valuing the profits that should be attributed to each of the cycles difficult.
Yet, domestic and international tax laws have not kept up with these changes.
The way forward
Although the OECD’s action plan has a 30-month timeline , Mandy says it is more likely to be five years.
In the meantime, African tax authorities will probably focus on key issues like transfer pricing, the source and permanent establishment concept, withholdings taxes and deduction restrictions. There has already been movement and changes on a number of these fronts in certain African countries, including South Africa since 2011.
Osman Mollagee, tax partner in the international tax services team at PwC, says they are expecting a significant change with regards to implementation, rather than legislation.
Mandy says if the OECD’s proposed action points are implemented, legislation will likely be complex and difficult to enforce. Other African tax authorities will probably need assistance with the complexity, he says.
Mollagee says the biggest shift over the next three years will be the growth in exchange of information. So a multinational company without a defined tax policy or strategy, that doesn’t deal with tax at a boardroom level, will face headwinds, Mandy says.
Companies need to look at the potential risks – not just around technical issues but also around reputational issues. Moreover, tax structures have to be sustainable.
The journalist attended the Africa Tax and Business Symposium in Mauritius as a guest of PwC.