BY AMANDA VISSER, 07 SEPTEMBER 2015, 15:00
MULTINATIONAL companies are facing far more expansive and complex audits by tax authorities fighting over the same pot of profits as budget deficits continue to increase.
An inevitable outcome of efforts globally to prevent tax bases from erosion is double taxation and increased disputes over adjusted assessments by tax authorities.
Key tax experts in the US, UK and SA have warned that the lack of tax certainty and the aggressive behaviour of tax authorities, especially on transfer pricing policies, may affect real investments.
Diane Hay, PwC’s special advisor and global expert on transfer pricing, says the Organisation for Economic Cooperation and Development’s (OECD) base erosion and profit shifting (Beps) programme is aimed at getting rid of instances where companies pay no tax.
At the same time the OECD is aware of the risk of an increase in double taxation that may harm trade due to the overzealous behaviour of tax authorities.
Hay has been part of the formulation of transfer pricing guidelines and is a recognised expert on advanced pricing agreements, mutual agreement procedures and dispute resolution.
The OECD is expected to conclude its 15 point action plan to combat Beps by October this year. Transfer pricing has been a key focus of the Beps programme.
SA Institute of Tax Professionals deputy CEO Keith Engel says anti-avoidance measures against transfer pricing abuses have gotten slightly out of hand.
"Businesses choose a price based on operational needs as opposed to tax considerations. Admittedly there has to be transfer pricing rules, because of abuse with aggressing pricing practices."
However, Engel says governments have been given a "free licence" to audit and challenge multinationals on cross-border pricing
"This happens even if there is no evidence of a bad purpose and even if there is no possibility of profit shifting that could result in global reduction of taxes. This creates uncertainty and affects real investments," Engel says.
One of the OECD’s action plans deals specifically with the improvement of the dispute resolution process when two countries claim taxing rights on the same profits.
Hay, who has been head of the UK tax authority’s transfer pricing group until 2008, is currently in SA to get a better understanding of some of the key transfer pricing issues affecting multinationals in Africa.
She says the general feeling about the processes of mutual agreements procedures are not working very well. Under these procedures two competent authorities seek to reach agreement on who has taxing rights over the same profits when the normal rules give rise to double taxation.
KPMG global transfer pricing leader Sean Foley says many developed countries have been pushing for mandatory binding arbitration when competent authorities struggle to reach agreement.
He says in practice there has been very little success with mutual agreement procedures. The end result is an increase in double taxation and disputes.
"When a mandatory arbitration clause is part of a double tax treaty we have seen that countries do not want to lose control over the process by having an arbitrator deciding on their behalf. They tend to reach an agreement."
Hay says when the OECD considered improving the dispute resolution process as part of the Beps project it suggested mandatory binding arbitration. This suggestion was met with little enthusiasm, she says.
Key members of the Group of 20 (G-20) such as China and India, who are expected to sign up to Beps as a package, immediately said they would never allow mandatory binding arbitration.
They will allow some sort of arbitration, but not where it takes the power away from the national tax authority.
"That is a bit of a problem," says Hay.
South Africa’s official position on mandatory arbitration is unclear, but one would expect opposition given the strong Brazil, Russia, India and China (Bric) influence.
"I think there will be a lot of suspicion to put cases in the hands of an independent panel. It is going to be a step too far for many tax authorities," says Hay.
She says the "real trick" to get better dispute resolution is not mandatory binding arbitration, because that is really the "longstop".
"The real trick is to get better processes upfront, getting more resources into the process, getting more recognition for the difficulty of some of the positions that competent authorities find themselves in and speeding up the processes as much as possible."
Engel says that government resources for competent authority are very limited, especially since local transfer pricing specialists overall are in short supply.
Foley says another tool which is being adopted by countries, and which tends to create more tax certainty, is advance pricing agreements. This gives certainty to a company that its transfer pricing policy is in order.
"It would be preferable if South Africa could add that to its transfer pricing measures," he says. To date, SARS has held off on these measures due to the overall shortage of transfer pricing skills.
The SA Institute of Tax Professionals will be hosting a transfer pricing summit from 9 to 11 September in Johannesburg where issues facing tax authorities and multinationals will be discussed.