Tax becomes an unlikely star as it takes centre stage
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WHAT do the Toronto Film Festival, Burger King, the Group of 20 (G20), Scotland, the UN, US President Barack Obama and the Organisation for Economic Co-operation and Development (OECD) have in common?
In September, they all had something to say about tax. It seems that tax is rapidly moving up the agendas of all sorts of companies, countries and organisations.
At the recent Toronto Film Festival, where South African director Jyoti Mistry launched her movie Impunity, Harold Crooks’s The Price We Pay also premiered.
Among the issues it aired was whether tax avoidance may be immoral, but not actually illegal. While this film will probably not make it into the mainstream movie theatres, it does show that tax is becoming an issue on which social commentators are making their mark.
Meanwhile, Obama has made some strong comments about what is known as tax inversion – where companies decide to move their tax headquarters away from a high-tax jurisdiction, such as the US, to somewhere with a lower effective tax rate.
Obama accused fast food chain Burger King of being “unpatriotic” and branded them “deserters”. These strong words show how sentiment about global tax structuring has become almost as strong as it is about climate change.
Take the recent Scottish independence vote. The Scottish National Party (SNP) stated that an independent Scotland would use aggressive tax structures to attract new investment and that the corporate tax rate would be lowered to 17 percent.
While it is important to have a competitive corporate tax rate, particularly for smaller economies, 17 percent is rather low – and this strategy would be likely to lead to a race to the bottom.
The UK is not that well rated in terms of the recent international tax competitiveness index. The tax systems of 34 OECD countries were reviewed on over 40 tax policy variables.
Estonia was ranked first, and France emerged as the worst-performing country. Estonia did so well because it has a low corporate tax rate of 21 percent and a flat 21 percent rate on individual income. Its property tax applies only to land (rather than to a property) and 100 percent of foreign profit earned by domestic corporations is exempt from the domestic tax system.
France did poorly because it has a high corporate tax rate of 34.4 percent, high property taxes (including an annual net wealth tax), a financial transaction tax, high individual income taxes on dividends and capital gains, and an estate tax.
While South Africa was not included in this study, tax incentives are something I follow closely. The rating system penalises a country if it has an unusual array of tax incentives – such as research and development (R&D) tax allowances. South Africa has just such an offering, with companies being able to claim a 150 percent tax allowance on R&D expenditure.
Those countries that did well – Estonia, Sweden, Switzerland, Denmark and Chile – had no R&D tax benefits. South Africa seems to be moving in the opposite direction to the global leaders, with many amendments to the recent Taxation Laws Amendment Bill affecting tax incentives.
It would be an interesting exercise to see how South Africa would rank if we were included in the international tax competitiveness index.
September also saw an update by the OECD of its base erosion and profit shifting (Beps) work, which effectively promotes multinationals paying their “fair” share of tax to the governments of countries where they operate. Quite a few Beps documents were released by the OECD last month covering recent progress, which may be adopted at the G20 summit meeting in Brisbane next month.
While the OECD has put a positive spin on issues such as country-by-country reporting, there has been quite a lot of criticism by the Financial Transparency Coalition and the Tax Justice Network on whether this will actually be a major step forward in transparency.
A big discussion centres on whether the reporting of tax matters should be between multinational corporations and governments, so the information does not enter the public domain. There are many conditions surrounding secrecy and confidentiality included in the OECD text.
This would effectively mean, if adopted, that multinationals will not be forced to disclose detailed tax information in their annual financial statements. Because of this, there is a view that the OECD is promoting transparency – behind closed doors! This approach also seems to be supported by South Africa.
The other big issue on the country-by-country reporting agenda is whether developing countries will be able to implement the new reporting system by 2018. While South Africa will probably be ready, most other developing countries will not.
Another big issue that doesn’t seem to be moving very fast is the treatment of so-called harmful tax practices, which covers preferential tax regimes offered by specific countries. What is interesting to note, however, is that tax incentives on assets are not seen as a harmful tax practice even though they are used to attract investment and can erode the tax base.
Many critics believe the OECD needs to look at more radical changes, such as a unitary taxation model – where worldwide profits (and taxes) of an multinational corporation are allocated to each country by sales, numbers of employees and assets, to ensure taxes are allocated fairly. It’s an interesting concept, but it needs considerably more thought. In the meantime, I do encourage forward-thinking multinational corporation executives to disclose more information on taxes.
While global policy is being decided on by 44 large countries – including South Africa through its G20 membership – there is concern that many of the 100 developing countries are not invited. Even when 44 countries take part, it seems rather secretive, and I have observed this first-hand.
South Africa does need to consider how it provides leadership to ensure the process is more inclusive. I would expect to see the African Tax Administration Forum as a vehicle for this leadership.
Finally, the UN has concluded another climate change meeting, and it seems that tax is finding its way onto the UN agenda. While I can’t imagine another body being set up by the UN to deal with tax, there has been a proposal to specifically include tax in the new Sustainable Development Goals (SDG), which will replace the Millennium Development Goals at the end of next year.
It is feared that developing countries might have lost more than $2.5 trillion (R27.9 trillion) in tax revenues over the period of the Millennium Development Goals, so it is vital that the UN keeps an eye on global tax developments to ensure developing countries’ interests are looked after.
Closer to home, it is clear to me that tax should be moving up the boardroom agenda. Are you aware how these global tax developments could have an effect on your business? Remember, many local businesses are global and tax authorities are everywhere.
Just ask Mark Shuttleworth, the latest man to do battle with the tax authorities.
Duane Newman is the director at Cova Advisory & Associates. Follow him on Twitter: @Duane_Newman