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“Numbers Don’t Lie But People Do”

Published 9 years ago
By Forbes Africa

Governments all over the world lose billions in revenue from corporate tax evasion every year. In many instances, citizens in a country pay a proportionally higher rate of tax than multibillion dollar companies.

Despite this being a global pandemic, Africa suffers more than most.

While delivering his Nelson Mandela lecture in Johannesburg, Sudanese-British mobile communications entrepreneur and billionaire, Mo Ibrahim, said more money is lost from multinationals not paying tax, through what he calls fancy accounting, than gained from aid.

“Physics and numbers don’t lie, but people do,” he says.

The continent is blessed with resources: Oil in Nigeria; gas and mineral reserves in Botswana; Angola, Ghana, and South Africa; the Democratic Republic of Congo has diamonds and cobalt; Mozambique has natural gas. These resources alone could lift millions of Africans out of poverty.

Former United Nations secretary general, Kofi Annan, wrote that the continent loses a huge amount of money from the use of shell corporations, offshore companies and tax havens by multinationals which often divert their profits.

But Dylan Buttrick, an associate at Norton Rose Fulbright South Africa begs to differ—slightly.

“It is important to understand the distinction between aggressive structures that facilitate tax evasion, and corporations that have tax efficient structures as a result of tax planning. In a world of increased globalization and multinationals, offshore structuring and tax planning is to be expected and remains legitimate,” says Buttrick.

The lack of infrastructure and resources makes it difficult for tax authorities to track payments. Revenue authorities would benefit from more sophisticated collection systems and processes that would help these authorities in enforcing compliance.

According to The Elders, an independent group of global leaders, transfer pricing—the practise of shifting profits to lower tax jurisdictions—cost Africa $38.4 billion every year, a number which Buttrick says is difficult, if not impossible, to quantify.

He says in recent years, African authorities have increased their focus on compliance with transfer pricing.

Buttrick further says the practise in the market is to ensure that transfer pricing policies comply with the South African tax laws, this despite significant chances in recent times, leading to a perceived uncertainty in some circles.

“Most multinationals do not indulge in invasion, i.e. fraudulent reduction of their tax, but may reduce their taxes in a particular jurisdiction through the use of legitimate tax planning tools, but beyond what certain politicians or even the public may deem appropriate,” says Buttrick.

Buttrick says from an exchange control perspective, South Africa’s banking and reporting system is fairly sophisticated and cross-border payments are easily monitored. The inflow and outflow of capital from the country will need to comply with exchange control regulations.

The G20 plans to fight international tax evasion by multinational companies. They will exchange tax information and support the Organisation for Economic Cooperation and Development (OECD) in its plans to prevent multinational companies from avoiding tax by moving profits across borders. The new rules would force companies to pay tax in the countries where they make their money, instead of where the tax rate is the lowest.

Companies like Google, Apple, Amazon and Starbucks are reported to have perfected the art of using loopholes within tax regulations. MercoPress reports that these firms argue that they are doing nothing illegal and have a duty to shareholders to minimize tax payments to maximize profits.

The OECD says that some of the existing tax rules, created in the 1920s, were designed to avoid double taxation of companies operating in more than one country. But this is haunting the industry nearly a century later as these same rules are being used to create double non-taxation.

The G20 leaders agreed to an unprecedented deal to share information on individual taxpayers. They plan to start exchanging information on tax matters among G20 members by the end of 2015.

David Cameron, the British prime minister, says the new tax rules state that only advanced nations will sign on the deal, but it’s important that developing countries participate in sharing tax regulations.

Reforming the outdated global tax framework needs to occur, with governments across the globe working together. Regardless, one question still bothers me: should multinationals be taxed on the basis of where they are doing business or on the strength or weakness of their lawyers?

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Related Topics: #Democratic Republic of Congo, #G20, #Global pandemic, #Kofi Annan, #November 2013, #Oil, #Resources.