The Taxman – An Unlikely Movie Star
What do the Toronto Film Festival, Burger King, the G20, Scotland, the United Nations, President Obama and the 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. Case in point, at the recent Toronto Film Festival, where Harold Crooks “The Price We Pay” was 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 shows that tax is becoming an issue on which social commentators are making their mark.
US President Barack 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, such as Canada. Obama accused fast food chain Burger King of being “unpatriotic” and branded them “deserters”, after they announced a merger with Canadian coffee chain Tim Horton’s Inc. which will effectively reincorporate them to Canada. These strong words show how sentiment about global tax structuring has become almost as strong…as it is about climate change.
Or 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{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. While it is important to have a competitive corporate tax rate, particularly for smaller economies, 17{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} is rather low – and this strategy would be likely to lead to a race to the bottom.
Recently the tax systems of 34 OECD countries were reviewed on over 40 tax policy variables by the International Tax Competitiveness Index (ITCI). Estonia was ranked first, and France emerged as the worst performing country. Estonia’s tax policy, with a low corporate tax rate of 21{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, a flat 21{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} rate on individual income, property tax that only applies to land (rather than to a property), and 100{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the foreign profit earned by domestic corporations exempt from the domestic tax system, outperformed it’s OECD counterparts. France did poorly because it has a high corporate tax rate of 34.4{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, 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 ITCI rating system penalises a country if it has an unusual array of tax incentives. SA has just such an offering, with companies being able to claim, for example, a 150{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} tax allowance on R&D expenditure, compared to countries that did well in the ranking – namely Estonia, Sweden, Switzerland, Denmark and Chile – which 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.
September also saw an update by the OECD of its Base Erosion and Profit Shifting (BEPS) work, which effectively promotes multi-national corporations (MNCs) paying their “fair” share of tax to the governments where they operate. Quite a few BEPS documents were released by the OECD in September, and may be adopted at the G20 Summit meeting in Brisbane, Australia, next month (November). While the OECD has put a positive spin on issues such as Country-By-Country Reporting (CBCR) there has been quite a lot of criticism by, inter alia, 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 MNCs and governments, so the information does not enter the public domain, and there are many conditions surrounding secrecy and confidentiality included in the OECD text. This would effectively mean, if the OECD approach is adopted, that MNCs will not be forced to disclose their 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 CBCR agenda is whether developing countries will be able to implement the new reporting system by the planned implementation deadline, 2018. While South Africa will most likely be ready, most other developing countries will not.
Another important issue which 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 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 be looking at more radical changes such as a unitary taxation model – where worldwide profits (and taxes) of an MNC are allocated to each country by sales, numbers of employees and assets, to ensure that taxes are allocated fairly. An interesting concept, but it needs considerably more thought. In the meantime, forward-thinking MNC executives should find it best not to disclose more information on taxes.
While global tax policy is being decided on by 44 large countries – including South Africa through our G20 membership – there is concern that many of the 100 developing countries are not invited. Even when the 44 countries take part, it does seem rather secretive. South Africa does need to consider how it provides leadership to ensure the process is more inclusive. The African Tax Administration Forum is expected to be a vehicle for this leadership.
Finally, the United Nations 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 (MDG) from the end of next year. It is feared that developing countries might have lost more than 2.5 trillion US dollars in tax revenues over the period of the MDGs, 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 impact your business? Remember many SA businesses are global and tax authorities are everywhere. Just ask Mark Shuttleworth, the latest man to do battle with the SA tax authorities.
This article was prepared for Business Report and is available here.