The global tax [r]evolution

One of the consequences of operating in an increasingly globalised and digitalised world, is that borders blur and taxing rights between countries become a hotly contested topic. The crux of the matter is that every country seems to want a bigger slice of the “profit pie” from multi-national enterprises operating in country.

In a slowing economy when tax collections decline below expectations, it is no wonder that the focus shifts to perceived erosion of the tax base. In recent months, Base Erosion and Profit Shifting (BEPS) has occupied the agenda of high profile international bodies such as Oxfam, OECD, Action Aid, and ATAF.

Fuelled by the perception that multi-national enterprises in particular, operating in country are sophisticated taxpayers who have access to the best “tax brains” in the world, revenue authorities seem to have adopted the mind-set that multi-national enterprises should be scrutinised, as a matter of course, to ensure that they pay what is due.

The Council of the African Tax Administration Forum (ATAF) seems to have taken on the role of communicating Africa’s position globally on the subject and mobilising resources across 36 countries on the continent of Africa to fight the cause. More countries are likely to join ATAF so that their voices can be heard more loudly.

The role of regulators in helping to provide a stable framework within which businesses can operate effectively cannot be emphasized enough, in light of this changing tax landscape and the rapidly increasing tax ‘competition’ among jurisdictions. Until recently there has been a worrying divergence between countries when it comes to articulating tax policy and drawing up and implementing their respective tax legislation. This has created uncertainty for businesses trying to conduct trade across borders as efficiently and profitably as possible – but also opened up loopholes which can be exploited.

The new equilibrium in the global tax environment has resulted in actions on the part of policy makers, regulators, revenue authorities and taxpayers which can be best described as the “Global Tax [r]Evolution” – this, in reference to topics such as the “responsible” tax agenda, change in tax authorities’ approach to interpretation of existing tax law and tax treaties, unilateral tax law changes, and the OECD BEPS action plan. The timing of each of the respective challenges for businesses is increasing too and their impact permeating across areas such as stakeholder engagement and brand protection, increased tax audits and adjustments, possible double taxation, increased complexity and compliance.

Over the past five years, Deloitte has commissioned biennial research with global tax decision-makers in response to the changing global market dynamics. With over 1,000 organizations surveyed, Deloitte’s recent Global Multi-national Survey found that 52% of organizations cite BEPS and OECD legislation as their biggest area of concern. And 93% of respondents agreed media and political interest in tax in their country had increased, while 74% said their organisations were concerned about increased media, political and activist group interest in tax.

It is clear that successfully navigating the new global tax environment is becoming riskier and more challenging for multi-national enterprises that do not plan properly for all eventualities. Only those that develop strategies to respond to current and anticipated tax changes, assess and quantify tax risks so they can identify key focus areas and improve their stakeholder management, will be able to ensure they are not thrown off course.

No doubt an increase in cross-border trade is one of the best ways to ensure more stability for regional economies – but it cannot happen in isolation. A joint effort is needed and then the desire to make it happen needs to be evident. In a significant move, the Commissioner for the South African Revenue Service (SARS) in July this year facilitated a forum of Tax Commissioners from Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zambia, to discuss how these countries can work together to prevent tax base erosion and illicit tax outflows. Commissioner Moyane made it clear that a system that can automatically exchange information when cross-border deals take place will go a long way to stamping out the increase in illicit trade.

Collective cross-border tax strategies between South Africa and its neighbouring countries are about to signal a paradigm shift in the way business is conducted in the sub-region.

South Africa and its neighbours have realised that it is absolutely critical that they take joint action – where most of the cross-border trade takes place – to stamp out corruption. Incidentally, the next meeting of this body of Tax Commissioners is expected to be held in October 2015, within 3 months of the first meeting, which shows the commitment to this initiative. Multi-national enterprises operating in these regions need to be prepared to reconsider the way they too regulate their tax and legal affairs.

Not only did it culminate in a joint statement that makes some extremely important recommendations, but it significantly lifts the level of tax rhetoric and commitment to change in Africa. South Africa’s recently appointed Commissioner for SARS, Tom Moyane, must be commended for starting the conversation, together with his peers across the sub-region who seem more willing than ever before to make changes that will improve tax certainty for the business world and tax collections.

A study of the recent statistics in this regard highlight just how severe the problem has become.

The OECD last year released a significant study called “Illicit Financial Flows from Developing Countries: Measuring OECD Responses”. It was the first report to measure how well countries are performing in their fight against illicit financial flows. In the report the OECD says an estimated $1 trillion is paid each year in bribes and reducing bribery reduces the opportunities for illicit gains, and hence illicit financial flows.

The International Monetary Fund recently released a working paper, which said the cost of multi-national enterprises deliberately avoiding tax exceeds $200 billion per year.

And a report by the African Union on illicit financial flows said $60 billion was tapped from the African continent on an annual basis.

The increase in the tax and regulatory burden seems to continue unabated and multi-national enterprises that can best navigate the changes brought about by the Global Tax [r]Evolution will continue to enjoy the rewards on offer on the continent. Those that do not, will get lost in some very stormy waters.