As investment in Africa continues to increase there will be a significant debate by the authorities on the best tax system and collection mechanism. This is according to Frits Litjens, PwC Global Tax Service Networks Leader.
Globally, companies can expect the tax authorities to toughen up their enforcement measures and focus on compliance levels as the economy emerges from the recent economic uncertainty.
“Certain policies, such as transfer pricing, are key potential growth areas for governments around the world to increase their revenues, and this is more particularly true in the emerging markets as they are in the process of developing tax systems,” says Litjens.
Discussions between PwC Tax Services and multinational companies suggest that transfer pricing will in the next five years be the single most significant tax risk facing them while doing business in Africa, says Litjens.
Complying with pricing rules
Transfer pricing is the price at which transactions between units of a multinational firm take place, including intercompany transfer of goods, property, services and loans. Without regulation, pricing may be used to shift profits between countries. Companies are required to comply with the pricing rules, and also to thoroughly document inter-company transactions.
The laws affect South African taxpayers with offshore operations such as foreign subsidiaries and holding companies. In Africa countries such as South Africa, Tanzania, Namibia, Kenya and Mozambique have introduced transfer pricing legislation. Other jurisdictions tax multinational companies’ under the anti-avoidance provisions of their domestic tax laws.
Litjens says that transfer pricing and thin capitalisation is increasingly becoming a risk area for companies as a result of an increase in audit activity from the authorities.
“Companies need to ensure they adequately prepare transfer pricing documentation on a co-ordinated basis. It is vital for companies to keep documentation of cross-border transactions within the organisation,” he warns. “But likewise, it is equally important that governments play by the internationally accepted rules when assessing transfer pricing.”
Paul de Chalain, Head of PwC Tax, Southern Africa says: “Although tax issues are debated at some level by the board, they are clearly not being given the degree of importance they deserve. By establishing tax at the heart of a company’s strategic agenda, it will be able to operate effectively in difficult economic circumstances, particularly when increasing demands are made on an organisation by the government to be tax compliant.”
While in South Africa, the King 3 Code on Corporate Governance does not address the issue of tax directly, its requirements are designed to facilitate risk management including tax risks. Mervyn King, chairman of the King Committee, has pointed out that accountability and transparency of the board are paramount.