Poor countries worry that developed nations drive tax agenda

EFFORTS by rich countries to find international solutions to prevent the erosion of a country’s tax base are being met with suspicion and cynicism from poor countries, tax experts warned at the annual Tax Indaba in Sandton on Tuesday.

The base erosion and profit shifting (Beps) project was set in motion in 2012 by the Group of 20 (G-20) countries following concern about practices used by multinational companies to shift huge chunks of profits to low-tax jurisdictions.

Some of the more aggressive business models meant that large multinationals in some instances paid little or no tax.

The Organisation for Economic Co-operation and Development (OECD) has been mandated to find solutions for Beps and its 15-point action plan will have to be implemented by the end of this year.

Annet Oguttu, a member of the Davis Tax Committee and president of the South African Institute of Tax Professionals, said it appeared as if the opportunity to reform the international tax system had been lost.

Ms Oguttu said that although huge strides had been made to address base erosion, developing countries remained concerned that the agenda was being driven by developed countries.

Developing countries were only engaged after the agenda had been drawn up. The rules that were now being written were done by a few countries, and it had the potential of compounding global inequality, she warned.

SA has been implementing various anti-avoidance measures to curb the erosion of its own tax base.

The concern and criticism that had been laid before the OECD’s door was that it did not re-examine the basic principles of the international tax system, Ms Oguttu said.

“It (Beps) has mainly been about strengthening existing international tax avoidance measures to make sure they are more effective in an era of modern business models,” she said.

Taxpayers had over the years been able to manipulate these measures, she said. “The question is whether it will help to strengthen them any further.”

PwC international tax services partner Osman Mollagee said one of the fundamental issues that had not been addressed was the question of taxing rights between source and resident based countries.

The question was whether the income should be taxed where it was generated (source) or where the company made its decisions and had its head office (residence).

Residence as a basis for allocating taxing rights had traditionally favoured “capital export” or the richer countries.

However, developing countries preferred the source base in allocating taxing rights, where they wanted to have the income taxed where the activities took place, Mr Mollagee said.

The issue has been debated for many years, but it does not form part of the OECD’s debate.

“The question is whether developing countries are happy to continue with the Beps project on the basis that there will be a post-Beps era where the source versus resident base debate will be taken up again,” Mr Mollagee said.

There is the concern that following the implementation of the action plans to prevent Beps there may no longer be any interest in pursuing the debate.

“I think we have to work together, but one should not underestimate the cynicism and the lack of trust between the poor and the rich world,” he said.