South African Activists Want Public Tax Disclosure In Mining

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By Edwin Naidu

Tax justice campaigners in South Africa plan to press the government for a review of the tax system to permit public reporting of companies’ taxes paid and profits earned in each country of operation, particularly in the mining sector.

Activists are gunning for the mining sector because they consider that the disclosure process in the country-by-country reporting for multinational companies doesn’t take into account the broader public interest issue of disclosure of tax information.

“We want to put pressure on the government to put in place a process to allow mandatory reporting for disclosure in the mining sector by 2020 because there are documents available relating to commitments made, when they received permission to mine in the country, that they should be held accountable to,” said Thembinkosi Dlamini, chairman of the Publish What You Pay South Africa Coalition.

The coalition, launched in October 2016, is made up of approximately 20 influential organizations, including the Centre for Applied Legal Studies at Wits University, Economic Justice Network, and Mining Affected Communities United in Action, among others.

Top Mining Jurisdiction

South Africa is the world’s largest producer of chrome, manganese, platinum, vanadium and vermiculite, and a major supplier of gold, coal, iron ore, nickel and uranium, with an estimated worth of 20.3 trillion rand ($1.6 trillion).

Dlamini, who is also a senior official with Oxfam South Africa, told Bloomberg BNA Feb.17 that compliance documents produced by mining firms, which include reporting on their environmental impact, demonstrate that there is a body of undisclosed information that should be made available for public scrutiny.

“Furthermore, our view is that profits for mining that takes place in South Africa before the product is sent to Switzerland and finally produced in London, should be attributed to the country of origin,” he said.

The coalition plans to lobby the government directly and through the Davis Tax Committee, which is currently conducting a review of the country’s tax system.

Aggressive Transfer Pricing by Multinationals

The Cape Town-based Economic Justice Network supports the coalition’s push for more tax reporting transparency in the mining sector. However, its programs manager, Mandla Hadebe, wants more disclosure across the tax landscape.

Over the past few years, there have been significant changes to the South African legislation relating to transfer pricing, but these changes haven’t gone far enough to address the aggressive transfer pricing practices employed by multinational companies to enjoy preferential tax treatment in a low-tax jurisdiction, according to Hadebe.

“While we continue to see focused, albeit limited, transfer pricing audit activity from the South African Revenue Services, capacity constraints has led to a lack of momentum around legislative progress. Delays in providing clarity around legislative changes and the ongoing delay in addressing an advanced pricing agreement program are symptomatic of this,” he said.

Hadebe added that certain intra-company transfers pose some level of transfer pricing risk and if such information is subject to mandatory reporting with the rest of the company’s financials, SARS officials could easily refer the company for further inquiry. SARS could also place the company on the priority list for audit, which would act as a deterrent to would-be offenders.

More Disclosure of All Taxes Sought

Duane Newman, the Johannesburg-based joint managing director of Cova Advisory & Associates, told Bloomberg BNA that “the end game needs to be more public disclosure of all taxes in a structured way which would mean an overhaul of the accounting tax disclosure standard.”

Newman said that the IAS 12, income tax accounting disclosure standard, which has been in place and undergone several revisions since April 1978, covers only corporate income tax while disclosure would reveal far more than is visible.

“The standard should cover all tax types—customs, VAT, PAYE, etc. This would help a reader understand what a company’s real tax contribution is to the economy. Income tax is only paid once a company is in an income tax paying position, which can be many years after an operation is up and running due to normal tax deductions allowed,” he said, noting that other taxes like value-added tax and pay-as-you-earn are contributions to the tax pot from day one.

Corporate Tax System Review

The government appointed the Davis Tax Committee on July 17, 2013, to conduct a review of the corporate tax system with special reference to tax avoidance measures such as base erosion, income splitting and profit shifting, including the tax bias in favor of debt financing.

But Newman said that there currently is a mismatch in respect of tax collection.

“Tax authorities need to manage all the taxes they collect—this is clear every year in our national budget process, while companies are only reporting on their income tax contribution to the tax authorities—which in South African context is only 20 percent to 30 percent of total tax collections,” he said.

Newman said South Africa could take a leadership role in this process as it has done in governance with King IV and he believes more is likely to be done in this regard.

King IV refers to a report on corporate governance by the King Committee in November 2016.

Anti-Avoidance Versus Pro-Investment

Keith Engel, the chief executive of the South African Institute of Tax Professionals, told Bloomberg BNA that the Davis Tax Committee could still recommend a tightening of the regulations to target avoidance but in accordance with Organization for Economic Cooperation and Development requirements.

Engel said that while the battle against base erosion and profit shifting has been going on since 2008, the National Treasury seems to have adopted an anti-avoidance focus instead of a pro-investment one so a slight tightening can be expected.

“The biggest cross-border target area relates to tax treaties but South Africa is likely to adopt OECD multilateral approaches to target avoidance. Multilateral treaty options and interpretations will be quickly adopted. New treaties will follow OECD recommendations fully,” he said.

Progress on OECD Standards

Kyle Mandy, a tax partner and director of PwC Africa, told Bloomberg BNA that South Africa has already made progress on meeting provisions in line with OECD requirements.

Osman Mollagee, also a tax partner with PwC Africa, told Bloomberg BNA that South Africa has complied with OECD requirements in three key areas: coherence, substance and transparency.

“The over-arching themes around coherence, substance and transparency indicate that South Africa has nailed its colors to the mast, and will be implementing as many of the OECD regulations as it can,” he said.

The Davis Tax Committee was unavailable for comment on the timing of its tax reform proposals but in a presentation to parliament on Nov. 29, 2016, the Committee said that as part of its proposed changes, it intends to:

  •  address the digital economy;
  •  neutralize hybrid mismatch arrangements, under which differences in countries’ rules are exploited to obtain double deductions, or to avoid recognition of income in both jurisdictions;
  •  counter harmful tax practices and prevent treaty abuse;
  •  reexamine transfer pricing work on intangibles, documentation and country-by-country reporting; and
  •  develop a multilateral instrument to enable implementation.

In an e-mail response, SARS spokesman Sandile Memela, said the final version for record-keeping requirements for multinational enterprises was published Oct. 28, 2016.

“In as far as recent BEPS developments are concerned, the regulations specifying the changes to the country-by-country (CbC) Reporting Standard for MNEs required for South Africa were published in their final form on 23 December 2016,” he said.

The deadline for comment on taxation to the Davis Tax Committee is March 31.

To contact the reporter on this story: Edwin Naidu in Johannesburg at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The call for comment by the Davis Tax Commission regarding its corporate income tax probe is at http://src.bna.com/mnF.

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