Multinational companies and tax transparency: what is changing?
Posted Tuesday, January 22 2013 at 02:00
A couple of weeks ago, PwC hosted the global paying taxes 2013 report in Uganda. Paying Taxes is a study which collects data across 185 economies, enabling tax reform to be monitored globally.
Alongside “Paying Taxes” is “Tax Transparency”, another study undertaken by PwC, which focuses on openness and transparency in tax reporting by businesses. This comes against the backdrop of the spotlight that multinational corporations (MNCs) are under for paying little or no corporation tax in some jurisdictions, particularly Africa.
Recently, the transparency initiative has gained momentum and as such, creeping but significant changes in fiscal policy largely affecting MNCs operating in Africa are expected. This will change the way in which MNCs report their taxes, including how some will be taxed.
Tax transparency has largely been driven by relentless campaigns by some Civil Society Organisations (CSOs) particularly for MNCs operating in the extractive industry (mining, oil and gas). They argue that if MNCs in Africa paid their fair share of taxes, poverty and the continent’s dependence on donor aid would reduce. The CSOs contend that Africa loses a significant amount of revenue through tax and transfer pricing abuse perpetrated by MNCs.
Governments in donor countries are now under pressure to act and curb this abuse. In 2012, the matter was tabled before the International Development Committee of the UK House of Commons. The UK government, a major development partner with many African countries, is being tasked to pass legislation that requires MNCs to be more transparent about the taxes they pay in Africa.
Recognising that transfer pricing abuse is one of the principal forms of cross border tax evasion, the committee was in agreement with most of the tax transparency measures that were proposed and recommended that some be legislated for. The measures include;
Country-by-country financial reporting: this would require MNCs to publish financial information on a country-by-country basis. Currently, international accounting standards do not require corporations to present financial information on this basis. The committee agreed with the view that requiring corporations to report their financial information on a country-by-country basis would enable irregularities to be more readily detected.
Already, a precedent was set in 2010 in the US by the Dodd Frank Act (a.k.a. Publish What You Pay), which requires US-listed companies in the extractive industry to report their payments to the government on a country-by-country and project-by-project basis. There are no reporting exemptions and disclosure is required for all payments over US$100,000.
Turnover based taxation rather than profit based taxation for the extractive industry: the committee recognised that while turnover based taxation should not normally be used, it may be the only reliable method of collecting corporate taxes for many revenue authorities with lower levels of taxation.
Automatic exchange of information between tax authorities: the committee recommended that requiring tax authorities to exchange information automatically with their counterparts in other countries would constitute a strong deterrent against cross-border tax evasion. Currently, tax authorities need an exchange of information treaty to facilitate this.
Declaration of related party transactions on annual tax returns: the committee recommended that to help developing countries’ revenue authorities tackle transfer pricing abuse, the UK government should stress— in its dealings with these revenue authorities— the importance of requiring related party transactions to be declared on annual tax returns. This would enable tax authorities in Africa to easily identify potential transfer pricing abuse and deal with it.
While the above measures focus on the extractive industry, their consequences will be far-reaching in the long term. In Uganda, it is now more than a year since transfer pricing documentation requirements were introduced. Since July, other African countries have followed suit in enacting transfer pricing rules. This indicates that these changes are coming. How ready will your company be?
The writer is the manager of transfer pricing at PwC Uganda.