aggressive tax avoidance, automatic exchange of information, Convention on mutual administrative assistance in tax matters, Investment, MNEs, NGOs, OECD, OECD BEPS, Organisation for Economic Co-operation and Development, tax avoidance, tax base, tax haven, Tax treaty, Transfer Pricing
The OECD BEPS project has been marketed to developing countries, primarily those on the African Continent, as a way to re-balance the bargain often struck between government and multinationals operating in, our through their countries.
BEPS, has been vociferously articulated by the OECD, international NGOS, and perhaps a little less boisterously by African governments themselves; as a effective multi-pronged solution to much of what is wrong with the Continent’s relationship with ‘big’ business’.
The modulated response by African governments is of course explained in the delicate, balance between tax and investment which is the often their main economic driver; and the realisation that the comprehensive package of international reform mandated by BEPS, is not only resource intensive but comes with a price-tag, which is likely beyond the limits of yearly, national budgetary allocation, for international tax diplomacy.
It is expected that BEPS will benefit Africa primarily in these four (4) ways:
- Limit base erosion via interest deductions and other financial payments (Action 4);
- Prevent tax treaty abuse and the artificial avoidance of Permanent Establishment status (Actions 6 and 7);
- Address transfer pricing issues, in particular base eroding payments (Actions 8, 9 and 10), documentation,country-by-country reporting (Action 13); and the lack of transfer pricing comparable; and
- Prevent the use by government of of wasteful tax incentives.
How BEPS works in practice and how its MNE taxpayers perceive the consequences of BEPS even now should be of major concern to Africa because of its heavy reliance on various forms of direct and indirect taxes, from MNEs operating in the countries.
It is likely that there will be a mis-match in expected outcomes on both sides. Indeed, MNEs may view BEPS as a death knell to the current model and levels of overseas investment, if as expected, post-BEPS yields contract. While some expect this to lead to a review of investment models by both sides of the development equation; what is more likely, is that rate of permutations in private sector investment modalities to keep profitably in line with share-holder expectations.
On the other hand, governments may presume that existing levels of investment to be maintained during and after BEPS implementation; even as they acquire tools to stem some of the ‘tax leakage’.
That said what is clear now is that the dividends of the BEPS project will not come merely through effecting or coercing behavioural change in the operating methodologies of MNEs. Rather, success (or otherwise)will be measured by how efficiently and effectively Africa can adapt its tax infrastructure to take advantage of the benefits that the BEPS rules promise.
By way of example, here are three areas where infrastructure is currently lacking across Africa ( and indeed in many other developing and developed countries):
- The information generated by increased transparency principles contemplated by BEPS means that tax administrations will also have to establish and monitor corresponding protocols and systems for evaluating, collating and most importantly applying the information received in order to protect, or enlarge its tax base while, protecting taxpayers’ confidentiality, preventing tax evasion and aggressive tax avoidance. There are several ways in which tax administrations can use the collected information to change behaviour and to counteract tax avoidance schemes. These include counteraction through legislative change; through risk assessment and audit; and through communication strategies.
- With the near global coverage anticipated with full BEPS implementation there is also a significant risk that countries will adopt inconsistent interpretations or approaches to implementation that will lead to a greater number of competent authority disputes. Managing those potential controversies likely will prove demanding, particularly because tax administrations in Africa already face significant resource constraints and poor outcomes in investor-state disputes.
- It is likely that in order to benefit from the implmentation of BEPS Africa tax administrators new internal infrastructures will be required. In some cases the changes may be modest but equally in other instances it will require the creation of an entirely new internal infrastructure—statutory, regulatory, and administrative. African administrations may be likely still be at the starting gate and so there capacity to benefit from the avalanche of BEPS-induced information may not yield the promises of international tax reform.
To their credit the OECD has set about provided a laundry list of activities to support the dividends of BEPS implementation by multinationals. The OECD has already started programmes with the following countries aimed at building effective solutions to address transfer pricing and other BEPS risks: Botswana, Ethiopia, Ghana, Kenya, Malawi, Morocco, Tunisia, Zambia and Zimbabwe. Programmes in Nigeria and Senegal in partnership with the European Commission and World Bank Group are about to start.
In conclusion it will be instructive to see how magnanimous the OECD and others will be in supporting Africa in re-orienting existing relationships with its MNEs as BEPS begins the upset the balance of the bargain between tax and investment in Africa.