Scores of South African corporate companies will soon be subject to increased scrutiny and cross-border tax reporting regulations as the country aligns its tax regulations with global standards. These latest requirements are contained in two draft notes from the SA Revenue Service (SARS).
The first deals with compulsory transfer pricing documentation retention requirements for companies with revenues over R1 billion and the second introduces the Country-by-Country Reporting (CBCR) Standard for Multinational Enterprises.
The requirement stems from the OECD-led Base Erosion and Profit Shifting (BEPS) project that aims to eliminate tax planning strategies which exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
The OECD reports that the magnitude of the problem, according to research since 2013, is conservatively estimated at between 4% and 10% of global corporate income tax revenues, worth between US$100 billion and US$240 billion annually.
The concept of eliminating profit shifting through practices such as transfer pricing is not new, but there has been renewed vigour on a global scale to accelerate agreement and compliance. The aim of the CBCR standard, which is the second draft note from SARS mentioned above, is to improve transparency of earnings by multinationals in multiple territories.
Through this measure, countries will be able to gain a more accurate picture of whether tax liabilities in their jurisdiction are being fully met.
The upshot of the new regulations is a far more vigorous reporting requirement on qualifying companies. The regulations call for organisations to submit their first reports as from 31 December 2017 for the fiscal year starting on or after 1 January 2016.
The threshold for companies to complete country-by-country financial reports has been set in South Africa at a turnover above R10 billion, with additional provisions that throw this net a little wider.
These additional provisions apply to South African tax resident companies that are not the ‘ultimate parent entity’ of a multinational group when their parent entity is not obligated to file a report in its tax jurisdiction; when the parent entity does not yet have a tax information sharing agreement with South Africa; or that fails to share information required by the new regulations. Despite these options, the group must still meet the R10bn first, and then if any of these apply, the SA entity will be legally obligated to report according to the CBCR standards.
The finer details and definitions of what constitutes a parent entity are quite complex, but any large corporate that is a subsidiary of a global group or a South African entity operating in multiple international markets will undoubtedly be affected. What these regulations do make very clear, though, is that many large corporations are going to have to invest considerable time and effort to ensure they comply with the new reporting standards.
Apart from adopting new processes, companies that do not have the ability to consolidate financial statements across multiple entities, particularly cross-border operations, may have to invest in the necessary technology to minimise disruption to their accounting teams.
There is little doubt that hiding or shifting profits is going to become increasingly difficult as this new era of transparency and information sharing takes effect. Ultimately, this is for the good of the local and global economy, and companies are advised to take these measures seriously and start preparing for the first reports in order to avoid disruption or non-compliance.