Wealth Gap: How corporates stash their cash

2015-03-01 15:00

In the recessional days since the start of the global economic crisis, unethical corporate behaviour has come under increasing scrutiny.

A world that once believed in letting the corporate sector get on with creating growth and jobs – whatever it took – started to look more closely at executive pay levels and ask whether big business was paying its fair share of tax.

Media investigations in the United Kingdom showed that tax-dodging multinationals such as Starbucks, Amazon and Google might have acted within the law, but – ethically speaking – their talent for hiding profits from the taxman in effect steals money that would have gone to the public purse for spending on the poor.

Closer to home, companies such as SABMiller, Lonmin, De Beers and Associated British Foods, which owns Illovo Sugar, have been the subject of detailed studies by not-for-profit organisations and academics into tax avoidance.

The supersuccessful UK division of the Nando’s food chain, owned by a South African family, the Enthovens, was recently the subject of an investigation into tax dodging by The Guardian newspaper. The publication revealed Nando’s UK paid tax of £12.6?million (R227?million) on a profit of £58.2?million, when it could have paid tax of £18?million had its offshore arrangements not existed.

A Nando’s spokesperson said it was standard practice.

“Richard Enthoven is the ultimate beneficial owner of Nando’s,” the company’s spokesperson told us. “He is not resident in the UK.” This means he is not liable to pay any British personal tax.

Plainly put, practices such as these amount to creative accounting. Loopholes in tax rules are exploited to make profits simply disappear.

The SA Revenue Service (Sars) says such practices keep billions of rands out of the public purse. In Sars’ Notes on Base Erosion and Profit Shifting report, the revenue service details its attempts to combat these practices.

These are starting to pay off. In the 2013/14 financial year, Sars settled a number of cross-border cases, bringing in an additional R3.5?billion in revenue.

Sars is currently investigating 20 further cases with a preliminary tax leakage of R5?billion.

Transfer pricing

Transfer pricing is the setting of the price for goods and services sold between controlled or related legal entities within a multinational.

For example, if a subsidiary company sells goods or services to a parent company, the cost of those goods or services is the transfer price.

If the transfer price were market related, it would match the price the company would use when selling to an independent customer or what the buyer would pay an independent supplier.

When goods are sold from a South African company to an international one for a price lower than the market price, or goods are sold from an international company to a South African one at a price higher than the market price, it generally indicates transfer pricing is being used to shift profits out of South Africa.

Another way transfer pricing can be implemented is when a multinational based in a tax haven charges a South African company large sums of money for line items such as image rights, management fees, secondment fees or brand royalties, thus shifting significant volumes of money to the tax haven.

SABMiller, Lonmin and Associated British Food have all been accused of transfer pricing.

SABMiller was accused by international not-for-profit organisation ActionAid of reducing its 2009 African corporation tax bill by as much as a fifth, depriving poorer countries of up to £20?million in tax. SABMiller rejected this interpretation of its business structures.

Hybrids

A hybrid is basically a circular flow of monies through various companies or entities aimed at creating tax-deductible interest for the borrowing company. The corresponding interest income will be housed in a tax-exempt or tax-indifferent “special purpose vehicle”.

Sars says these hybrids are often used in black economic empowerment (BEE) deals and create substantial wealth for existing shareholders.

“Thus the schemes are not only used to gain an unfair tax advantage, but also undermine the objectives of BEE.”

Interest

Another loophole is created when offshore loans are provided to a multinational’s South African company, which is then charged excessive interest on that loan to remove profits to a more favourable tax jurisdiction. South African companies can also lend money to offshore companies and then undercharge the borrower on interest.

Treaty Abuse

Many multinationals create what are in effect shelf companies in tax jurisdictions that have favourable conditions for transferring money in and out of South Africa, thereby shifting profits away from where value is actually created.

Mauritius is one such tax jurisdiction that has been used by many companies that operate in southern Africa. Sars has recently moved to close the loopholes there.

ActionAid accused Associated British Foods of funnelling $7?million (R82?million) in fees paid to two subsidiaries in Ireland and Mauritius to reduce its tax bill, but Associated British Foods said this was not unlawful.

South African legislation allows Sars to ignore such entities and attribute the income back to a South African company.

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