Financial expert calls for new measures on tax havens

Isaac Pinielo | Wednesday June 29, 2016 12:31

Speaking to Mmegi Business on Monday during a three-day Africa Media Training Workshop on Tax and Illicit Financial Flows here, he said any country could be a tax haven for another.

A tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment.

With unitary taxation, also known as formulary apportionment, Turner said countries could address shortcomings as each group of companies is treated as a single unified economic entity.

“It (unitary taxation) recognises that there can be no sale, cost or profit until the company transacts with an external party. Thus, all inter-group profit shifting is negated,” he stated. He explained that the global profit of an entity is allocated to each country in accordance with key variables, such as sales, employee and assets, and each country can then tax the resulting profit at any rate that it wishes. Turner said companies usually shift profits offshore through buying and selling goods and services to a related company.

“The purpose is to move profits from a higher tax country to a lower tax or no-tax jurisdiction,” he said. He said companies are able to do so because they are generally taxed at the place of their residence rather than where the underlying economic activity takes place. He acknowledged that profit shifting using intangible assets can be extremely difficult to detect. Turner, who is the investigations director for Finance Uncovered, which is a network of investigative journalists and campaigners, said that in order to make sure that companies are not engaged in profit shifting, tax authorities have to look at transfer pricing. Transfer pricing is the setting of the price for goods and services sold between controlled or related legal entities within an enterprise.

According to Turner, international tax rules say that transfer pricing should take place on an ‘arms-length’ basis, meaning that the price paid for goods between related companies should be the same as unrelated companies. He said African countries should have transfer-pricing specialists in their revenue authorities, noting that there are only three countries in Africa that have transfer pricing teams in their authorities.  Turner further noted that the system of unitary taxation has been operated within the US since the 1930s to negate the impact of domestic tax havens.