Base Erosion and Profit Shifting: joint workshop

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Finance Standing Committee

11 September 2015
Chairperson: Mr Y Carrim, Ms J Fubbs and Mr S Luzipho (ANC)
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Meeting Summary

Participants at the workshop were told there were three portfolio committees coordinating the Base Erosion and Profit Sharing (BEPS) project -- Finance, Mineral Resources and Trade and Industry. This meeting was to take forward processes that had begun with the Trade and Industry Committee last year, and had gone as far as public hearings. The three committees had mandated the Parliamentary Budget Office (PBO) to do the research that would be presented. To politicians, BEPS meant multi-national companies in South Africa selling to their branches elsewhere in another country at a lower price, or paying no taxes or a lower tax in SA, or paying tax in another country. This eroded the tax base in SA -- that was why it was called base erosion and profit shifting. In 2012, the publication Global Financial Integrity had noted that R270 billion had gone out of the country, which was a lot of money which could have done more for health, education and other social development sectors. In 2012, Global Financial Integrity had noted that R270 billion had gone out of the country, which was a lot of money which could have done more for health, education and other social development sectors. The different parties were finalising their policies on this issue. It was not a new matter, and the government had made it a priority in this Parliament.

The Parliamentary Budget Office said BEPS and illicit flows made it difficult for government to generate money. Some tax payers, including multi-national enterprises (MNEs), unfairly reduced SA’s tax revenue by inflating deductible costs of production, advertising fees, management fees and interest on foreign loans. They were also deflating income by under-selling or delaying transaction dates and other methods, such as the price at which entities within an MNE traded with each other for the transfer of goods and services.

National Treasury said capital flows were an integral part of growing an economy, and supported trade and investment. Legitimate flows included trade payments and dividend payments, and these were recorded and published as economic data. Illicit flows were unrecorded -- money flowed out of the country classified by in three forms as corrupt, criminal and commercial. Many authorities were involved in prosecuting, tax collection, anti-money laundering and regulation. By definition, it was impossible to know the exact amount or level of illicit flows, as those who broke the law did not voluntarily report their criminal actions.

The SA Revenue Service (SARS) said many countries faced the problem of businesses exploiting gaps in the international tax system to artificially shift profits and avoid paying tax. Examples in the public domain included Apple, Caterpillar, Google, Microsoft and Starbucks. The challenge was that a country acting on its own could not close the gaps and address the mismatches that arose in the interaction between multiple countries’ tax systems. As a result, during the G20 leaders’ summit in Mexico in 2012, the heads of state had explicitly referred to the need to prevent base erosion and profit shifting. The G20/ Organisation for Economic Cooperation and Development (OECD) had launched the BEPS action plan in July 2013. The focus was on transfer pricing, transparency and other aspects affecting international taxation. Finance ministers had endorsed the outcomes and mandated the OECD and the Global Forum on Transparency and Exchange of Information to develop toolkits to support developing countries addressing BEPS, and to launch pilot projects to assist developing countries to move towards an automatic exchange of information.

The Financial Intelligence Centre (FIC) said organised crime, the illicit economy and illicit financial flows (IFFs) affected democracies and the functioning of financial markets in economies across the globe. Illicit traders generated vast amounts of cash that needed to be laundered by morphing cash into instruments that enabled the movement of the funds into global electronic financial systems.  Money laundering, tax evasion, secrecy jurisdictions and IFFs were seen as developmental obstacles. Globally, the annual average flow of IFFs was in excess of $1 trillion (2007-09). Global IFFs had grown at an annual rate of 8%, doubling from 2001-10.  Africa’s share was about 6%, or $60 billion annually (or $450 billion over a nine-year period). South Africa’s share of the total African proportion of IFFs for the period was 13%.  Trade mispricing occurred in countries dominated by extractive industries, like South Africa.

The South African Reserve Bank (SARB) said illicit financial flows involved criminal activity or breach of a statutory duty/law, but capital flight was not necessarily related to criminal activity. Successes had been a dramatic increase in the detection of IFF, especially relating to trade mispricing, with more than R100 million blocked over the past nine months, further IFF had been deterred, and several matters had been referred to other agencies. Challenges were the preservation of audit trails versus the removal of red tape, and legal barriers to setting up effective multi-agency task teams and the sharing of information. As the regulator of cross-border transactions, SARB was well positioned to play a more prominent role in the detection, deterrence and disruption of illicit financial flows.

Members expressed general appreciation for the technical detail provided by the participants. They agreed that the Department of Finance would have to lead the process, which would result in recommendations to Parliament. Concern was expressed, however, that there should be a balanced approach, as there was a risk that over-restrictive measures could be a potential deterrent to future foreign direct investment,

Meeting report

Introductory comments

Mr Y Carrim (ANC) welcomed visitors and Members to the workshop. There were three committees that coordinate the Base Erosion and Profit Sharing (BEPS) project -- Finance, Mineral Resources and Trade and Industry. This meeting was to take forward processes that had begun with the Trade and Industry Committee last year, and had gone as far as public hearings. The three committees had mandated the Parliamentary Budget Office (PBO) to do research that would be presented today. He was seeking to draw other committees that had relevance to BEPS. To a politician like him, BEPS meant multi-national companies in South Africa selling to their branches elsewhere in another country at a lower price, or paying no taxes or a lower tax in SA, or paying tax in another country. This eroded the tax base in SA -- that was why it was called base erosion and profit shifting.

The common mechanism for doing this was transfer mispricing. BEPS was linked to illicit financial flows, and the African Union (AU) had appointed a commission under former President Mbeki, and had produced a report on the subject. Many countries were looking at the report and developing legislation. In the Finance Committee, the Economic Freedom Fighters (EFF) had come with a paper on BEPS, and different parties were finalising their policies on this issue. It was not a new matter, and the government had made it a priority in this Parliament. The SA Revenue Service (SARS) had responded accordingly and would present on what it had done so far. At the end of the meeting, the PBO must be mandated to come up with a clear timeline for a programme of research.

This was a complex and technical issue, with no easy answers. Amounts lost to SARS through BEPS were only estimates. The Mbeki report said that more money left this continent and came back as development aid. The government needed to be put under more pressure by Parliament on this issue than it currently was. The discussion for the day would identify areas of policy and research, and cultivate areas for developing legislation which would be taken through the parliamentary process. The Davis Committee was also working on this issue. Good work had been done by Trade and Industry, and some representations had been made to the Finance Committee.

Ms J Fubbs (ANC) was very pleased that Trade and Industry was working together with Finance and Mineral Resources. Transfer pricing, transfer mispricing and illicit flows out of the country went beyond Science and Technology, Transport and Economic Development. In 2012, Global Financial Integrity had noted that R270 billion had gone out of the country, which was a lot of money which could have done more for health, education and other social development sectors. The government had to move speedily on this issue and if necessary, as Parliament, push the government into action. She was pleased to hear the Minister of Finance saying in his budget speech that “action has to be taken to close the tax evasion budget loophole such as transfer pricing and profit shifting by SA corporates. South Africa will continue its support of G20 decisions in this regard and implementation of action on transparency and sharing of information. South Africa must take a stand in the Southern African Development Community (SADC) on tax havens”. This provided the energy and commitment to drive this process in Parliament.

 Parliamentary Budget Office on Base Erosion, Profit Shifting and Transfer Mispricing

Mr Dumisani Jantjies, Deputy Director, PBO, said the government needed money to implement programmes. Imposing taxes was used to implement (pay for) government programmes. Government imposed taxes on residents and non-residents. BEPS and illicit flows made it difficult for government to generate money. Some tax payers, including multi-national enterprises (MNEs), unfairly reduced SA’s tax revenue by inflating deductible costs of production, advertising fees, management fees and interest on foreign loans.

They were also deflating income by under-selling or delaying transaction dates and other methods, such as the price at which entities within an MNE traded with each other for the transfer of goods and services. Goods and services had a wide meaning. It included tangible and intangible property, granting of financial assistance, granting of guarantees, cessions, etc. Setting transfer prices or “transfer pricing” was important because, according to the UN Conference on Trade and Development (UNCTAD), over 60% of world trade was within or involved MNEs. Due to their relationship, entities in MNEs had the ability to distort transfer prices and ultimately profits reflected in particular jurisdictions, thereby eroding the tax base and depriving countries of their correct share of taxes. For this reason tax administrations had cause for concern where transfer prices were incorrect or mispriced.

Transfer pricing was thus an essential feature of cross-border activities of MNEs and their outcomes may be perfectly acceptable, but “transfer mispricing” was not. There was currently no conclusive evidence to substantiate and provide sources to accurately quantify the revenue loss in the South African context as a result of transfer mispricing. Some discourses about BEPS’ impact on revenue losses often took into account both legal and illegal flows.

Discussion

Mr D Macpherson (DA) said no one wanted to see the hard work being done in South Africa and the profit being enjoyed somewhere else. This was a very technical area and it would have been good to have invited Judge Davis, as he had credibility in the way he was dealing with taxes. To combat illicit flows, SARS needed to be administratively capacitated. He asked the PBO for timelines for the legislative changes needed to combat illicit flows. He did not want to see the Sixth Parliament discussing this issue.

Mr J Esterhuizen (IFP) said there was still evidence of unemployment, but many corporates were not paying their share of revenue and it seemed SARS was not winning the war. There were legislative deficiencies and limited control over foreign-owned companies. However, there was a need to balance combating illicit outflows and not deterring foreign direct investment.

Mr Z Mandela (ANC) asked which laws would be put in place to arrest or monitor illicit financial flows.

Mr M Kalako (ANC) wanted clarity on what was meant by saying that transfer pricing was legal and transfer mispricing was illegal. He asked if there was a best practice elsewhere in the world that could be adopted for use in South Africa. Fundamental to financial flows was the system of capitalism, and he did not foresee the country dealing with this problem under capitalist modes of relations.

Mr Carrim said if that was it, then one should let the country socialise the means of production.

Ms R Bhengu (ANC) said Mr Kalako had hit the nail on the head -- to deal with this issue, one needed radical social economic transformation. The big question was who controlled the economy. To her, this was a three-legged pot with unequal legs, and these legs were the state, the private sector and the community. There was a need to address who controlled the economy to strengthen the leg of the state and that of the community. Judge Davis must be brought in to give his input on this discussion.

Ms Fubbs said what had to be addressed was base erosion before tax. The focus must be on how profits were generated at the expense of workers’ salaries and workers’ conditions, as tax was based only on profit.

Mr N Gcwabaza (ANC) said when Stats SA released statistics on manufacturing rates, SARS had to be able to anticipate the tax it was to receive. He asked about the role of the SA Reserve Bank (SARB) in monitoring inflows and outflows.

Mr Carrim said Judge Davis had appeared before the Industry and Trade Committee and there might not be any need to call him, but if he was to be called, he would take the issue from where Trade and Industry had left, instead of covering the same ground. The Davis Committee was part of National Treasury, and Members may agree or disagree with what Judge Davis said. Parliament had information that it agreed with, and rather than putting pressure on Judge Davis, Parliament must put pressure on the executive.

Mr Jantjies replied that the PBO had to coordinate with various institutions. He had had a chat with some members of the Davis Committee, and they were keen to engage Parliament on the subject. South Africa needed a broader international approach, like the Organisation for Economic Cooperation and Development (OECD), on dealing with issues raised, than just a South African context. It was always difficult to adopting model, as countries were unique, but extractive mining countries usually had similar problems and developed similar approaches.

Mr Carrim asked the relationship between illicit outflows and base erosion.

Ms T Tobias (ANC) asked if ownership patterns of companies listed on JSE can be obtained and whether money generated by South African companies does not find expression somewhere. She asked if OECD reports address the needs of developing countries.

National Treasury on Illicit Flows Workshop

Mr Ismail Momomiat, Deputy Director General: Tax and Financial Policy, National Treasury, said the issue under discussion raised a number of questions, such as:

  • Did we want to discuss the GFI and Mbeki reports?
  • Did we want to discuss illicit flows or capital outflows/inflows or capital flight?
  • How do we stop illicit flows in the future?
  • How do we bring justice to illicit flows of the past and future transgressors?
  • How do we measure past and future illicit flows?
  • What are the current authorities doing to deal with past and future illicit flows?

Capital flows were an integral part of growing an economy, and supported trade and investment. Legitimate flows included trade payments and dividend payments, and these were recorded and published as economic data. Illicit flows were unrecorded -- money flowed out of the country classified by the GFI in three forms as corrupt, criminal and commercial. Many authorities were involved in prosecuting, tax collection, anti-money laundering and regulation. By definition, it was impossible to know the exact amount or level of illicit flows, as those that broke the law did not voluntarily report their criminal actions.

SARS on Base Erosion and Profit Shifting

Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said many countries faced the problem of businesses exploiting gaps in the international tax system to artificially shift profits and avoid paying tax. Examples in the public domain included Apple, Caterpillar, Google, Microsoft and Starbucks. The challenge was that a country acting on its own could not close the gaps and address the mismatches that arose in the interaction between multiple countries’ tax systems. As a result, during the G20 leaders’ summit in Mexico in 2012, the heads of state had explicitly referred to the need to prevent base erosion and profit shifting. The G20/OECD had launched the Base Erosion and Profit Shifting (BEPS) Action Plan in July 2013, which aimed at addressing mismatches, gaps and weaknesses in international tax and treaty law that permitted double non-taxation. The focus was on transfer pricing, transparency (country-by country reporting) and other aspects affecting international taxation (treaties, controlled foreign company rules, hybrids). Finance ministers had endorsed the outcomes and mandated the OECD and the Global Forum on Transparency and Exchange of Information to develop toolkits to support developing countries addressing BEPS, and to launch pilot projects to assist developing countries to move towards an automatic exchange of information. The G20 finance ministers had called on the OECD to establish a framework for non-G20 jurisdictions, particularly in developing economies, to participate in monitoring on an equal footing.

On 17 July 2013, the Davis Tax Committee (DTC) had been appointed to inquire into the role of South Africa’s tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability. On the international front, the DTC was required to address concerns about BEPS, especially in the context of international tax, as identified by the G20/OECD. On 30 September 2014, the DTC had issued an interim report entitled “Addressing Base Erosion and Profit Shifting in South Africa”, which noted the legislative interventions made by South Africa over the past years to counter BEPS, and made recommendations in other areas that needed to be addressed, such as the reconsideration of section 6quin of the Income Tax Act and documentation requirements for transfer pricing purposes. Section 31 of Income Tax Act, 1962, provided that transfer prices must be at arm’s length (i.e. MNE entities need to transact at terms and conditions that would have prevailed had they been independent of each other), and SARS may adjust if not (primary adjustment). The “arm’s length” principle was rooted in Article 9 of double tax agreements and guidance at a generic and transactional level on its application was contained in OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

As foreshadowed in the 2015 Budget Review, SARS had modified the company income tax return to obtain more detailed information with respect to transfer pricing and to place a greater focus on potential BEPS issues. Amendments had been proposed in the draft Taxation Laws Amendment Bill, 2015, to regulate the obtaining of information held offshore and to extend the period SARS had to revisit an assessment that incorporates a transfer pricing issue in certain cases.

SARS was in the process of drafting a public notice under section 29 of the Tax Administration Act, 2011, requiring large corporates with cross-border transactions with connected persons, to maintain specific transfer pricing documentation. The Foreign Account Tax Compliance Act (FATCA) regarding reporting on US citizens’ accounts in foreign jurisdictions had been introduced in the USA in 2010. An inter-governmental agreement (IGA) was negotiated with the USA in 2013/14 for automatic exchange of information obtained from financial institutions under the existing double taxation agreement with the USA. The IGA signed on 9 June 2014 was finally ratified by South Africa on 1 October 2014, and took effect on 28 October 2014.  

Amendments to the Tax Administration Act, 2011, to underpin implementation of IGA, had been included in the Tax Administration Laws Amendment Act, 2014. Information from financial institutions for the first period of 1 June 2014 to 28 February 2015 was due to SARS by 30 June 2015, and was due to be exchanged by 30 September 2015. G20 Finance Ministers had endorsed the Common Reporting Standard (CRS) for the automatic exchange of tax information on 23 February 2014. A multilateral competent authority agreement with respect to the automatic exchange of information under the CRS was signed on 29 October 2014, along with 51 other jurisdictions. Exchange of information would take place under existing double taxation agreements and international treaties. Amendments to the Tax Administration Act, 2011, to facilitate implementation of CRS had been included in draft Tax Administration Laws Amendment Bill, 2015. As South Africa was part of the early adopters group, information would be required from financial institutions for the first period of 1 March 2016 to 28 February 2017, which was due to be exchanged by 30 September 2017.

The major challenge for tax administrations reviewing cross-border transactions was lack of information to identify risk. The G20/OECD Country by Country (CbC) report would provide an overview of group revenues, profitability, tax, employees and assets around the world for this purpose

Ms Tobias asked if SARS charged tax on containers as part of the secondary adjustment.

Ms E Coleman (ANC), Chairperson of the Economic Development Committee, said she was listening with interest as the questions in her Committee were being responded to, such as tracking amongst South African regulation bodies and collaboration with regional and international bodies. She was satisfied with the response to the Mbeki panel. The Davis report dealt with the strengthening of institutions, and she thought there could be better coordination in terms of sanctions. She asked if competition authorities were playing a role in the transfer mispricing.  

Ms Fubbs asked if there was anything being done in the OECD to address the discrepancy on double taxation agreements. Art works were valued, so she asked why it was difficult to value intellectual property, if a Picasso could be valued before it was sold. 

Mr Carrim said it was a pity the EFF was absent and would raise the issue in the House that the government was doing nothing about financial flows. He asked the number of people SARS needed for the medium term expenditure framework (MTEF) cycle. He understood the challenges SARS faced, as this was a global issue. The country must find a balance of acting stridently and effectively on this matter, but not deterring foreign direct investment (FDI). The government should have done more when the economy was growing at 5% per annum.

Mr Tomasek replied that advanced pricing agreements (APAs) were an interesting question, as they provided certainty. The first thing in APA was a bilateral or multilateral APA with the countries that would be impacted. The problem with this was selection bias from the tax payer. If an institution was under-resourced, the question was whether it must go after people who were complying, or those who were not compliant. That was a difficult question. An APA allowed one to do a pre-audit of what was happening and two sets of resources on an audit in this country, and the other country -- which may have a completely different perspective -- arguing that the tax must be received by it.

Ms Tobias said there was a South African flight that had crashed into the sea during the apartheid era. Papers had reported that it had dangerous baggage that had not necessarily been recorded, and there had been no documentation on it. The generic issue of flows that had been raised was not to track what the South Africans had, and there had been no proper documentation on both sides.

Mr Momomiat said one could not look at everything, except for spot checks and random checks, otherwise trade became impossible. If people were carrying the wrong things, it was for the airline and customs to check. A proportionate response was needed to all of this. Of course, nobody would put something in an airline to bring it down.

Mr Tomasek replied that those who were part of the customs legislation would realise the robust debates were because SARS wanted to be better informed on what was coming into the country. Before the containers were packed, there was advance clearance, where customs were informed as to what was being carried. There were no dividend taxes on containers. A shipping container moved backwards and forwards across borders and there was no need to tax them except in exceptional circumstances.

Ms Nishana Gosai, Manager: Transfer Mispricing, SARS, said that SARS did not want to venture into a process that would take it more than five years on the APA, without considering the resource constraints it faced. It was very hard and the question was whether it was good for the country to negotiate an APA. Picassos could be valued, but intellectual property (IP) could involve people in multinational companies moving across borders, engaging in information and knowledge it could not track. Steve Jobs was Apple -- and how could a price be put on him? IP may be knowledge in the pharmaceutical industry.

Financial Intelligence Centre on Illicit Financial Flows, Abusive Transfer pricing and Trade Mispricing

Ms Kathy Nicolaou, Senior Policy Analyst: Financial Intelligence Centre (FIC) said organised crime, the illicit economy and illicit financial flows (IFFs) affected democracies and the functioning of financial markets in economies across the globe. Illicit traders generated vast amounts of cash that needed to be laundered by morphing cash into instruments that enabled the movement of the funds into global electronic financial systems.  Money laundering, tax evasion, secrecy jurisdictions and IFFs were seen as developmental obstacles. Globally, the annual average flow of IFFs was in excess of $1 trillion (2007-09). Global IFFs had grown at an annual rate of 8%, doubling from 2001-10.  Africa’s share was about 6%, or $60 billion annually (or $450 billion over a nine-year period). South Africa’s share of the total African proportion of IFFs for the period was 13%.  Trade mispricing occurred in countries dominated by extractive industries, like South Africa.

Ms Nicolaou described the main components globally. 60% was in the form of commercial transactions, involving multinational enterprises, including tax evasion through transfer and trade mispricing; 35% was through criminal activities, such as trade in drugs, and smuggling of weapons and people; and 5% was corruption and the theft of public funds. Dev Kar, lead economist at Global Financial Integrity (GFI), defined IFF or illicit money as “money that was illegally earned, transferred, or utilised. Somewhere at its origin, movement, or use, the money broke laws and hence it was considered illicit.” The United Nations Development Programme (UNDP) definition said IFFs “include, but are not limited to, cross-border transfers of the proceeds of tax evasion, corruption, trade in contraband goods, and criminal activities such as drug trafficking and counterfeiting.” In extractive sectors, these flows mostly originated from corruption, illegal resource exploitation and tax evasion, including smuggling and transfer mispricing.

The following push and pull factors enabled IFFs: poor governance, corruption, weak enforcement and regulatory institutions and structures; double taxation agreements (DTAs); tax incentives, especially if abused or used in conjunction with tax holidays (by exploiting the rules relating to the change of ownership that resultsed in base erosion of a country’s wealth and asset base); and the existence of financial secrecy jurisdictions and/or tax havens.

South Africa had experienced IFFs totalling more than $122 billion between 2003 and the end of 2012. In 2012 alone, $29.1 billion left the country undetected. South Africa's IFF’s accounted for nearly 7.6% of GDP, representing nearly twice the average for developing countries. Trade mspricing and abusive transfer pricing for South Africa accounted for approximately 65% of IFFs. This was the BEPS focus. Proceeds from criminal activities represented approximately 35% of IFFs. Corruption represented approximately 5% of IFFs.

There were a lot of questions to be raised. Should the position paper, policy measures or intervention take a more holistic approach in tackling IFFs, which was a broader mandate? Or should the focus only be on BEPS -- tax evasion through abusive transfer pricing?  What was the intended outcome of the strategy, policy and legislation to be developed -- preventing IFFs and ensuring that the productive resources in South Africa retained their earnings, thus promoting investment and growth? What were the policy tools and levers to tackle the problem and achieve the intended outcome? If a holistic approach was planned, how would this be phased over time? What existing pieces of legislation and policy tools could be amended for quick wins in the short-term? Which pieces of legislation needed to be amended or recrafted for a longer-term approach? What were the time-lines? Was this a feasible option? Which role-players were critical in developing, legislating and implementing such a strategy? Who would coordinate? Who would sit on the core/steering committee? Which were the peripheral departments that were necessary to participate in this process? What phased workstreams needed to be established? Was there a clear understanding of the problem and its value chain? And at which stage was the flow likely to become illegal?  Was the same approach going to be developed for all sectors -- primary, secondary and tertiary?

Legislative and policy changes needed to be implementable with reasonable state capacity. Any measure implemented would have operational and capacity implications for the state. Measuring abusive transfer pricing and trade mispricing -- to a lesser extent -- was fairly complex, and it was not always possible to separate the two. Abusive transfer pricing was complex and used legal processes to hide revenue from the state. Measures should encourage FDI and growth.

SARB on Cross Border Financial Flows

Mr Elijah Mazibuko, Head: Exchange Control, SARB, said the role of the Financial Surveillance Department was a delegated function of the Minister of Finance responsible for the monitoring of cross-border transactions, to prevent the loss of foreign currency resources. It constituted an effective system of control over the inward and outward movement of financial and real assets and avoided interference with the efficient operation of the commercial, industrial and financial system. The powers and functions were in terms of the Exchange Control Regulations promulgated under the Currency and Exchange Act, 1933 (Act No. 9 of 1933). It was a supervisory body in terms of the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001). It required that all foreign exchange transactions were reported by authorised dealers, investigated unauthorised foreign exchange transactions, froze bank accounts, recouped capital exported illegally, transferred forfeited funds/assets to the National Revenue Fund and seizedf unauthorised currency at ports of entry/exit.

Illicit financial flows involved criminal activity or breach of a statutory duty/law, but capital flight was not necessarily related to criminal activity. Successes had been a dramatic increase in the detection of IFF, especially relating to trade mispricing, with more than R100 million blocked over the past nine months, further IFF deterred, and several matters referred to other agencies. Challenges were the preservation of audit trails versus the removal of red tape, and legal barriers to setting up effective multi-agency task teams and the sharing of information. As the regulator of cross-border transactions, SARB was well positioned to play a more prominent role in the detection, deterrence and disruption of illicit financial flows

Discussion

Ms Fubbs asked why SARS could not tax online gambling, when itunes could be taxed. She asked if R25 000 was the amount that corporates could carry across borders, or whether this was for individuals, as it was a large figure.

Mr Carrim asked about the government’s response to the AU report on financial flows. He asked why the mining sector was particularly guilty of BEPS.

Mr Macpherson there was a big difference between financial flows and tax evasion. No one was going to support South African companies not paying their fair share of taxes. A number of companies were moving their bases to Mauritius because of corporate tax rates and ease of doing business. However, people in the country had a dominant view that business was just a monster that wanted to scorch the earth and take profits. Some individuals were doing this, and needed to be dealt with.

Ms Tobias said the debate was being politicized, and she was not going to be quiet on the immoral behaviour of companies which shifted profit after having been given tax incentives. The government was going to discourage any South African company that made money in South Africa to shift the money elsewhere, as this was against the spirit of patriotism. It seemed incentives did not help and the issue must not be one of animosity between business and government, or overregulation of business activities. South Africans understood well what it was to be poor and surviving on government grants for survival.

Mr S Luzipho (ANC) said there was potential for double and triple dipping, and the consequences thereof. He referred to the level of incentives that went to companies and the level of unfair trade by profit shifting. While the presentations had tried to focus on the legality of flows, the focus should have been on fairness. He did not agree that it was difficult to get a disclosure of information from companies. He asked if there was a way of dealing with the trade and extractive industries to ensure that the legislative environment would yield the desired results on revenues. The legality of financial flows needed to be scrutinized so as to arrive at a conclusion on whether they were addressing the needs of the country.

Mr Momoniat said companies were there to make a profit, and listed companies published their annual reports and profits. There was a level of transparency with listed companies. The government itself had exemption for small companies in order not to go through some rigorous process. There was a huge reputational risk for listed companies not to provide information. Mining was targeted mainly because it was an extractive industry involving digging things from the ground and selling them both locally and internationally. Mining was a licenced business and minerals belonged to the community -- that was why there was a royalty tax. Mining required huge capital upfront, and most companies were multi-national. South Africans did not save enough money in the first instance. Multi-nationals brought capital, and foreigners could bring capital only when they felt their money was protected. The exchange controls did not generally apply to people bringing in capital, and they could also take it out through dividends. There were tax incentives which only reduced your tax liabilities, but this did not mean that that it prevented one from investing in other parts of the world. South Africa had supported SA companies to invest in other countries, especially African countries. There were benefits to South Africa when companies invested in other countries, besides dividends, intellectual and technology benefits. This was where transfer pricing occurred, and country by country reporting would bring localised accountability. Nothing prevented a company from providing more information, but in terms of the tax system, this could not be made public. This was an entrenched international practice. Exchange controls were set by the Minister of Finance, and there was very small risk with individuals taking their money out. The risk was with high net worth individuals, of which there were few. When companies relocated, that was a concern, and if it was to a tax haven, the net would close on them and the international tax treaties would help with that. Two thirds of transactions of a major country like India went through a small island neighbour of SA because of tax agreements.

He thought the framework was much improved and some companies like MTN were making a very valuable footprint in many African countries and beyond. In the US, there was tax evasion, as it did not have a sensible approach to its corporates outside the US. It only taxed when funds were repatriated back to the US, and very few did so. Now there was what were called tax evasion structures to reduce tax liability. After the 2008 global financial crisis, countries were taking a more proactive approach in protecting their tax base. South Africa was using a very old model. For example, using the words “exchange control” deterred other companies from investing in South Africa. This was a concept that came from the sterling era. Today, terms like “capital accounts margins” were used. These were last resort controls and there were better ways to control the economy. A gambling tax had been announced a few years ago. It was still needed, but it was not a high priority. Anything offshore was difficult. Taxing the digital economy was not easy. It may be easy for big service providers, but not a small company providing some “app.” With offshore gambling, there was something it could do, but there were limits to it until international agreements became into force.

Mr Tomasek said that it was following a model used internationally and largely driven by voluntary compliance. If there was a big company that did not want to register locally, its ability to touch the organisation was limited. However, there were reputational risks for a company not complying.

Mr Carrim asked the views of the Department of Trade and Industry and Mineral Resources on the discussions that were taking place.

Mr Stephen Harnival, Chief Economist, DTI, replied that FDI in itself was not always good for the South African economy. It was positive when it involved new investments, job creation and new technology coming into the country. Examples where it was bad for the country, was when an American company bought a company in SA, got hold of the intellectual property that had been developed by owners of the company, and the investor then attempted to shut down manufacturing in this country and move to another jurisdiction. South Africa was open to FDI, but FDI was not a long-term strategy for the SA economy. The illicit economy and trade mispricing tended to go hand in hand. Trade mispricing could have significant impacts on the South African economy, and it was working together with Treasury and SARS in this regard. The textile industry was severely impact by unrecorded and uninvoiced goods. There were particular safety issues on the importation of some materials that did not need technical specifications, yet were dangerous. Overall, it had been cooperating with colleagues in government, but its focus was mainly on FDI and trade mispricing.

Mr Musa Mabhuza, DDG, Mineral Resources, said the Department was working with SARS and was receiving technical support as it had realised that there was some information asymmetry among various government institutions, especially with regard to the quality and quantities of mineral resources that were exported. It was in the final process of finalisng its relationship with the South African Bureau of Standards, as it had the technical expertise. In South Africa, there was a great interest in the mining sector and his assumption was that if other sectors were looked into, they may also be found guilty of BEPS.

A Member said there were problems when products became beneficiated and pricing became very complicated, to prevent transfer mispricing. Given that SA exported unprocessed minerals, he asked why there was a problem when the minerals became beneficiated.

Mr H Schmidt (DA) said it was important to conclude these highly technical and philosophical debates with grounded conclusions. Having extracted this general information, the Committee on Mineral Resources must also look at this issue, together with the Committee on Trade and Industry.

Mr Mabhuza said in mining, with a single mineral like platinum, one was likely to find six minerals and ten by-products. One could just say one only exported platinum, not reflecting the other products, and therein lay the problem. The quality of the exports needed to be validated, together with the South African Bureau of Standards.

Mr Harnival said the prices of minerals were set outside the country on the Chicago or London metal exchanges, and this made the mineral sector complicated. It should be possible to track changes in pricing. He thought that transfer mispricing was happening in other sectors, apart from minerals.

Ms Fubbs said the Committee had not yet come to the point of discussing when outflows exceeded local expenditure. These were issues that needed to be tackled, no matter the ideology -- whether capitalist or socialist -- because it was a reality. She was not sure which institution should deal with this. She asked if there was a definition in black and white on financial flows.

Mr Momomiat replied that NGOs said a lot of things, and if one really needed to engage, one must engage with the source of their data, but what was illegal was illegal.

Mr Luzipho said mining had been the key driver of the economy for some time and was leading currently on BEPS in terms of statistical facts available. This was more historical, and did not mean if one did a paper study one could find similar results from the service industry.

Mr Macpherson said there was no need to spend time verifying statistics -- the focus should be on how to plug the leaks.

Mr Kalako said it was clear the government was doing something and was looking at ways to improve. The three committees must have a summary of the measures and begin to interface with the executive to make sure there was coordination and capacitating agencies with interest in this issue.

Ms Tobias thought Committees should revert to their own portfolios to make recommendations, if this was admissible.

Mr Carrim said the workshop had been to equip Members with technical knowledge. Ideas had material force only if put into action. Illicit financial flows was one issue, and one form of it was BEPS which was effected through transfer mispricing. He thought the focus should be on BEPS, rather than being embroiled in illicit flows, as it had to bring in the SA Police Service (SAPS), the National Prosecuting Authority (NPA), and other institutions. The Finance Committee could not deal with illicit financial flows with a lot of legislation on its table. The parliamentary staff and the PBO had to work together and produce a report of about six to eight pages, clear and concise, on the way forward. Clarity must be made on legal and illegal flows. The report would be sent to all committees affected, and would provide the framework of working together. If it was agreeable, Judge Davis must be brought in. The eight committees must meet at least once a quarter to discuss progress on policy, fine tuning policy and on what the departments were doing. 

Ms Fubbs said the Minister of Trade and Industry must consult with the Ministers of Finance, Mineral Resources and Economic Development on some issues. She needed BBBEE to be implemented and if not, to have certain clauses withdrawn. No legislation must be on the books with no one to implement it.

Mr Luzipho agreed that Finance was leading the entire process,. However, the report on this would be disrupted by the Budgetary Review and Recommendation Report (BRRR) process. Finance must find time to continue to lead, despite having a lot of legislation, until the report became the baby of Parliament.  He was not impressed by the turnout of Members, but maybe better few was better.

The meeting was adjourned.  

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