Linda Ensor
10 January 2008
Cape Town — New business models developed by multinationals to address the opportunities of globalisation require fresh approaches by tax authorities , says the director of the Organisation for Economic Co-operation and Development (OECD), Jeffrey Owens.
An internationally renowned tax expert, Owens is in SA to attend the Forum on Tax Administration, an OECD conference held every 18 months, which is taking place in Africa for the first time. About 100 delegates, from about 40 countries, will be at the two-day forum - the largest gathering of tax administrators - which starts in Cape Town today. A number of African tax commissioners will be attending for the first time, as well as the leaders of six large enterprises, who will provide input on business trends .
Earlier this week, Owens said in an interview that the "name of the game" in multinational business restructuring was the centralisation of services . This had been made possible by greater integration of national economies and more sophisticated forms of communication.
"For example, in the past, a multinational might have had a financial-services subsidiary in five or six countries. Now they tend to be centralised ... Also, in the past, multinationals would have had valuable intangibles: patents and know-how, located in a number of countries, but today the model is very much to have one location," Owens said.
"This trend is accompanied by the splitting of risks. So, instead of having your distributors in different countries -- bearing the risk of their activities -- the risk is stripped out so effectively that they become agents, and the risk is centrally located. This clearly has implications for tax authorities, because ... your tax base tends to where the risks are.
"Stripping out the risk means stripping out part of your tax base and, even though tax is generally not the main reason for restructuring, once a decision has been taken to restructure, the tendency would be to find a low-tax jurisdiction as the place to locate your intangibles.
"This poses challenges for governments that are losing part of their tax bases."
Owens said tax administrators needed to understand the global pressures faced by large multinationals and the new business models to deal with them. Only then could they investigate the tax implications of these models.
With about 60% of cross-border activities taking place between subsidiaries of multinationals, tax administrators a re tasked with placing a value on these transactions.
One of the principal challenges that multinational s pose for tax authorities is their ability to use transfer pricing to move income from high- to low-tax jurisdictions, and to move expenses in the opposite direction so they can minimise their tax obligations.
Owens said tax administrations had to strengthen their co-operation and share information if they were to tax multinationals effectively. A form of co-operation was auditing the subsidiaries of multinationals in different countries simultaneously .
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