Tax havens find ways to adjust to increasing scrutiny
Low-tax jurisdictions, previously known as tax havens, have evolved over the years to adjust to increased international scrutiny and a changing tax legislative environment.
However, many companies have come under international scrutiny because of their low effective tax rates — despite having relied on the instruments negotiated by their own governments.
Ernest Mazansky, head of tax at Werksmans, says one of the main reasons companies choose to operate in a low tax jurisdiction is because of the benefit of paying a low tax rate.
Tax is a cost like any other and has to be managed by management. If a company cannot operate equally well in a high tax jurisdiction and a low tax jurisdiction, why would it not choose to set up in the low tax jurisdiction, he remarked at the annual Tax Indaba in Sandton.
Mazansky says it is necessary to define what is a low tax jurisdiction. Some are so defined because of their low statutory tax rates — such as Mauritius or the Cayman Islands.
However, there are also jurisdictions with high tax rates but which offer companies a 10-year tax holiday to establish themselves in specific economic zones, and another 10 years at a low rate. "Is that not a low tax jurisdiction, and why would you be going there if not to get a low tax rate?" Mazansky asked during a panel discussion.
Wayne Fuller, international tax manager at Old Mutual, says following the financial crisis many countries in Europe have been on a drive to bring down statutory tax rates, although the perception is that they are still high tax jurisdictions.
In many instances the decision to operate in a particular jurisdiction is driven by the location, the ease of doing business and the infrastructure offered by the host country. Tax is rarely the sole driver of where a company set up its business, says Fuller.
"There is so much scrutiny on multinationals that if they solely enter a jurisdictions for tax purposes, they will fall foul with the first report they have to submit, or Oxfam (a confederation of non-governmental organisations) will haul them out."
Fuller says companies operate in a society where their ethos and values are visible. "You have to think long and hard before you do things that would put you in a dark space."
He referred to the impact of reputational damage on companies associated with the Gupta family and how quickly things can go wrong once public opinion turns.
He also referred to the voluntary payments in the UK by global companies — such as Google — following significant social and political pressure because of the low effective tax rate they were paying.
Fuller says companies do not want the "heat" from society for paying low tax rates, notwithstanding that the double tax treaties allow it.
Mazansky calls the voluntary payment "extortion". "They were operating in a legal framework that was put in place and facilitated by the very government that is complaining."
Thabo Legwaila, head of tax at Citibank, says multinational companies operating in developing countries are more compliant than local companies. Collecting taxes for developing countries is becoming a big challenge because of their previous reliance on tax types that do not generate the incomes of the past, such as oil.
Many tax authorities, however, continue to distrust multinationals and some authorities have been seen to raise "ridiculous assessments". The multinational is left with the burden of proving why they should not be paying the amounts.
Mazansky says companies have no moral obligation to pay more than they are legally obliged to pay. Tax authorities that are unsatisfied with legislation are able to address it through legislative processes.
Fuller is, however, of the view that company leaders have to ask whether they are morally paying their fair share.
Mazansky used the example of a tax concession introduced in SA to stimulate investments in venture capital companies. If a taxpayer invests an amount in a venture capital company, the full investment is tax deductible.
Mazansky questioned why a company that gets a concession to reduce its taxable income would not use it.