Follow the money to combat corporate impunity and growing inequality
A recent report estimates that almost half of all transnational corporations’ profits are shifted to tax havens each year
SA is in a high-unemployment, low-investment and low-growth trap. To address the problem, the government proposes budget cuts and austerity. The latest medium-term expenditure framework makes this unequivocally clear: it mandates that “any additional allocations proposed to a programme must be funded by a reduction in funding from another programme” referring to the expected cuts of 5% in 2020, 6% in 2021, and 7% in 2022.
Business Day noted that “If expenditure cuts of this magnitude are made, they would be the deepest since the infamous Growth Employment and Redistribution budget stabilisation process in 1996.” These cuts will not be made to wasteful expenditure and corruption, instead it will be to key sectors such as education and healthcare.
This will only deepen SA’s social and economic ills. What is needed is a fiscal and social stimulus. To do this government will need to raise more resources. To this end from November 5 to 7, President Cyril Ramaphosa will hold a second investment summit. The expectation is that big foreign investors can be persuaded to put their capital in SA’s productive sectors.
However, one has to ask if this is realistic, when fixed-capital formation over the past few years have been declining and has, in fact, reached a 14-year low. More concerning with respect to inward capital flows from transnational corporations are recent reports and exposures of how corporations are shifting huge amounts of capital from productive spheres of investment into tax or secrecy havens.
SA and other developing countries are more dependent on corporate income taxes than developed countries ... It is estimated that SA loses 7% of corporate income tax revenue each year
A recent report estimates that almost half of all transnational corporations’ profits are shifted to tax havens each year, reducing corporate income tax revenue by nearly $200bn, or 10% of global corporate tax receipts
As a result, we see countries competing against each other to seem more appealing to corporations by reducing their corporate tax rates — in the tax race to the bottom. Over the past three decades the global average corporate income tax rate declined by more than half.
SA and other developing countries are more dependent on corporate income taxes than developed countries. As a result, profit shifting adversely impacts on developing countries. It is estimated that SA loses 7% of corporate income tax revenue each year.
Much of this is related to transfer pricing, particularly from the mining sector, which has one of the highest incidences of profit shifting. These often take the form of profits leaving SA through sales commission fees, management fees and administration fees. Often, a combination of these different transactions are used. These transactions all lack economic substance, meaning that they do not have any basis except to reduce the value of taxes liable.
Officials from Sars have stated that they allow transactions (without inspection) based on what seems reasonable by industry standards. Given this, most companies would utilise transfer pricing mechanisms within a range that would not result in any suspicion being raised. The case studies the Alternative Information and Development Centre (AIDC) has done have corroborated this, with Lonmin paying sales commission fees and management fees of about 2% each year. These were, in effect, paid to a post box, managed by Appleby, based in Bermuda.
Similarly, the AIDC has been doing an investigation over nearly five years, starting in 2015, investigating another mining corporation involved in fraud and transfer pricing practices. This investigation, until now referred to as the Crocodile Case, is coming to ahead as court papers are being filed towards litigating against the corporation implicated in illicit practices. They, too, used a sales commission fee at the high range of 9%, together with other profit-shifting mechanisms.
If these shifted profits are repatriated, it would mean that 28% would go to Sars and the rest would be available for paying decent wages, fulfilling social labour plan obligations, as well as for re-investing. This is why profit shifting is not just about tax avoidance (and/or evasion) but also about wage avoidance, contributing significantly to increasing income inequality.
Trade unions and transparency
Consequently, workers are among the most affected and therefore have the most to gain. Moreover, trade unions also hold a key that can unlock greater transparency by demanding the financial statements of corporations’ subsidiary companies during wage negotiations. It is important to follow the money, to find where the money goes, and who the real beneficiaries are.
The first step to tackle profit shifting and wage evasion is the restoration of Sars’ capacity after the state-capture travesty. However, to ensure that we do not put Sars at risk of another state-capture interlude requires publicly accessible registries of all taxpayers’ information. This strengthens the critical oversight role civil society can play in investigating deleterious practices (corporate and individual), thereby ensuring greater levels of accountability.
However, greater transparency is not enough, it is also critical that we strengthen other measures of accountability. This will require the implementation of reforms to both national and international tax law:
- At a national level, legislating a general anti-tax avoidance agreement act that will be able to give statutory bodies, including Sars, real power to take up legal cases against corporations involved in profit-shifting practices.
- Internationally, a transition to a global minimum effective corporate tax rate and the introduction of a formulary apportionment unitary tax system, which would put an end to the tax race to the bottom, as well as ensure that corporations pay taxes according to where workers are located, and where sales are made.
SA requires more resources to finance social development and adequately tackle mass unemployment, inequality and deepening socio-economic ills. Combating profit shifting and wage evasion is one way to do it.
• Brown is economic justice programme manager at the Alternative Information and Development Centre.