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The East African : Dec 19th 2015
34 The EastAfrican BUSINESS DECEMBER 19-25,2015 New BEPS tax ≥ules will inc≥ease global consistency, cut tax avoidance COMMENTARY NIKHIL HIRA “We are seeing a changing perspective of taxation and increased sharing of information between tax authorities across borders.” T he past few years have seen numerous complex structures designed to minimise tax liabili- ties being attacked by revenue authorities around the world. Many of these structures were not necessarily illegal and they sought to avoid — not evade — tax using available reliefs, exemptions and allowances. The origins of cross-border tax planning can be traced back to 1920, when there were relatively few companies with interests other than in their home countries. Over the years tax systems became more complex but at the same time more inconsistencies arose. As the world moved into one of the biggest recessions it has witnessed in 2008, pressure on governments to make ends meet grew. Pressure to raise revenues and a general backlash from the public in many developed countries, made the authorities focus more on the myriad complex tax planning schemes. While most of these schemes were generally legal and used loopholes in the law, the moral aspects of it all came to the fore and the debate raged. Therein came Base Erosion and Profit Shifting (BEPS) and the associated actions that are keeping taxpayers and their advisors awake at night. BEPS refers to tax outcomes that may result in stateless income or the shifting of profits from a hightax jurisdiction to a low-tax one such as a tax haven. Tax planning strategies take advantages of rules in one coun- try to achieve the desired outcome in anotherand without various countries working together it is not really possible to eradicate the use of these strategies. Thus the G20 came up with the idea of the OECD looking at BEPS on a global basis. Central to all the deliberations that came up with the final 15 actions in October were: • Eliminating tax mismatches such that all income is taxed • Aligning profits with value creation • Increasing consistent levels of transparency with tax authorities and • Implementing change in a co-ordinated fashion. In essence, we are seeing a changing perspective of taxation and increased sharing of information between tax authorities across borders, all designed to help governments collect additional revenue. All this is, and will continue, to bring enormous changes to tax laws with a view to bringing global consistency, tax treaties and the way business will need to operate in future. This attempt to achieve a level of consistency globally is not easy and is reflected in the fact that among the countries that participated in BEPS there has been the issue of achieving complete consensus on the various actions. Indeed, in most of the 15 ac- tions, there are three possible levels of endorsement: minimum standards, common approach and best practices. In the end the effectiveness of the 15 file disclosing and analysing the activities in each country. Countries in the East African region already have transfer pricing rules in place and it is expected that some of these new requirements will be incorporated into local transfer pricing rules. Clearly the additional reporting under country-by-country is likely to be onerous on business and waiting until the requirement is formally in place before acting is dangerous. Perhaps businesses need to consider some form of simulation of past periods to ensure that the information is available and accessible. Remember businesses may well need to alter their IT systems to cope with the new requirement. At a high level country-by- country reporting will provide local authorities with a considerable amount of information regarding the global presence of business. This is certainly going to raise more questions by the authorities — and many more fishing expeditions. One is going to have to be ever vigilant. Business model The second area that busi- nesses needs to prepare for is their business model and financing of operations, most of which are closely linked to cross border activities. BEPS looks at the structure of intragroup financing and attempts to eliminate the use of entities or instruments that are viewed differently between lending and borrowing territories. Also, BEPS will look to restrict The new laws encourage increased sharing of information between tax authorities across borders. Picture: File actions is highly dependent on the various countries changing both their tax laws and the treaties that they have with other countries. There are however two areas that are likely to be significantly impacted in the short term — compliance and the business model. Businesses will need to start evaluating these as a priority to manage the associated risks. A key part of the BEPS actions is the requirement for countryby-country reporting, which will have significant impact on businesses and their level of finan- cial disclosure. A template for this reporting has been developed containing the standard items that will need to be disclosed by a group for all the countries where they have operations. At this stage it seems that this requirement will come into force in 2017 and that the initial disclosure will be in the parent entity jurisdiction. In addition to country-by-country, there is a recommendation that businesses maintain and provide a master file detailing transfer pricing policies covering all inter-company transactions and a local interest deductions to align with external finance costs of the group. Effectively the transfer pricing arrangements that were previously considered at a transactional level will now be considered at a global supply chain level. What is very clear from BEPS is that tax is changing at a rapid pace and all of us are going to be impacted in various ways. Preparation and planning are going to be critical to cope with the future. Nikhil Hira is a partner at Deloitte East Africa. The views expressed here do not necessarily reflect those of the firm. Ca≥ impo≥ts d≥op, t≥ade≥s u≥ge pa≥liament to amend new law By GITONGA MARETE Special Correspondent IMPORTERS OF used motor vehicles now want Kenya’s parliament to amend the newly passed law on duty, saying it is not only hurting Kenyans but may result in low tax collection after a decline of 20 per cent in vehicle imports. According to Car Importers Asso- ciation of Kenya (CIAK) chairman Peter Otieno, local motor vehicle imports have fallen from 12,00014,000 units per month to about 11,000. Data obtained from Kenya Ports Authority (KPA) shows that in June, motor vehicle imports stood at 14,111 units; in July they were 14,753 and in August 13,921. September and October recorded 12,189 and 11,483 units, respectively. The difference between July and October imports was 3,270, representing a 23 per cent decline. In the 2015/2016 budget, Treas- ury imposed a Ksh200,000 ($1,921) excise tax on all vehicles more than three years old from the date of first registration and Ksh150,000 ($1,441) for newer vehicles, expected to raise Ksh25 billion as part of efforts to finance the Ksh2.1 trillion ($2 billion) budget. Later, perhaps in response to the uproar against the law, Parliament passed the Excise Duty Bill with amendments recommending that used cars should be charged Ksh100,000 ($960) while new ones are levied Sh150,000 ($1,441), a suggestion President Uhuru Kenyatta rejected, reverting to the earlier law. The duty replaced the existing 20 per cent excise tax based on a vehicle’s value, which is charged alongside Customs and VAT. 36,224 Number of ports Kenya made by June last year after the service was introduced in April. Kenya Auto Bazaar Association secretary Charles Munyori warned that the targeted money would not be forthcoming, following decreased imports. “If you look at the tax for a high- end vehicle such as Toyota VX, it used to be nearly Ksh1 million but it has now fallen to a flat rate of Ksh200,000 ($1.9 million). With decreased imports of smaller vehicles, you don’t expect the taxman to collect as much as they expected,” said Mr Munyori. He said the remedy would be to amend the law and create an environmental levy for all machinery including manufacturing equipment, instead of “penalising” importers of used vehicles. Mr Munyori noted that if indeed the law were intended to mitigate the effects on the environment, the government should have introduced an environment levy charged on all motorised equipment and oil products, to be collected in the same way as the 1.5 per cent railway levy on local imports. “We made a proposal of 1.5 per cent levy, which would have led to collection of more revenue, but it was ignored. When you talk about pollution of the environment, even factories that use diesel play a key role, so imposing the charge only on vehicles is applying the law selectively,” he said.
Dec 12th 2015
Dec 26th 2015