-Tax Talk – All not so quiet on the Western front

In this series of articles, Cameron Kotze, the Tax Partner at Ernst and Young, discusses some topical tax issues for our readers.

Namibia joined the global community last year in introducing transfer pricing legislation to protect its tax base from transfer pricing abuses by multinational enterprises. Due to a perception of high incidences of transfer pricing within the Ministry of Finance, we expect that it would be a major focus area in years to come.However, according to some experts African and other developing countries are unable or unwilling, to properly invest in transfer pricing regimes, making them unable to police the regulations properly.Does the lack of investment and training on transfer pricing mean that multinationals operating in these countries is less at risk, or even more at risk? According to some experts this lack in training and investment in itself increases the risk in that the Revenue Authorities may literally attack everything.In recent years, many non-complying companies under the mistaken impression that monitoring was lax in these countries, fell prey to vigilant tax authorities.And in 40 per cent of cases where a tax adjustment was made, it also resulted in double taxation – a very rude awakening indeed! In the 2004 budget speech the Minister of Finance mentioned some remedies used by tax authorities globally to enforce transfer pricing regulation, including stricter penalties, new documentation requirements, increased information exchange, improved training and specialisation.As it stands, penalties for the late payment of income tax is currently in terms of the general penalty provisions in the Income Tax Act 24 of 1981 (“the Act”) in the form of interest at the draconian rate of 20 per cent per annum, calculated daily and compounded monthly.Unlike, South Africa the adjustment would probably not carry a deemed dividend tax and a separate penalty for underpayment of tax.While no documentation guidelines have been issued as yet, it is expected that a Practice Note dealing with transfer pricing and thin capitalisation will be issued soon and it would probably follow the South African Practice Note to a large degree.It is also expected that the corporate tax return would be amended in time to specifically require information regarding transfer pricing and also request the submission of written agreements in respect of inter-company transactions.It would be interesting to see whether the preparation and submission of transfer pricing policy documents would be made compulsory in Namibia.The Ministry of Finance currently can request information from a foreign Revenue Authority, necessary for carrying out the provisions of the double taxation agreements (“DTA”) or of its local tax laws, by using exchange of information provisions contained in the relevant DTA’s.While it is true that specialist resources and training to enforce transfer pricing regulations properly, is lacking at the moment, the Ministry of Finance will probably accept the fact that start-up costs in acquiring the resources and training is necessary and follow the SARS’ example in that regard.The Namibian Ministry of Finance is also not going at it alone – the Southern African Development Community (“SADC”) is also implementing transfer pricing rules as part of a programme to achieve tax harmonisation and has apparently set up a tax committee to offset capacity constraints in many countries.Most importantly, in cases of uncertainty, SARS is just a phone call away from neighbouring countries’ revenue authorities.It is very likely that the Ministry of Finance will adopt a similar approach to the SARS and initially focus on high risk transactions, i.e.transaction with connected persons in low tax jurisdictions, management fees, the payment of royalties and interest free loans etc and thereafter as their experience grows, focus on specific industries.Multinationals operating in Namibia, may opt for the wait and see approach, however, they should be aware that in time, a transfer audit is highly likely.And the longer they take to get their ducks in a row, the bigger the risk of being attacked and substantial interest as well as double taxation arising.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.Due to a perception of high incidences of transfer pricing within the Ministry of Finance, we expect that it would be a major focus area in years to come.However, according to some experts African and other developing countries are unable or unwilling, to properly invest in transfer pricing regimes, making them unable to police the regulations properly.Does the lack of investment and training on transfer pricing mean that multinationals operating in these countries is less at risk, or even more at risk? According to some experts this lack in training and investment in itself increases the risk in that the Revenue Authorities may literally attack everything.In recent years, many non-complying companies under the mistaken impression that monitoring was lax in these countries, fell prey to vigilant tax authorities.And in 40 per cent of cases where a tax adjustment was made, it also resulted in double taxation – a very rude awakening indeed! In the 2004 budget speech the Minister of Finance mentioned some remedies used by tax authorities globally to enforce transfer pricing regulation, including stricter penalties, new documentation requirements, increased information exchange, improved training and specialisation.As it stands, penalties for the late payment of income tax is currently in terms of the general penalty provisions in the Income Tax Act 24 of 1981 (“the Act”) in the form of interest at the draconian rate of 20 per cent per annum, calculated daily and compounded monthly.Unlike, South Africa the adjustment would probably not carry a deemed dividend tax and a separate penalty for underpayment of tax.While no documentation guidelines have been issued as yet, it is expected that a Practice Note dealing with transfer pricing and thin capitalisation will be issued soon and it would probably follow the South African Practice Note to a large degree.It is also expected that the corporate tax return would be amended in time to specifically require information regarding transfer pricing and also request the submission of written agreements in respect of inter-company transactions.It would be interesting to see whether the preparation and submission of transfer pricing policy documents would be made compulsory in Namibia.The Ministry of Finance currently can request information from a foreign Revenue Authority, necessary for carrying out the provisions of the double taxation agreements (“DTA”) or of its local tax laws, by using exchange of information provisions contained in the relevant DTA’s.While it is true that specialist resources and training to enforce transfer pricing regulations properly, is lacking at the moment, the Ministry of Finance will probably accept the fact that start-up costs in acquiring the resources and training is necessary and follow the SARS’ example in that regard.The Namibian Ministry of Finance is also not going at it alone – the Southern African Development Community (“SADC”) is also implementing transfer pricing rules as part of a programme to achieve tax harmonisation and has apparently set up a tax committee to offset capacity constraints in many countries.Most importantly, in cases of uncertainty, SARS is just a phone call away from neighbouring countries’ revenue authorities.It is very likely that the Ministry of Finance will adopt a similar approach to the SARS and initially focus on high risk transactions, i.e.transaction with connected persons in low tax jurisdictions, management fees, the payment of royalties and interest free loans etc and thereafter as their experience grows, focus on specific industries.Multinationals operating in Namibia, may opt for the wait and see approach, however, they should be aware that in time, a transfer audit is highly likely.And the longer they take to get their ducks in a row, the bigger the risk of being attacked and substantial interest as well as double taxation arising. Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.