Tax disputes in Africa are on the rise, with the new wave of disputes extending beyond corporate income tax and transfer pricing to value-added tax (VAT), customs duties, withholding taxes and payroll taxes.
New and amended legislation, and the level of subjectivity in interpreting these changes, often create disputes. The evidence taxpayers present to support their tax positions then becomes critical.
Common triggers
One of the most common triggers for increased audit activity is discrepancies in a company’s own data.
Tax authorities now have access to more data than ever before, through information-sharing and mandatory documentation requirements, says Cabrini McCarrick, transfer pricing (TP) partner at international tax advisory firm Regan van Rooy.
“The simplest trigger is where officials evaluate tax returns, financial statements, legal agreements and local files and identify discrepancies.
“When tax authorities use your own information against you, it is not a very good position to be in,” she notes.
The firm hosted a webinar unpacking the risks and reasons behind the heightened audit and dispute activity in Africa. Revenue pressures generally lead to an increased focus on enforcement and tax collection.
“I have always thought that transfer pricing is the greatest gift to tax authorities because, by definition, there is no right answer. It is inherently subjective, so it is such an easy way to start an audit,” adds Regan van Rooy’s managing partner Caoilfhionn (pronounced Keelan) van der Walt.
Transfer pricing documentation impacts a company’s customs duties, VAT, expat tax, payroll and permanent establishment tax positions. In many instances, there is insufficient focus on what is in the TP documentation.
This often leads to exposure in other taxes.
Information requests not willy-nilly
Van der Walt warns that taxpayers should not assume that information requests from a tax authority are “innocuous or anodyne”. They should think of it as the start of a chess game. The thinking must be pragmatic and strategic.
According to McCarrick, information requests are comprehensive and take longer than before. “If your company receives a request for information, it is not just willy-nilly… someone is investing in looking at your business for a specific reason.”
Dealing with the initial request is critical.
The entire process – from the request to the formal audit investigation, interviews, the letter of audit findings, the assessment, and objections and appeals – can be a drawn-out process.
Around 5% of the cases make their way to the courts, but in most cases tax authorities and businesses enter into a negotiation process and reach a settlement. This can happen at any point during the process.
The entire process can take at least two years.
“That is why the best bet is always to try and avoid a dispute at any cost. They are extremely time consuming and requires a lot of documentation and resources,” says McCarrick.
Prevention rather than cure
Dr Daniel Erasmus, partner at TRM Tax Attorneys, believes prevention is better than cure. His advice to large multinational companies, particularly those susceptible to tax risks, is to establish internal tax risk steering committees.
These should be the central place where emerging tax risks are aired out and scrutinised.
Erasmus adds that tax authorities would, obviously, want to get their hands on the minutes and materials circulated at these discussions.
Hence, the importance of appointing a “litigation-ready” and experienced lawyer as chair to preserve attorney-client-privilege. The committee should scan all documentation provided to tax authorities to ensure that privilege is not breached.
Erasmus also advises multinationals to collect and collate all the necessary and relevant evidence as soon as risks are identified. “People move on, emails get lost, data [is] stored away and people forget.”
McCarrick notes that the new wave of tax disputes now includes all taxes where there is high-value and high-reputational impact.
Evidence is critical
“Once a taxpayer takes a position, they need to be able to explain it in a constructive narrative that is commercial savvy. It has to make commercial sense.”
She warns that the quality of disputes in Africa has increased due to the use of artificial intelligence and the sharing of information between tax authorities.
There has also been an increase in legal precedents in tax legislation. Companies must assess these developments and decide whether they have relevance for their business, and implement changes where necessary.
Increased disputes, new focus areas and tighter enforcement mean that companies must be “defence-ready” rather than remaining reactive.
This article was republished from Moneyweb. Read the original here.
