How multinational firms take money offshore

15 Nov, 2019 - 00:11 0 Views

eBusiness Weekly

Tawanda Musarurwa

Zimbabwe could be losing out on millions each year as multinational firms in the country avoid tax through complex transactions between their subsidiaries.

A number of high profile cases have shown the variety and complexity of the transactions through which illicit financial flows (IFFs) — illegal movements of money or capital from one country to another — are taking place.

Illicit financial flows typically occur in countries with weak legal and institutional frameworks, and Zimbabwean authorities are increasingly recognising the problem.

Among the methods of illicit transactions taking place is what is known as transfer pricing — when intra-company transactions are accounted for at prices in excess of cost.

Such transactions are supposed to follow the “arm’s length principle” — a term used to describe transactions conducted at market rates and on an equal footing between two independent parties — but when they do not, transfer pricing occurs.

In Zimbabwe, several companies have been caught on the wrong side of the law as this kind of tax evasion becomes increasingly rampant.

The companies include international firms and those that operate in the country but are incorporated outside of it.

“We believe there could have been outward flow of money due to related party transactions which are not at arm’s length due to lack of sufficient legislation to tackle transfer pricing issues,” said Zimra commissioner general Faith Mazani in response to emailed questions.

The arm’s length principle has existed under Sections 23, 24 and 98 of the Income Tax Act for a number of years. But the guidance by which Zimra determines whether transactions are consistent with the arm’s length principle was only introduced in 2016.

The latest upgrade of the Income Tax Act — Section 98B — requires that every person who engages or will engage in a related party transaction, must submit a return to Zimra disclosing the details of the transaction or contemplated transaction.

“Zimra now has the relevant legislation to enforce under Sections 98A, 98B as read with the 35th Schedule of the Income Tax Act. Prior the upgrading of the legislation was updated, Zimra used to apply the anti-tax avoidance legislation under Section 98 of the Income Tax Act but its application was not effective,” said Mazani.

Over the past few years, Zimra has dragged a number of multinational companies before the courts for tax evasion through forms of transfer pricing and related-party transactions.

But related party transactions are not inherently sinister.

“Related party transactions are not a problem on their own, but become a challenge when the prices used for the transactions are not at arm’s length,” added Mazani.

“When transactions are not (at) arm’s length, Zimra applies the relevant legislation to make adjustments for tax purposes through audits.”

According to tax experts Fungai Vongayi, an associate director and head of Transfer Pricing at Ernst & Young, and Josephine Banda, head of Ernst & Young Central Africa, the legal requirement to submit a Transfer Pricing Return provides Zimra with information which assists them in conducting a Transfer Pricing risk assessment.

“Besides being a risk assessment tool for Zimra, the Transfer Pricing Return also provides Zimra with useful information to conduct a Transfer Pricing audit.

“Tax avoidance or non-disclosure has been a concern for many tax jurisdictions around the world. As Africa is steadily making progress in becoming integrated within the highly complex and globalised tax environment, many structural measures are being put in place to mitigate tax leakage through tax evasion or avoidance,” they said in a joint emailed response.

Some prominent cases that Zimra has had to deal with include:

Standard Chartered Zimbabwe vs Zimra

Standard Chartered Zimbabwe was dragged to the courts by Zimra over the non-payment of tax on a US$100 million facility it acquired for its local clients sourced from parent company Standard Chartered Bank Plc London and to which it repaid with interest to the offshore bank.

The local subsidiary argued that the beneficiaries sourced offshore funds which they borrowed from Standard Chartered Bank PLC London (the offshore bank) and repaid with interest to the offshore bank, with it (Standard Chartered Zimbabwe) acting merely as a conduit for facilitating access to the funds and for seeking RBZ approval on behalf of both the borrowers and the offshore bank, hence was not obliged to pay tax for those funds.

But the High Court judged in Zimra’s favour, determining that Standard Chartered Zimbabwe, as payer of the fees, was obliged to withhold the non-resident tax and remit such tax to the Commissioner within 30 days as per Section 30 of the Income Tax Act.

Efforts to get a comment from Standard Chartered Zimbabwe were fruitless as questions sent to the bank’s chief executive Ralph Watungwa went unanswered.

AT International vs Zimra

High Court documents (HH 823-15) show that AT International, a firm incorporated in the British Virgin Islands, a British overseas territory in the Caribbean (but is not permitted to trade in that jurisdiction) came into partnership with the Reserve Bank of Zimbabwe (RBZ), through which the former supplied basic commodities valued at US$11,7 million to the RBZ between July and September 2008.

Zimra conducted a tax investigation of the purchases in foreign currency of the Reserve Bank of Zimbabwe from the appellant for the period between May 2006 and September 2008 and the investigations revealed non-payment of value added tax (VAT) on the supplies made in that period. AT International disputed that they have a tax liability in Zimbabwe as they do not have a self-established presence in the country.

The group argued that its involvement with Zimbabwe was limited to the supply of its stock to agents who operate on a commission basis to store and handle the stock it holds in Zimbabwe. But the High Court determined that AT International was required to be registered under sections 23 (1) and (3) and (4) (b) as read with s 56 (1) and (3) of VAT Act and can be treated as would a registered operator and therefore liable to pay tax.

AT International did not respond to requests for an interview.

Meanwhile in terms of dealing with IFFs, the Reserve Bank of Zimbabwe — which has a purview over externalisation issues — has said there has been an increase in service payments between related companies, especially holding companies and their subsidiaries resulting in some corporates inflating service fees in order to externalise foreign currency.

To deal with the problem, the RBZ has determined that service payments should not exceed an aggregate of 3 percent of revenue as well as requiring prior RBZ approval.

And with most company transactions going through the official banking system, the RBZ has said any financial institution found to be complicit in externalisation is legally punishable under the Money Laundering and Proceeds of Crime Act (Chapter 9:24).

 

This story was produced by Business Weekly. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.

 

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