25 July 2011

Africa Tax: Dwindling revenues means increased diligence from authorities

Submitted by: MyPressportal Team
The Africa Tax Conference, an annual event hosted by Ernst & Young, will be held for the first time in Kenya in October 2009.
The forum brings together taxation experts the world over. “If there be a time when the tax authorities have shown aggressiveness in revenue collection then it is now. The forum will therefore be an opportunity for business managers to rub shoulders with experts and gain invaluable knowledge on emerging tax planning measures”, Gitahi Gachahi, the Ernst & Young regional tax partner believes.

A shrinking revenue base is top of mind for tax authorities in Africa as much as it is for their counterparts the world over. The upshot for businesses is that they can expect a more rigorous pursuit of tax revenues from governments, substantiating the need for sound advice and assurance for full compliance with relevant legislation in every territory in which they operate.

That’s according to Charles Mackenzie, tax business development director Africa at Ernst & Young. He says this will be among the key themes at the annual Ernst & Young Africa Tax Conference.

“We have these conferences to better serve clients by connecting them with our teams across Africa; since taxation is a dynamic activity, it is necessary for companies to keep abreast of developments and trends to remain within the gambit of the law while minimising tax exposure,” Mackenzie says.

Gachahi further observes that in situations of economic down turn, a modern tax payer is faced with a dynamic market with many competitors, regulators, tax authorities and investors scrutinising transactions with unprecedented intensity. He or she requires ideas to be able to counter business risks including tax risks. The Africa Tax conference will explore some of the tax planning ideas that will help the tax payer be able to deal with the ever increasing tentacles of the revenue authorities.

Transfer pricing has been identified as one of the most important tax issues globally. According to a research done by Ernst & Young, nearly 40% of respondents interviewed regard transfer pricing as a very important tax issue. In the recent past revenue authorities have been requesting companies to prepare Transfer Pricing polices and related documentation. The target group cuts across all sectors. Multinational companies are therefore advised to ensure that they develop and implement a transfer pricing policy in line with the applicable tax legislation, says Gitahi Gachahi.

An examination of how revenue authorities across Africa are coping with a shrinking income base owing to the downturn is a key issue, confirms Mackenzie

Among the challenges presented by taxation is the interpretation of the laws which pertain to any one jurisdiction. Mackenzie says an emerging trend is that international standards and precedents are drawn upon by authorities, providing a best practice yardstick against which to gauge their tax legislation and collection policies. “Much of our client base is comprised of the world’s biggest and most prominent companies which seek to be tax complaint wherever they may operate. They also seek to avoid any surprises where tax is concerned, which may place their operations at risk,” he says.

This makes the case for sound advice. “By way of example, if a particular revenue authority believes a particular transaction is treated one way, but the tax payer has different interpretation, we are in a position to establish the correct one. That is where a natural tension between Ernst & Young and revenue authorities arises; given that we interpret such issues with reference to international case law and OECD precedents [Organisation for Economic Cooperation and Development] and other best practice standards.”

Mackenzie says in that in many cases, revenue authorities accept that Ernst & Young is better able to interpret legislation given that it has more facts at its disposal, the real challenge is to present those facts to the authorities in a cogent and reasoned fashion

He says compliance is just one element of tax optimisation. “It is in the interpretation which goes hand in hand with compliance that real value is added. And interpretation is not static; it is as dynamic as the constant stream of new legislation and legal precedent which emerge from the many nations which comprise the African continent.”

Mackenzie adds that it is notable too, that tax collection is not immune from the force of globalisation. “Increasingly, interpretation from one jurisdiction tends to influence activities in another. An exploding raft of global knowledge enables commissioners to use precedent to strengthen their arguments and, by the same token, provides the taxpayer with a yardstick to gauge his tax exposure.

“This is particularly so in the interpretation of double taxation agreements, which in Africa as a general rule, are in transition from old fashioned, cumbersome and unfriendly rules to ones which provide more certainty and facilitate trade.”

New technologies are also driving the market resulting in the introduction of many new approaches to increase efficiency and reduce risk. “By way of example, we will also take a detailed look at how African markets are evolving and how the internal audit function is working together with tax professionals to address tax risk,” Mackenzie notes.

The revenue authorities are coming up with modernization programs to enhance revenue collection. The modernisation programs have resulted into automated mechanism of tracking tax payers and tax evaders. Companies should be aware of the improved use of technology to keep pace with the revenue authorities, says Catherine Mbogo, a tax partner with Ernst & Young.

Many countries have not entered into double taxation treaties which would help in reducing the tax effects of transactions, observes Gitahi. The conference will help in sensitizing states to lobby with their revenue authorities and come up with double tax treaties to mitigate the effects of double taxation.

* The annual Ernst & Young Africa Tax Conference takes place in Nairobi, Kenya, from 4-7 October 2009.

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