New research from Baker McKenzie, The Shape of Water: Tax Disputes in the Age of Intangible Value, shows that the amount of tax under dispute in Fortune 500 companies is equal to more than half of the profit growth in the Fortune 500. With disputes predicted to continue rising in the coming years, corporate taxpayers around the world, including, in Africa must revisit their tax strategies so that they are able to mitigate these risks.
Hard earned profit growth in the Fortune 500 is threatened by the scale of current tax disputes. Baker McKenzie's report notes that among the Fortune 500, as much as USD 75.3 billion is currently under dispute. Further, two thirds (65%) of tax leaders are of the opinion that the increase in tax disputes has arisen from fundamental shifts in how corporate value is defined.
Baker McKenzie's research also shows that African governments are investing more to improve their tax administration than they have in the past and that African revenue authorities are more sophisticated than ever before, especially with regard to how they define corporate value and how they calculate corporate tax liability.
These fundamental shifts in how corporate value is defined are the result of the complexity created by the digitization of businesses. These complexities include the free flow of value across multiple jurisdictions, without the need for customs or local operations. This flow of value draws on highly technical or specialist knowledge with the consequence that accurate quantification and attribution of location of tax liability has become increasingly complex.
Companies have become 'digital': technology companies are selling customers digital solutions; consumer goods organizations are digitizing traditional delivery models; financial firms are using AI to create new customer value and innovations like 3D printing are revolutionizing the manufacturing sector. As such, the distinction between traditional companies and ‘digital’ has become artificial (no pun intended). Business as a whole has been digitized – from operating structures and supply chains to customer interaction and service delivery. The challenge of capturing fluid, and in a sense immaterial, taxable value is, therefore, relevant to multinationals in all industries.
Although efforts are being made to implement new guidance in the form of Base Erosion and Profit Shifting (BEPS), tax authorities have been slow to respond to these changes. However, the realignment of taxation with economic activities and value creation has created new complexities and risk for corporations. For example, tax structures were once led by national legislation, but some tax authorities are now interpreting and adopting various elements of BEPS. This regulatory development has left organizations reeling, because authorities have taken a piecemeal approach by applying concepts not yet incorporated into law and retroactively imposing them on past tax filings, and Africa is no exception. Several African countries are party to The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI"), including South Africa, Egypt, and Nigeria.
Even though implementation of regulatory change will take time, it is advisable for multinationals to act now, whilst revisions are still underway, by building scalable and effective dispute management systems that are better designed to capture corporate value.
Tax directors should also be aware of new trends in enforcement – particularly audit digitization and hiring practices – that will affect how they interact with authorities. Innovation in electronic invoicing and data capturing now provide global tax authorities with an unprecedented view of the ‘digital footprint’ of corporate value – emboldening them to conduct increasingly far-reaching investigations. Some authorities even recruit in-house tax professionals to improve their understanding of modern value generation.
The reality of looming tax liability is one of the few certainties in life, and as such corporations should appreciate the real and material risk associated with the rise of tax disputes.