Deloitte Tax identifies three tax risks to consider when managing your supply chain

This article, prepared by Deloitte Tax, identifies international tax implications when restructuring your organisation’s supply chain activities. For additional information contact Louise Vosloo (Lead Director –  International Tax) at lvosloo@deloitte.co.za or Janien Jonker (Senior Tax Consultant) at jjonker@deloitte.co.za.

“The best supply chains aren’t just fast and cost-effective. They are also agile and adaptable, and they ensure that all their companies’ interests stay aligned.”

(Hau L. Lee, US Professor of Operations, Information and Technology in Harvard Business Review, Oct. 2004)

Three tax risks to consider when managing your supply chain

Supply Chain Management (SCM) aims at fulfilling customer demands through the most efficient use of resources, which includes distribution capacity, inventory and labour. Merely locating the assets and risks of one’s supply chain in a favourable tax jurisdiction is not sufficient. The functions, together with the people, must be located in the chosen jurisdiction to manage these particular assets and risks. It is essential that the systems and processes, implemented and applied, support these functions in order to create a sustainable tax benefit.

Local tax authorities will attempt to defend their tax base at all costs. This may result in the local tax authorities seeking substantial taxable capital gains and/or transfer pricing adjustments when restructuring actions (which reduce the ultimate tax they would have received) are implemented.

Therefore, careful planning and documentation substantiating the reasons why certain steps were taken, are essential to ensure most tax risks are mitigated. Transfer pricing documentation also forms an important part of the documentation required. In the absence thereof, a substantial amount of time and resources may need to be set aside in the event that adverse assessments have to be defended.

The following are a few tax risks to consider with regard to supply chain management:

Low tax jurisdictions

It is interesting to note that whenever a South African group is considering a restructure of its current operations, Mauritius is almost always the first “low-tax” jurisdiction to be considered, and justifiably so. Mauritius has a wide treaty network and a low tax rate, and it provides relief for capital gains tax when shares are sold.

However, it is common knowledge that whenever a “low-tax” jurisdiction (e.g. Guernsey, Mauritius, Isle of Man) is part of a company’s group structure, it is frowned upon by SARS. This is no surprise, as there is most likely no other reason to have an entity in such a location, other than for the provided tax benefits.

Therefore, even though a favourable tax jurisdiction can be chosen, it asks for something in return – substance.

This could be illustrated as follows:

Company Z, a South Africa tax resident, sets up an entity (Company Y) in the Netherlands, to optimise its supply chain management by utilising the tax benefits provided for. The following activities should, inter alia, be executed by Company Y to ensure it has sufficient substance in the Netherlands:

• No strategic or policy decisions regarding business operations should be taken by Company Z.
• All board meetings should take place in the Netherlands.
• Staff must be suitably qualified and provided with suitable equipment, such as telephones and computers.
• Decisions should not merely be “rubber-stamped”, as though already taken by Company Z.

The substance and risk are components that impact significantly on the amount of profits that may be attributed to the company in the supply chain, in this instance Company Y. In addition, in the event that the decisions pertaining to the day-to-day operations of Company Y are taken by Company Z, SARS could determine that Company Y is being “effectively managed” from South Africa, and subject it to South African tax on its worldwide income.

Double taxation agreements (“DTAs”)

A country with a wide treaty network is an important consideration.

In terms of supply chain management, the two primary articles of any DTA to watch out for are the articles dealing with permanent establishments and business profits.

Even if an entity is set up in a favourable tax jurisdiction, it should be careful about not carrying out any activities in South Africa that could result in the creation of a permanent establishment in South Africa.

This could be illustrated as follows:

Company X is set up in the Netherlands, but contracts are negotiated and signed on its behalf by a person in South Africa. This would result in the creation of a permanent establishment for South African tax purposes for Company X in terms of the DTA entered into between South Africa and the Netherlands.

In light of the above permanent establishment creation in South Africa, the particular DTA further determines that the profits attributable to the permanent establishment would be subject to South African tax, thus possibly negating any tax benefits that may have otherwise been generated.

Controlled foreign company (CFC) considerations

Our CFC legislation currently acts as an anti-avoidance provision by imputing the income of a foreign company and subjecting such income to tax in the hands of its South African shareholders.

It contains the so-called “diversionary-rules”, and Silke on International Tax at paragraph 3.6.2.2. states the following in respect thereof:

These rules, which are essentially provisions targeted at tax avoidance, are aimed at deterring South African taxpayers from entering into transactions aimed at shifting income that otherwise would have been taxable in South Africa, out of the South African tax net and into a taxing regime that is more beneficial.

The diversionary rules need to be reviewed when goods are sold and services rendered to South African residents who are connected parties in relation to the offshore entity.

Conclusion

When restructuring one’s current supply chain activities, it is important to consider the international tax implications, as set out above. One cannot implement new supply chain functions by only considering the physical execution thereof.

We recommend that you thoroughly research, consider and apply possible solutions to suit your company’s unique operations, which can result in potential tax savings.

Download the article in .pdf format . . . . Three tax risks to consider when managing your supply chain 

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Filed under: Finance, Risk Management, Taxation, anti-avoidance provision, capital gains tax, CFC, Controlled foreign company, Deloitte, Deloitte Tax, diversionary-rules, Double taxation agreements, DTA, international tax, international tax implications, low tax jurisdictions, low tax rate, Mauritius, SARS, Silke, South Africa, supply chain, tax, tax authorities, tax jurisdiction, taxable capital gains, Taxation, taxing regime, taxpayers, transfer pricing adjustments, treaty network, wide treaty network

Deloitte Tax discusses issues relating to global expansion and personnel secondments

This edition of Deloitte Tax News discusses issues relating to global expansion and integration, with particular focus on international personnel secondments. If you have any questions, contact Mark Silver at masilver@deloitte.co.za or Moray Wilson at morwilson@deloitte.co.za.

Click Here to download Deloitte Tax News

In this edition of Deloitte Tax News

Many organisations are looking to expand their businesses into new markets and, in the international context, the ‘global integration’ of operations is a common theme. In this edition of Tax News, we cover a number of topics that have relevance in this area, with a particular focus on issues relating to international personnel secondments.

Properly managing the appointment of personnel and the placement of these people in a location is critical to the success of any venture, and our first article examines how companies can better align their global mobility programmes to create real value.

We explore the principles that govern the taxation of employment income in South Africa, including: what constitutes ‘South African source income’, the tax exemption applicable to foreign service income and the confusing rules regarding the taxation of residential accommodation provided to expatriates.

There is a growing trend for organisations to use global talent pools and just-in-time staffing, and our article on short-term business travellers examines specific tax issues relating to this category of employee.

Africa continues to enjoy increased investor attention and our article on this topic identifies some key factors to consider when expanding one’s business into Africa.

We consider some important corporate tax issues arising from the ‘external company’ regime in the new Companies Act, and we conclude this edition with an update on the regulations issued under section 12L of the Income Tax Act to promote energy savings.

In our personality slot, we profile Bernadette Abbott, who heads up the Global Employer Services division for Deloitte in South Africa.

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We trust that you will enjoy and benefit from the content in this publication. If you would like to provide us with your feedback or if you have any questions, feel free to contact Mark Silver at masilver@deloitte.co.za or Moray Wilson at morwilson@deloitte.co.za

Filed under: Executive Leadership, Finance, Talent & Human Capital, Taxation, Africa, appointment, Companies Act, corporate tax, Deloitte, employment income, expatriates, foreign service income, global employer services, global expansion, global integration, global mobility programmes, global talent pools, just-in-time staffing, new markets, personnel secondments, placement, residential accommodation, South Africa, tax, tax exemption, Taxation

Duane Newman of Deloitte Tax explains how treasury’s R25bn package will support growth in SA

This article, authored by Duane Newman (lead director for Deloitte Tax Management Consulting), explains how  the R25 billion allocated by National Treasury will be used to support growth in South Africa. You may contact Duane at dnewman@deloitte.co.za

Click Here to access the original article published on MoneyWeb

Grants and incentives will be a national focus over the next six years

The Medium Term Budget Policy Statement (MTBPS) issued by Finance Minister Pravin Gordhan on 25 October 2011 announced that the Medium-Term Expenditure Framework (MTEF) will introduce an economic support package to encourage improvements in competitiveness and promote structural change within the South African economy.

Following the contraction of capital expenditure during the 2009 recession, private capital investment has started to revive, expanding at an annual rate of 4% during the second quarter of 2011. The growth is largely attributable to purchases of machinery and transport equipment. Despite the capital investment recovery, real investment during the second quarter of 2011, remained 8% below pre-recession peak levels.

In response to the slowdown in the global economy South African’s fiscal and monetary policy remains supportive of growth. The employment gains and poverty reduction that government aspires to achieve require structural reforms to set the economy on a different growth path that increases labour absorption, improves international competitiveness, ensures a more equitable distribution of wealth and a transition to a green economy.

To achieve these goals government will make R25 billion available over the next six years through various grants and incentives to assist enterprises, boost industrial development and accelerate job creation. 

The primary focus of the R25 billion grants and incentives fund is to facilitate investment that attracts employment intensive industry and services to South Africa.  The incentives will build on the current incentives on offer for industrial investment, technology and training. Current incentives have not achieved the jobs creation estimates as initially planned. In many instance less job opportunities have been created. Also the incentives have not been widely accessed. Incentives for IDZs will be improved. At the moment there are no real incentives for investing in an IDZ.  The goal is to develop the IDZs into competitive logistics hubs participating in global supply chains and entrenching South Africa as a crucial gateway for trade into Africa.   Also very important is the alignment of trade, investment and energy policies to support the transition to a green economy.  Policy coherence in this instance is required to successfully transition to a green economy. 

Government acknowledges that investment in economic infrastructure has to coincide with a more competitive labour market that supports higher economic growth.  Transforming the South African labour market can only be achieved through adequate job creation, training and community works projects. These objectives are being pursued by means of the recently launched Jobs Fund administrated by the Development Bank of Southern Africa. The Jobs Fund was established at the beginning of the year with a value of R9 billion. So far only R352 million has been spend. A far more effective administrative system is required going forward to assist with job creation. 

The transition of South African economy to a green economy can only be achieved through major investments in renewable energy by the private sector. To facilitate the required investment the Industrial Development Corporation and the Development Bank of Southern Africa will have a specific focus on funding green projects.

The Department of Energy has moved away from a capital subsidy systems. It will rather provide appropriate feed in tariffs.  Other initiatives include reducing carbon emissions through government’s integrated resource plan, the proposed carbon tax and the introduction of a dedicated fund for green economy initiatives. 

Grants and incentives will be a national focus over the next six years as government attempts to achieve the country’s economic goals through incentivising investment that correlates with these objectives.

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Filed under: Executive Leadership, Finance, Financial Services, Government & Public Sector, Talent & Human Capital, Taxation, capital investment, Carbon Tax, Deloitte, Development Bank of Southern Africa, distribution of wealth, Duane Newman, economic growth, economic infrastructure, economic support package, employment, grants, green economy, incentives, industrial investment, international competitiveness, job creation, Jobs Fund, Medium Term Budget Policy Statement, Medium-Term Expenditure Framework, National Treasury, Pravin Gordhan, South Africa, South African economy, structural change, tax

What effect will the Foreign Account Tax Compliance Act (FATCA) have on South African financial institutions?

This article, prepared by the Deloitte Financial Services Tax Team, discusses FATCA compliance for South African financial institutions. If you have any questions, contact Nazrien Kader at nkader@deloitte.co.za

Foreign Account Tax Compliance Act (FATCA) for South African financial institutions

FATCA requires Foreign Financial Institutions (FFI) to obtain information about every holder of every account across all of their affiliated entities, to comply with verification and due diligence procedures to identify US accounts and to report annually with respect to any US account or suffer the new 30% withholding.

Under newly proposed U.S. Treasury Code Sections 1471 through 1474, effective for payments after December 31, 2012, all foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the U.S. Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to the same 30 percent withholding. This new reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and “know your customer” procedures utilised by foreign banks. Chief compliance officers, tax reporting heads and other key players within your organisation will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with Foreign Account Tax Compliance Act (FATCA) non-compliance.

Relevance and impact

The legislative intent of FATCA is to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts. As such, this revenue raising provision, which was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147), is expected to significantly impact the systems and operations of both U.S. and non-U.S. companies.

While the regulations have not been finalised to date, companies will likely need to make modifications to their internal systems, control frameworks, processes and procedures for timely compliance with these regulations on or before their effective date of January 1, 2013.

Practical considerations

If a financial institution enters into an agreement with the IRS there are some immediate considerations, including:

• How will US persons be managed? Will they be held in specific entities, jurisdictions and will they be offered all products?
• How will US persons be identified? FATCA does, in effect, require checking the whole of the customer base to identify a relatively small population.
• What are the systems implications? There are likely to be system enhancements required to flag and track US persons as well as linking to Know-Your-Customer information.
• Will account opening procedures be changed in order to positively identify US persons in accordance with their IRS definition?
• How will the project be managed throughout a group? The IRS will expect common compliance benchmarks and it may be effective to open a dialogue with the IRS to discuss plans and scope, etc.
• What controls will be put in place to ensure compliance? There is a separate independent audit requirement. The IRS could terminate the agreement with the consequent 30% withholding tax applied on all proceeds from financial investments in the US.
• What exemptions and possible negotiations with the US Treasury should be considered?

Download the full article . . . .  Foreign Account Tax Compliance Act for South African financial institutions

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Filed under: Executive Leadership, Financial Services, Deloitte, FATCA, financial services, Foreign Account Tax Compliance Act, Foreign Financial Institutions, non-financial foreign entities, tax, tax reporting, U.S. Treasury Code

Tackling tax and regulatory challenges when investing in Africa

 

by Billy Joubert (Tax Director – Deloitte Tax) and Dr Jacek Guzek (Senior Manager – Deloitte Consulting)

Africa offers unique opportunities to multi-national enterprises (MNE’s) as part of their strategies for growth. It is commonly recognised that Africa holds significant reserves of the world’s metals and minerals and is therefore of key importance for mining groups.

A surprising fact is that natural resources generate only a third of Africa’s GDP growth. The remainder comes from other sectors such as wholesale and retail, transportation, telecommunications and manufacturing.

Several African countries compare very well to the famed BRIC economies on ease of doing business and political risk. According to an UNCTAD report, the profitability of foreign companies in Africa has been consistently higher than in most other regions in the world. Since 2004, Africa has had the highest growth rate of private foreign direct investment (FDI) into emerging markets, which in 2010 increased by more than 20%. The rate of return on FDI in Africa has averaged 29% since 1990, and since 1991 it has been higher than in all other regions – by a high margin in a number of years.

Read the full article . . . .  Investments into Africa – Tackling tax and regulatory challenges

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Filed under: Executive Leadership, Deloitte, investing in Africa, regulatory challenges, tax

Deloitte Tax News

This edition of Tax News focuses on taxpayer engagement with SARS, more particularly some of the administrative practices and powers of SARS and how these impact on taxpayers, and on the rights and remedies available to taxpayers.

We have recently witnessed SARS engaging in a number of “information gathering meetings” with taxpayers. In our experience, it is important that taxpayers exercise considerable care in preparing for and participating in these interactions with SARS, and our article on this topic provides some insight into what taxpayers can expect in such meetings.

In order for taxpayers to fully exercise their rights when dealing with SARS, it is crucial to have a proper understanding of SARS’ powers and the extent of the rights held by taxpayers. We explore these issues in two articles, one specifically dealing with the rights granted to taxpayers under the Promotion of Administrative Justice Act.

We also provide some information on our web-based technology (Tax Controversy Manager) that is designed to assist taxpayers in managing data flow prior to and during tax examinations.

Although there are still a number of areas of uncertainty, in appropriate circumstances, we believe that SARS’ Voluntary Disclosure Programme (VDP) offers real value to taxpayers. The VDP now has less than 8 months left to run and we provide an update on some of the critical issues to consider when engaging in this process.

In our personality slot, we profile Nazrien Kader, the recently appointed head of Tax & Legal Services for Deloitte in Southern Africa.

We trust that you will enjoy and benefit from the content in this publication. Please feel free to provide us with your feedback via e-mail.

Access the full report . . . . Deloitte Tax News

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Filed under: Taxation, Deloitte, South Africa, tax

Tax Enabled ERP Solutions – Unlocking tangible value from your ERP implementation

Enterprise Resource Planning (“ERP”) provides an opportunity for companies to track and monitor business flows. While this creates a significant benefit across the highly regulated and diverse landscapes in which companies operate, there is additional value to be unlocked through a carefully designed ERP system.

Organisations in the midst of implementing or upgrading an ERP system often overlook the importance of the tax department as stakeholders of the system. The organisations invest in deep operational improvements, but ignore broader issues of structural tax planning or they make supply chain decisions without understanding their full tax implications.

Taxes are directly affected by a company’s overall operating model and as such, constitute a structural cost. The choices made today – how contracts are negotiated, who controls manufacturing processes, how inputs are sourced, how products are distributed – determine the structural tax obligations in future. Only when strategic tax planning forms an integral part of the overall business vision will it be possible to drive down a company’s structural tax rate.

However, effective and long term tax planning requires an understanding of the group’s strategic objectives, goals and constraints. Up to 40% of the increase in profit, which companies may generate from supply chain improvements, can be consumed by taxes. Therefore, to reduce potential tax leakage, it is essential to consider the tax element of an ERP solution.

Simultaneously, businesses increasingly require their tax functions to provide insight for critical decisions. Fast, accurate delivery of the tax provision and tax calculations for financial reporting purposes, as well as reporting on tax compliance filings and for management decisionmaking, are all minimum expectations today.

Frequently, the unique needs and requirements of the tax function are not adequately addressed when implementing an ERP system, as the current “as is” tax structure is implemented with the new ERP system, relinquishing potential tax benefits and forcing the tax department to continue inefficient manual processes for tax compliance, planning and forecasting.

Therefore, according to Forrester, “Smart (technology) buyers have started to include a new factor in their sourcing decisions: tax implications. Understanding how taxes will be affected can help companies make better sourcing decisions and fund new projects.”

Tax Enabled ERP Solutions: Direct and Indirect Tax Benefits

A well designed Tax Enabled ERP Solution can increase speed, accuracy and data integrity — all of which are important, particularly when working through lastminute updates at either quarter-end or year-end. These improved data collection processes also help companies better manage workflow, which in turn increases visibility. Furthermore, it provides greater control over information and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities such as strategic income tax planning.

A Tax Enabled ERP Solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations such as: maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.

By considering the tax implications during the ERP design process, companies are able to ensure that the ERP system produces the critical tax-relevant data and information needed to streamline tax compliance processes, more effectively identify and implement tax savings strategies, and provide better audit support.

Currently many ERP-systems do not give visibility of many indirect taxes (VAT and Customs) which results in much data manipulation outside the system to effectively manage these taxes.

A Tax Enabled ERP Solution should be designed and configured to easily provide financial information that may historically have been inaccessible and enable improved capture processing and reporting throughout the financial and tax processes. In addition, it should enable improved data collection processes, allowing the tax department to work more efficiently and to deliver value to the organisation in new ways.

As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that at best, do not enhance the tax reporting process, and at worst: actually impede access to tax-sensitive information and do not take advantage of potential tax savings.

Tax Enabled ERP Solutions: Overcoming the Challenges Faced by Global Organisations

Operating a global organisation poses very specific challenges in the area of tax management and reporting. These may include unusual taxes being imposed (such as withholding taxes on administrative and technical fees), regulatory approval that is required for certain types of transactions, combined with a lack of relief in terms of double tax agreements. Group Tax Managers need to constantly be up to date with the issues existing in those countries to avoid lengthy delays in payments and penalties. While it is not possible to foresee all challenges, organisations that have, or intend having, a multinational presence can reduce one of their significant risks by ensuring that their ERP solution is tax enabled.

Contact Details:

Duane Newman

Duane is the director who leads the Tax Management Consulting business in South Africa. This business specialises in implementing tax technology.

+ 27 (0)11 806 5362 or

dnewman@deloitte.co.za

Frank van Niekerk

Frank is the director who leads the SAP business in South Africa.

+27 (0)11 209 8028 or

fvanniekerk@deloitte.co.za

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Filed under: Taxation, Deloitte, ERP, structural tax rate, structural tax strategies, tax, tax enabled ERP systems, tax planning, tax savings, technology

Effective Integration, Enhanced Decision Making: The Risk Intelligent Tax Executive

No one ever said a tax executive’s life was easy. Simply staying current with the vast and ever-evolving number of international, national, and local tax and related financial accounting rules is a perennial challenge.

Working with tax authorities around the world requires high-level negotiation skills. And because tax processes often occur outside existing enterprise-wide platforms, tax controls and governance can lag behind those in the more established environment of financial reporting systems. Moreover, colleagues within the business sometimes view the tax executive’s role and department simply as an exercise in compliance and reporting with little value add.

Read full article . . . . Effective Integration, Enhanced Decision Making – The Risk Intelligent Tax Executive

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Filed under: Taxation, Deloitte, tax