Calls for failed BEE deals to be probed as black partners see no benefits
CITY-PRESS.NEWS /26 NOVEMBER 2018 - 15.30 / JUSTIN BROWN
The vast majority of black people who have entered into empowerment deals have not seen dividends, profits or any other benefits from these transactions.
This is according to Logan Wort, African Tax Administration Forum (Ataf) executive secretary, who was speaking at the seventh annual African Transfer Pricing Summit held in Johannesburg last week.
Ataf, an international organisation that provides a platform for cooperation among African tax authorities, was formed in 2008; has 38 African member countries; is headquartered in Pretoria; and has a 20-member secretariat.
Wort, a former National Treasury spokesperson, said South Africa contributed 40% to Ataf’s total annual budget and in its nine years the organisation had trained 15 000 tax officials throughout the continent.
“I have known many people that have gone into black economic empowerment deals over the past years and I will tell you that 90% of them [say] they have not seen dividends or profits.
"Some of them ... were listed as directors and those companies got tenders and a lot of business because of black faces on those letterheads,” Wort said.
“Because of profit stripping, transfer pricing, intercompany related businesses, I would suggest looking at why so many BEE participants did not receive a cent from these deals, 20 years on because there were never profits declared.”
Wort said that there was a need to investigate what percentage of BEE deals result in black partners getting benefits.
“There are companies that have made these deals to gain access to business.
"The beneficiaries of the deals have for many years been told that profits have been reduced, there are no profits, or that there are no dividends to be paid. Some remain indebted because they paid for those shares,” added Wort.
“It is possible that within those BEE deals – through transfer pricing activity and intercompany activity – profits were stripped out over the years, which robbed BEE partners. I’m saying there is a case here to be investigated.
“South Africa has a good reason to investigate related company transactions over two decades to find if those related companies’ transactions may have resulted in BEE partners not getting their share and value out of deals.
"I would suggest that more than 50% of BEE deals [did not] benefit the BEE partners.”
Regarding transfer pricing, Wort said South Africa faced huge transfer pricing challenges in the extractive industries.
Transfer pricing is the setting of the price for goods and services sold between related legal entities within an enterprise.
This presents opportunities for companies to manipulate prices at which goods and services are sold between the entities and in turn the manipulation of prices can been used to reduce the tax liabilities of the entities involved.
“Transfer pricing often raises highly complex, subjective and fact-intensive issues that lead to lengthy and costly disputes with tax payers and tax administration,” Wort said.
“South Africa’s challenges, when it comes to the extractive industries, aren’t different from the rest of Africa.”
Wort said when it comes to commodities, diamonds were the most vulnerable to price manipulation.
“The post-export sale of diamonds is often 50% more than the export price.
“That was proven in the report of the Financial Action Task Force in 2013, where it showed that 60 million carats of Africa diamonds were exported to Dubai and then sold to third parties for an average of 50% more without any value added.
"I imagine that South Africa is not spared in that process.
“The big thing for any country when it comes to tax losses would be trade mispricing and so I think it would be useful to look at whether the necessary risk and audit tools are there to look for the undervaluation of imports and overvaluation of exports.
“On the broader African continent, undervalued illicit financial flows are responsible for 60% of total illicit taxes that flow out of African countries.
“On average, an African country has less than 6% inspection capability at customs. You depend a lot on automation, scanning and a risk model.
"That risk model includes dealing with freight forwarders, bonded warehouses and so on.”
Wort said African countries give away too much in tax incentives.
“In the global index of what makes European companies decide to do business in Africa, tax incentives ranked at number 13. So there is no reason to give massive tax incentives.
“Africa needs to look at its domestic tax policy, including broadening the tax base, collecting more from individuals and introducing a better tax mix.
"A lot of African countries don’t have property or capital gains taxes, they rely on oil, gold and coffee. They need to move away from single-source tax reliance.”
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER