Roxanna Nyiri, National Head of Transfer Pricing and International Tax, BDO South Africa
With more and more small- to medium-sized companies operating across borders, many are falling victim to increasingly complex international tax rules. Once a local company becomes a multinational organisation, the complexity of its business operations increases dramatically, which goes hand-in-hand with a significant increase in tax complexity. Roxanna Nyiri, National Head of Transfer Pricing and International Tax at BDO South Africa, gives an insight into the various practices affecting South African entities doing business abroad.
A very important aspect of doing business internationally is planning for the tax implications of foreign business operations. There are numerous ways to “do business” in Africa or overseas, and not all of them involve setting up an actual office in a foreign country. When foreign activities are defined as creating a permanent establishment, local entities may be obligated to pay taxes in the foreign country on profits derived from products sold and services provided there.
In today’s global business village, the concept of withholding tax is not a foreign one. There are a number of local companies providing services in other countries, and these countries charge a specific amount of tax in respect of the services rendered. “From a BDO perspective, this can generally be summed up as the tax paid in respect of the service fee revenue. When the local country pays its taxes, there is a certain percentage of tax withheld by the foreign country, which is then paid over to the local authority. In this instance, the country making a payment needs to remit the balance,” states Nyiri. The concept also makes provision for the local entity to claim the credit on the tax that was paid.
In every country, the complex tax system significantly affects business decisions and business operations. The individual circumstances and objectives of companies can vary greatly. Nyiri tells us that “very often, however, the concept of withholding tax is not applied correctly. There are instances when the tax is withheld when it shouldn’t be. Other instances involve a scenario where the incorrect rate of withholding tax is applied.”
The rates in question are essentially determined by the domestic laws of the operating country and any double tax agreement, which could ordinarily reduce the rate of the withholding tax. “Once again, it is all about the correct application that allows the receiving country receive the credit. What is important to note is that any incorrect application causes unnecessary delays and more seriously, an inability to for the local entity to claim back the credit.”
In its capacity, BDO would act as a facilitator for local companies. “In an instance where the incorrect tax is applied, we would approach the local revenue authorities of the foreign entity to try and recover the tax on behalf of our clients. This process, however, is usually not as simple as it sounds. This is mainly due to the fact that each country is governed by their individual tax laws prescribing how the process should happen.”
More often than not, country-specific interpretations do not always align with the overarching international principles. “What we find is that there is a great deal of inconsistencies between the tax laws of various countries when it comes to international tax laws.” This creates a conundrum of sorts for local entities as the whole scenario isn’t minimalistic in nature and usually involves huge amounts of money. Taking this into account, local companies constantly run the risk of incurring additional operating costs that vary according to the nature of the business.
According to Nyiri, in doing business across borders companies need to always stay abreast of any applicable tax rules in the respective country. Where there is a mismatch, companies need to approach the revenue authorities for a ruling.
In order to address any misinterpretations, companies need to be more proactive - if there is a transaction with an offshore entity, local entities need to first have a thorough understanding of the nature of the transaction. “We always encourage our clients to approach the foreign-country authority for a ruling if there are any grey areas with the transaction.” Nyiri further advises that companies also need to be proactive in assessing the double tax agreement in place and making sure that there is an understanding of the different perspectives from both entities.
The biggest challenge experienced in recent times is that of getting offshore authorities to provide their interpretation in writing, or getting them to commit to a ruling in writing. In dealing with many of these authorities, there is generally not a specific time period for resolutions. For any local entity doing business abroad and being subjected to withholding tax principles, the single biggest factor to consider is the amount of money involved.
While dealing with other countries is at times challenging, South Africa also has its own nuances. Generally, when trying to claim back the withheld tax locally, there are two methods to do so which includes the rebate method and the deduction method. The rebate method encompasses services as they relate to transactions carried out offshore. If the same services are provided locally, the foreign entity is paying a withholding tax (locally sourced income) then the local entity can claim a deduction. Both methods provide a unique application for different scenarios.
As with any country around the world, doing business abroad does take time and requires careful planning. One needs to pay particular attention to various operational necessities. Nyiri believes that from a local point of view, the South African Revenue Services (SARS) can play a bigger role in assisting local entities. The local authority can help by being clearer in terms of the application of tax laws. In most instances, local entities have to go through a gauntlet in order to get answers. “These companies should ideally be able to lean on SARS for support. A bit more proactivity is required from SARS in this regard,” she concludes.