Africa: The Rising Tide of Tax Disputes

The Rising Tide of Tax DisputesTax Disputes arise when there is a disagreement between taxpayers and tax authorities regarding the interpretation or application of tax laws. These disputes may concern various issues such as the accuracy of a tax return, the eligibility for tax deductions or credits, the correct amount of tax liability, or transfer pricing adjustments. Tax disputes can lead to lengthy legal proceedings...

02 October 2018

By JJ van der Walt, Candidate Attorney, and Arnaaz Camay, Tax Executive, Tax Practice, Baker McKenzie Johannesburg

New research from Baker McKenzie, The Shape of Water: Tax DisputesTax Disputes arise when there is a disagreement between taxpayers and tax authorities regarding the interpretation or application of tax laws. These disputes may concern various issues such as the accuracy of a tax return, the eligibility for tax deductions or credits, the correct amount of tax liability, or transfer pricing adjustments. Tax disputes can lead to lengthy legal proceedings... 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 disputesTax Disputes arise when there is a disagreement between taxpayers and tax authorities regarding the interpretation or application of tax laws. These disputes may concern various issues such as the accuracy of a tax return, the eligibility for tax deductions or credits, the correct amount of tax liability, or transfer pricing adjustments. Tax disputes can lead to lengthy legal proceedings.... 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{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) of tax leaders are of the opinion that the increase in tax disputesTax Disputes arise when there is a disagreement between taxpayers and tax authorities regarding the interpretation or application of tax laws. These disputes may concern various issues such as the accuracy of a tax return, the eligibility for tax deductions or credits, the correct amount of tax liability, or transfer pricing adjustments. Tax disputes can lead to lengthy legal proceedings... 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 administrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... 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 taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The...tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure....
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 liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure... 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 ShiftingBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... (BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode...), 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 BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode.... 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 filingsA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations..., and Africa is no exception. Several African countries are party toThe Multilateral Convention to Implement Tax TreatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... Related Measures to Prevent Base Erosion and Profit ShiftingBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... (“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 liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure... 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 disputesTax Disputes arise when there is a disagreement between taxpayers and tax authorities regarding the interpretation or application of tax laws. These disputes may concern various issues such as the accuracy of a tax return, the eligibility for tax deductions or credits, the correct amount of tax liability, or transfer pricing adjustments. Tax disputes can lead to lengthy legal proceedings....