Vol.3 No.11, 01 April 2003

Taxation Issues with Respect to International Corporations

by Mark Hennesy

Most Developing Countries, including South Africa, are vying among themselves to attract investment by multi-national corporations. The author of this contribution to SANE Views, list member Mark Hennesy, points out here that this is by no means an automatically favourable arrangement for our national economy

For many years Mark Hennesy was a senior manager of a South African subsidiary of an American multi-national corporation. He is therefore intimately acquainted with the cost accounting. tax and profit structure of such corporations. The purpose of this submission by him to SANE Views is to draw attention to the potential loss of tax revenues by South Africa, and similarly by other developing nations, in favour of developed countries that are the homes of International Corporations'. In this contribution he points out some of the reasons why this is so.

The outcome of this is that there is a very high likelihood of taxation subsidy flowing from the subsidiary country to the 'Home Country' wherever a subsidiary of an International Corporation operates. Taken in global terms this means that there is a taxation flow from developing and emergent countries to the developed world.

International Corporations do bring advantages, such as the introduction of new technology and expertise. It is therefore not suggested that one should be against such corporations operating or investing in our country. However we should be very aware of the disadvantages that arise from their operations and the way they are measured. Corporations and their executives will ultimately behave according to how they are measured. If that results in tax revenues flowing to the 'Home Country' rather than to South Africa, then that is what is going to happen.

South Africa should therefore in the first place be a little more careful before allowing South African assets to be taken over by international corporations, and then also be aware that in doing so, to a significant degree, our tax authorities are losing control of the future taxation flow from such assets. Similarly we should recognise that when we allow large owners of South African assets to move their 'Home Country' off-shore, something similar will take place.

In the second place South African tax authorities should apply innovative thinking to how to combat the distortions in tax flows. A movement of emphasis in the tax structure from profit to revenue would certainly help as far as imported goods are concerned, but this would tend to provide an incentive to exporters of finished goods, e.g. motor cars, to lower their transfer price to the corporation which would not help. Nevertheless the first step in addressing any problem is to recognise its existence, and that first step is the purpose of this memo.

April 2003

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