Profit shifting can cost Guyana $$$ billions annually

Oct 28, 2018 News

…unless requisite laws are implemented- Charted Accountant

By Kiana Wilburg

On an annual basis, several developing countries are losing over US$200 billion simply because of a global taxation issue called “Profit Shifting.”
Profit shifting, in short, is where profits are made by company “A”, which operates in let’s say Guyana, but instead of that company reporting the profit to be taxed in Guyana, it finds ways of reporting that same profit in another country.
Countries such as Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Japan, Korea, Luxembourg, and Mexico, have all been able to plug this tax loophole by implementing stringent anti-profit shifting laws.

Chartered Accountant, Shawn Naughton

But if Guyana fails to do the same, it can very well end up losing billions of dollars that could support its development. This was recently noted by Chartered Accountant, Shawn Naughton.
During an interview with Kaieteur News, Naughton insisted that this is an issue, which the nation’s authorities must address with a sense of urgency and before first oil. He said that the failure to do this could see Guyana losing some $100B annually.
Naughton said, “Clearly, this practice of profit shifting would rob countries of tax revenue and therefore its development. Multinational companies (companies which operate cross borders through branches and/or sister companies) may benefit from profit shifting so they are motivated to take advantage of opportunities to ‘profit shift’ wherever the opportunity is made available to it.”
“The main reason for profit shifting by multinational companies is the minimization of their global tax bill. This is made possible because each country has its own unique tax laws with some countries taxing more harshly than others. Recognizing this, some multinational companies shift profits around to benefit from the best tax deal on offer.”
Naughton said that another but less recognized reason that multinational companies shift profits around is patriotism. He opined that some prefer to shift development to their home countries, wherever possible, and so, would deprive other countries to fulfill this objective.
HOW IT IS ACHIEVED
The Chartered Accountant noted that it is important for Guyanese to understand that profit shifting is achieved by collusion; collusion between two or more sister companies operating in two or more countries.
He said, “Let’s take the case of Chevron, and its subsidiary in Australia. That company’s profit shifting scheme shifted revenue away from its branch in Australia to the tune of US$260M but the authorities were able to get justice for this because they had anti-profit shifting laws…
“The Australian court ruled that US$260M must be taxed…In addition, the court ruled that Chevron should pay to the Australian government $40M in penalties for not abiding to the relevant laws.”
Naughton said that the aforementioned example underscores the point that profits earned in country “A”, as a result of operations in that country, should be taxed in country “A”. He stressed that this is the tax logic held globally, as evidenced by the tax policies of countries throughout the world.
The Chartered Accountant said, “This is a reasonable position to take since companies make use of resources available in the countries in which they operate so should contribute to the use of those resources (road network, etc). Ensuring that profits are reported for taxing purposes based on where it is earned are not easy to achieve without appropriate anti-profit shifting laws.”
ANTI-PROFIT SHIFTING LAWS
Naughton said that many countries have introduced legal rule, which seeks to protect it from profit shifting attempts by multinational companies. He said that there are also many countries, which have not yet done so.
He said, “One reason for countries not yet having anti profit shifting rules is costs. Many developing countries are still with tax systems, which fairly address domestic taxing matters but are without much by way of rules for addressing international tax issues such as profit shifting. This fact makes developing countries like Guyana an easy prey for profit shifting attempts.”
FORMULATING INT’L TAX POLICIES
According to Naughton, there is some good news for developing countries wanting to develop international tax laws to protect them from profit shifting attempts. He noted that model tax laws have been developed by a few organizations, which can help in the process of a country’s development of international tax laws.
He said that these organizations include the Organization of Economic Cooperation and Development (OECD). Naughton explained that OECD’s model is believed to be so robust that the UK (a member of the 30 plus economic powers making up the OECD) has included major sections of the model within its domestic laws without a single change.
He said that developing countries can therefore study the model, to understand the logic behind the measures in the model, then implement as is deemed appropriate (with or without changes).
The Chartered Accountant said that countries like Guyana, which suddenly attained international popularity, because of the new oil and gas industry, will be faced with a significant amount of international business activities.
He cautioned that these countries should therefore become more concerned about issues like profit shifting and should begin/continue taking steps to improve its protectionist measures.