TAXATION OF LARGE TAXPAYER ENTERPRISES Taxation of Multinational Enterprises (MNEs) – A case of the Zambia Revenue Authority By Mr. Wisdom M. Nhekairo Commissioner General

OUTLINE Rationale for setting up the Large Taxpayer Office Services provided by the Large Taxpayer Office Challenges and Risks posed by MNEs Dealing with Challenges

RATIONALE FOR SETTING UP THE LARGE TAXPAYER OFFICE It is a commonly observed phenomenon globally that a small group of largest taxpayers account for the majority of tax take in any given economy: Given this importance, a recent trend in tax administration has been to pay particular and targeted attention to this group of taxpayers, A common approach has been to establish an integrated Large Taxpayer Office. This approach is fundamentally premised on a one stop shop concept that provides the ability to deal with the taxpayer conclusively

RATIONALE CONT. All tax types are handled from one office Ensure adherence to standards enumerated in the taxpayer charter Enhanced relationships with corporate taxpayers based on intimate knowledge of the industry and business Proactive approach in dealing with our taxpayers Improved Service delivery arising from a productive interaction that demonstrates insight into unique business needs. Moving away from one size fits all approach Reduced administrative and compliance costs on both the taxpayer and the Revenue Authority

ORGANIZATION GOVERNANCE Based on the forgoing principles ZRA made deliberate steps to Introduce the Large Taxpayer Office (LTO) concept in he last quarter of 2008 following the Modernisation project of the Domestic Taxes Division with the help of the IMF. The LTO is headed by a Director reporting to the Commissioner Domestic Taxes and this office handles Income Tax, VAT and Mineral Royalty. In particular the ZRA LTO comprises four Units thus: Taxpayer Services Processing and Enforcement Audit (Two units within this – Mining & Non Mining) Business System Support and Intelligence

TAXPAYER SERVICES UNIT The LTO Taxpayer Services Unit performs the following functions: Taxpayer Information – Providing timely information to clients Registration – Processes registrations on all taxes handled by LTO Taxpayer Education – Engaging clients on topical issues affecting them and providing the necessary guidance Client Relationship – Enhancing taxpayer relations based on mutual respect, trust and transparency.

PROCESSING & ENFORCEMENT SERVICES UNIT The LTO Processing & Enforcement Unit performs the following functions: Receipt & Processing of tax returns and payments Taxpayer Accounting Processing of tax refunds Debt Management

AUDIT UNIT The Large Taxpayer Office has two distinct audit units, that are the Mining and Non Mining Units. The mandate of these two Units are : Undertake Risk Based & Issue Focused Audits e.g. credibility checks Undertake integrated audits

BUSINES SYSTEM SUPPORT & INTELLIGENCE UNIT The LTO Business System Support and Intelligence unit performs the following functions: Taxpayer Risk profiling Business analysis Implement Risk analysis in all work processes

TAXPAYER SELECTION CRITERIA For a taxpayer to qualify to belong to the Large Taxpayer Office they must meet the following criterion. Taxpayers with turnover of K20 billion and above; Specialized industries or business sectors operating in the following sectors Mining, Finance and Insurance sectors; or Multinationals with their group companies

CHALLENGES & RISKS The major challenges and risks the LTO faces include the following: Transfer Pricing – setting prices, conditions and terms on transactions with related parties on cross border transactions in such a way that profits arise in a country determined by the the MNE determines. Thin Capitalisation – Exploiting tax deductible interest flows. Hedging Transactions – Structuring complex commodity hedging transactions in such way that losses are reported in a country determined by the MNE Intragroup services - Pricing of management fees and technical services among others at non arms length basis and also whether these services have in fact been provided.

CHALLENGES & RISKS Effective systems audit – Effective audit of the taxpayer’s accounting information system so at to obtain assurance on the integrity of the information provided by the accounting system. Treaty Shopping – Incorporating parent companies in countries that have DTAs with the country of residence of the subsidiary company for the purposes of exploiting DTA provisions that have lower tax rates on certain transactions like , Interest, Royalties and Management and Consultancy fees that the parent company will undertake with the subsidiary.

DEALING WITH CHALLENGES The ZRA as been using a number of methods aimed at addressing the challenges and risks posed by MNEs: Legislation - The tax law has provisions for limiting transfer pricing and thin capitalisation Capacity building of staff: through training and workshops in specialised courses offered by CATA, ATAF, OECD among others. Cooperation with other tax jurisdictions, currently the Revenue authority has an MoU with the Norwegian Tax Administration aimed at strengthening specialised large taxpayer revenue administration.

DEALING WITH CHALLENGES Cont’d Transfer Pricing Practice note for staff to refer to during the course of their work. Enhanced Integrated audits Fostering enhanced relationships with taxpayers aimed at sensitizing them on various tax concerns.

CONCLUSION The LTO has since scored the following successes: Increased level of voluntary disclosures by taxpayers on tax underpayments. Reduced cost of enforcement for the Revenue Authority. Reduced cost of compliance for the taxpayers.

Thank You