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Tax Views Article - New developments in Nigeria, South Africa and Turkey

New developments in Nigeria, South Africa and Turkey

As global organizations face challenges to protect against, prepare for and resolve disputes with tax authorities, a 5-part webcast series from KPMG’s Global Tax Dispute Resolution and Controversy Services’ (GTDR&C) visits key jurisdictions across the globe to provide you with what you need to know to stay current. In the fourth of our series, Sharon Katz-Pearlman led a discussion with tax disputes leaders in Nigeria, South Africa and Turkey. Their discussion is summarized below.


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Around the world with KPMG’s Global Tax Dispute and Controversy network – New developments in Nigeria, South Africa and Turkey.

The fourth article of our series is based on a webcast led by Paul Lynch and featuring GTDR&C leaders from KPMG International’s network of firms in Nigeria, South Africa and Turkey, who highlighted what tax executives need to know to navigate current challenges in these jurisdictions. Their discussion is summarized below.

You can find details about other webcasts in this series here.

Nigeria – Victor Onyenkpa, Partner, KPMG in Nigeria

Until the past few years, the Nigerian government paid little attention to tax matters as it could comfortably depend on revenues from the country’s crude oil resources. But plunging crude oil prices have created new revenue pressures, and the Nigerian government is going after tax revenues with a vengeance. Now the Federal Inland Revenue Service (FIRS) is more likely to raise assessments and defend them aggressively through Nigeria’s administrative and court appeal system.

Nigeria operates a self-assessment tax system. Taxpayers calculate their taxes due and file returns, and the FIRS reviews the return, asks for clarifying information, and either accepts the filing or raises an administrative assessment for taxes considered unpaid. 

A taxpayer who disagrees with an assessment may file a notice of objection within 30 days of its receipt. At this point, the FIRS may ask for additional information. Based on further review, the FIRS may abandon the assessment or issue a Notice of Refusal to Amend the Tax Assessment – automatically triggering the appeal process. The taxpayer then has 30 days to launch an appeal to either administrative Tax Appeal Tribunal (TAT), which hears matters of fact, or the Federal High Court FHC). Cases not resolved at these levels can be appealed to the Judicial Division of the Court of Appeal or and as the final resort, to the Supreme Court.

The majority of taxpayers begin their appeal at the TAT, but almost all TAT decisions are appealed to the FHC and the majority of the TAT’s decisions are then overturned. Questions have been raised about the competence of the TAT to hear tax cases, as Nigeria’s constitution gives jurisdiction over tax matters to the FHC. Three constitutional challenges have been heard by the FHC, with inconsistent judgments. In two cases, the FHC agreed that the TAT has no jurisdiction. In the third case, the FHC held that the TAT’s role is to assist the FHC, not usurp it.

The current situation is causing some taxpayers to skip the TAT stage and take their case to the FHC directly, where the majority of recent cases have favored taxpayers. The high proportion of taxpayer wins may be due to the FIRS’ failure to conduct appropriate internal reviews before making assessments. It could also stem from the FIRS’ use of in-house lawyers – who are seen as less rigorous than those in private practice – to test the strength of FIRS’s positions and determine which cases to litigate. Where the TAT finds against the taxpayer, the taxpayer is required to pay the amount at issue, even if they are taking their appeal further.

In addition, TAT decisions do not always address the tax law principle in question in the dispute. In a recent value added tax (VAT) dispute, for example, the TAT ignored the legal definition of ‘imported service’ and found VAT applied to a service that met the definition because the specific service itself was not exempt under the law.

In addition, from the audit stage through to the higher courts, taxpayers face considerable uncertainty from issues such as:

• the FIRS’ application of contradictory provisions in the tax law, even where the inconsistency has clearly resulted from amendments over the years that were made without considering their impact on other provisions

• contradictory judgments issued by the FHC, resulting in uncertainty over which judgment to follow (as in the constitutional challenges to the TAT’s jurisdiction)

• the FIRS’ routine practice of raising assessment refusal notices well beyond the official 30-day cut-off.

Nevertheless, as more tax cases are heard by the courts, their understanding of the issues is expected to increase, improving the quality of their judgments and providing more precedential certainty for taxpayers.

In today’s current environment, it’s more important than ever to have good documentation to back up your tax positions. Also keep in mind that the FIRS’ determination to maximize collections means it is open to negotiations ‘without prejudice’, so you may get a better outcome by working out a settlement, especially given the length of time it takes for court proceedings to conclude. The most effective negotiations occur at the highest levels within the FIRS, so you may be able to achieve optimal results by involving third-party advisors who have developed experience and relationships with the FIRS’ senior officials. 

South Africa – Roula Hadjipaschalis, Director, Corporate Tax, Tax Controversy and Dispute Resolution, KPMG in South Africa

Despite weak economic conditions, South Africa’s tax authorities are achieving record tax collections, with growth in tax revenues climbing faster the country’s GDP in recent years. Tax revenues topped 1 trillion South African rand (ZAR) for the first time in 2015-16, exceeding its target by more than ZAR0.2 billion.¹

The four main revenue contributors were:

• Personal income tax: 36 percent

• Value added tax: 26 percent

• Corporate income tax: 18 percent

• Customs and excise duties: 14 percent²

The South African Revenue Service (SARS) has achieved these results by wielding the new and expanded powers it enjoys under the Tax Administration Act (TAA). The act took effect in 2012 and is intended to balance the rights of the tax authority against those of the taxpayer. The SARS is the TAA’s main architect, however, and the frequent amendments that the SARS has made – often to overturn taxpayers’ successful objections – have greatly strengthened its hand. 

Powers granted to SARS under the ITA include the following:

• Third-party information requests – The SARS has the right to demand information about taxpayers from their business associates.

• Third party payments – The SARS has the right to demand suppliers re-direct their payments to taxpayers to the SARS to cover the taxpayer’s tax debts.

• New powers of SARS to interview – The SARS has the right to enter taxpayers’ business premises and interview employees.

• Search and seizure – The SARS has broad powers to search premises and seize assets in cases where the SARS suspects fraud or that the taxpayer is liquidating assets to protect them from collection action.

• Jeopardy assessment – The SARS has the right to accelerate collections in cases where it believes a delay would put the collection at risk.

However, no detailed regulations have been provided to guide the SARS in exercising its new powers. In the case of employee interviews, for example, Australia has set out detailed guidelines to help avoid adverse outcomes due to information from unknowledgeable or disgruntled employees, including requirements for written questions and responses, for employees to swear oaths and for employees to be prepared to testify in court if needed. The lack of such rules casts considerable doubt on the quality of information received by the SARS from employees.

A number of other trends are propelling levels of uncertainty and tax disputes even higher:

• Tension between various SARS divisions is impeding communication, creating silos and resulting in multiple requests to taxpayers from different divisions on the same or similar issues.

• The courts have supported taxpayers’ rights to correct administrative actions in a number of cases, but taxpayers in similar situations are not pursuing corrections on their own behalf due to the prohibitive time and expense involved.

• The SARS suspects virtually all transfer prices as profit shifting strategies and is increasingly aggressive in challenging taxpayers’ positions.

• The SARS looks to more developed tax systems (e.g. Australia, Canada, UK) for ideas to employ at home and tends to simply ‘copy and paste’ other countries’ laws in domestic legislation without providing guidance or sufficiently knowledgeable audit resources to enforce them.

• Global tax transparency and disclosure is in focus, with South Africa signing on to exchange of tax information agreements, country-by-country reporting and common reporting standards. Among other things, South Africa scrapped its withholding tax on service fees in favor of new requirements for taxpayers to formally disclose their transactions with foreign suppliers, which essentially gives SARS a shopping list of items to target on audit.

But perhaps the biggest concern for international companies is the escalating aggression of the SARS’ audit practices. It is changing its views without warning on previously accepted administrative ruling and practices. Its strict enforcement of requirements to pay taxes in dispute is prompting taxpayers to settle or abandon appeals, regardless of their position’s strength. It is automatically initiating audits on claims for refunds. And it is challenging prescription (statute-barred) periods in the tax law, requesting information beyond the 5-year limitation period – sometimes as far back as 10 years – and using that information to assess years within the limitation period or to allege fraud for earlier years so the limitation no longer applies.

Companies in South Africa have some mechanisms available to help them manage tax risk, although these mechanisms are not as effective as they could be. Advance rulings do not carry the certainty they did in the past, given the SARS’ recent tendency to overturn them. Legal privilege may be available, but the SARS is inclined to oppose attempts to assert it. Taxpayers can take complaints over the SARS’ administrative practices to the Tax Ombudsman, but its findings are not binding on either the taxpayer or the SARS. The SARS’ practices can also be challenged under the Promotion of Administrative Justice Act, but this is generally not worth the considerable time and effort.Taxpayers may have better experiences under South Africa’s voluntary disclosure programs:• The regular voluntary disclosure program gives companies the opportunity to regularize their tax defaults with SARS and any exchange control violations with the South African Reserve Bank.• A special voluntary disclosure program, which will run from 1 October 2016 to 31 March 2017, allows taxpayers to regularize their tax affairs related to foreign assets. This program is designed to help taxpayers get onside with their foreign asset reporting in advance of new tax information exchange measures and common reporting standard being implemented as a result of the Organisation for International and Co-operation’s Action Plan on Base Erosion and Profit Shifting.The SARS’ Alternative Dispute Resolution program is also worth considering. Even if this route proves unsuccessful, it does not affect your ability to take the dispute back to the usual process for objections and appeals for further consideration.In the near term, tax complexity is likely to increase. From new taxes on carbon, sugar and tires to withholding taxes on management fees and increases to the rate of VAT, companies in South Africa will need to manage changing obligations in an increasingly fractious tax audit environment. More change may come through forthcoming recommendations of the Davis Commission. This government committee is considering how the tax system should evolve, and it is likely to call on the government to derive an even greater share of revenue from personal income taxes.Companies with investments and business in South Africa can protect themselves and minimize potential tax controversy by being proactive about tax management and being open and honest in dealings with the SARS. Ensuring that your documentation retention and tax management policies are up-to-date is critical. Given the SARS’ recent tendency to request information beyond the 5-year limitation period, consider not keeping documentation beyond the 7-year period required by company law. Finally, you should take steps to ensure your board and C-suite executives are aware of the heightened commercial and reputational risks that disputes with the SARS might entail.

¹Business Day, 30 April 2016.

²"4 taxes that helped SARS collect R1trn", Fin 24.

Turkey – Abdulkadir Kahraman, Partner, Head of Tax Services, KPMG in Turkey

Like most countries, Turkey is seeking to increase its tax revenues. But where other countries are aiming for higher collections with fewer resources, Turkey is investing heavily in beefing up its audit staff. In the past year, the number of tax auditors has risen from 4,000 to 10,000 – a 250 percent increase. 

In another move to improve audit effectiveness, the Auditing Board was recently reorganized into four specialized sub-divisions:

• Large Scale Taxpayers Group

• Organized Fiscal Evasions Group (i.e., tax shelter issues)

• Thin Capitalization, Transfer Pricing and Offshore Income Group

• Small and Medium-size Enterprises Group 

The resulting audit focus, along with the relative inexperience of the new audit staff, is driving a surge in tax assessments, disputes and appeals, especially in the area of transfer pricing.

Turkey’s Revenue Administration is leading the government’s transformation to the ‘e-state’, and investments are being made in making the tax system digital. All tax returns can be filed electronically, and e-bookkeeping, e-invoicing and similar systems have been made compulsory for a considerable number of taxpayers in the recent years. This is allowing the administration to develop a database with extensive information on taxpayers, and it is applying data analytic techniques to efficiently track and select taxpayers for tax audits.

The reorganization of the Auditing Board is promoting the standardization of tax audits in order to eliminate different applications of audit practices and treatment of taxpayers. As part of this initiative, a ‘hearing committee’ application was introduced. Through hearing committee meetings, taxpayers have the chance to explain their cases to tax auditors (excluding the auditor performing the audit) before the final tax audit report is issued. Unfortunately, taxpayers are not informed of the outcome of these hearings or whether an assessment will result, which has limited this tool’s effectiveness.

Rising number of transfer pricing disputes

All of the above initiatives are fueling the increased number of transfer pricing audits and assessments, especially for cross-border transactions. In particular, the tax authorities are challenging royalty and management fee payments from Turkish entities to related non-resident. 

Royalties are being challenged on the basis of the royalty rates applied. Tax auditors generally use secret comparable rates as the base for tax assessments, and it is difficult for taxpayers to mount an effective defense against a comparable that is undisclosed. Also complicating the evaluation of royalty rates is the absence of an official local database for comparable analysis. The tax authorities may reject information in databases commonly used in industry (e.g. Amadeus, Orbis) because they are not officially recognized in the regulations.

In challenging management fees from Turkish entities to related non-residents, the Turkish tax authorities sometimes claim the services include a transfer of know-how that should be considered and reclassified as royalty and subject to withholding taxes. Alternatively, the authorities claim that the services are not actually performed, or that some or all of services are not for benefit of the Turkish entity, based on application of a benefit test or an argument that the Turkish entity is already performing the services.

Customs and stamp taxes under scrutiny

The tax authorities’ focus on audits of customs and stamp taxes are also helping cause the rise in tax disputes:

• Through broadly focused post-clearance customs audits, the tax authorities are going beyond the value of goods declared to examine stamp duty of contracts, withholding taxes for royalty-license agreements, resource utilization support fund payments, transfer pricing procedures and cross border transfers. 

• Turkey’s stamp tax is being strictly enforced on many kinds of signed documents, primarily business agreements and contract. The statute of limitation for the stamp tax is not limited to 5 years. Rather, stamp tax applies as long as the contracts are in effect, and disputes are arising over whether the conditions for the stamp tax’s application are met and over the scope of the stamp tax base.

Procedure for negotiating assessments and penalties 

When tax disputes arise, resorting to the courts is unlikely the preferred option due to the time and expense involved for the taxpayer and tax authorities alike. As an alternative dispute resolution mechanism, Turkey has introduced a Tax Settlement Procedure for use after tax audits. The procedure gives taxpayers the chance to negotiate the amounts of tax assessed and penalty, and the tax authorities are given discretion to reduce assessed amounts based on the negotiation. The procedure can be invoked either before or after an assessment is made.

Advance pricing arrangements and mutual agreement procedure

Turkey also has an advance pricing arrangement (APA) program and mutual agreement procedure (MAP) clauses in its tax treaties, but, unfortunately, neither has proven effective in providing tax certainty and reducing tax disputes. 

Taxpayers may pursue APAs for less complicated items, such as royalties. They may be hesitant where more complex items are concerned because they generally believe an APA application will draw tax audit attention to uncovered years, especially if the APA is not successfully concluded.

The tax authorities are equally hesitant about entering MAPs to resolve tax disputes. Because the MAP is optional, the tax authorities often choose not to use it due to the length of time involved and the uncertainty that the investment of time would bring success.

A new bill for amnesty and incentivesWhy amnesty?

There are two basic reasons: Internal and global. 

The global one is related to overwhelming “transparency initiatives” from a combination of public pressure and political willpower at both the G20/OECD, the USA and European Union (EU) levels has resulted in a paradigm shift in the global tax landscape. Therefore, the Turkish government would like to give an opportunity to taxpayers to open a “white paper” before “automatic exchange of information” measures from BEPS, FATCA and CRS:

The internal one is related to local developments. Recently, following the statement made by the Minister of Finance that “the government would submit a re-structuring pack for tax debts” to the Turkish Parliament, the submission of the “Bill on Restructuring of Certain Receivables” to the Turkish Parliament came on July 22, 2016 and it has been enacted on August 3, 2016. It is going to be published in the Official Gazette. 

The amnesty bill provides various opportunities ranging from restructuring “overdue payables”, “voluntary declaration”, “pending court cases” and “a voluntary disclosure regime” for Turkish taxpayers having undisclosed assets out of Turkey. Taxpayers who come forward under the regime will be able to bring undisclosed foreign-held assets with protection from audits and assessments for tax, customs and foreign exchange regulation purposes.

In addition, the bill would introduce a new voluntary filing option, allowing taxpayers to make a voluntary disclosure of a tax filing failure or omission before a tax audit takes place. Principal amounts of tax would still be payable, but penalties would be reduced to 20 percent of the penalty otherwise payable. 

According to the bill, the taxpayers who voluntarily increase their tax bases for Corporate Income Tax, withholding tax and VAT bases concerning the years 2011, 2012, 20013, 2014 and 2015 will not be further subject to a tax audit related to the years and type of taxes that they have applied (e.g. implying an immunity against a potential audit/challenge by the tax office, which is referred to as “Tax Amnesty”). 

The tax base increase rates according to tax types and minimum increase in tax bases are presented on the following table for corporate entities. 

Tax Base Increase in Corporate Tax

Year Tax Base Increase Rate %

In case of a loss declaration, 

minimum base increase (TL)³

Tax rate over the increased tax base (%) Reduced tax rate over the increased tax base (%)⁴
2011 35 28.000 20 15
2012 30 29.650 20 15
2013 25 31.440 20 15
2014 20 33.470 20 15
2015 15 37.940 20 15

The provisions with regard to "pending court cases"

We will try to clarify, in the following table, what the opportunities are for receivables and penalties that fall within the scope of the bill, based on section headings:

Overdue receivables (meaning, in summary, receivables, in definite tax amounts, which are overdue, and for which lawsuit may not be filed):

  Tax reduction Late payment charges Payment method
Past due receivables "0%" reduction

Instead of late payment charges,interest calculated based on Domestic-Producer Price Index

50% reduction for this portion in cash payment

Cash payment or payment to be made in 36 months in 18 instalments

Receivables based on continuing tax inspections (in summary, since the tax inspection has not yet been completed, the tax amount is uncertain):

  Tax reduction Penalty reduction Late payment interest Payment method
Receivables for which inspection is ongoing 50% reduction 100%

Instead of late payment interest, interest calculated based on Domestic - Producer Price Index

(50%) reduction for this portion in cash payments)

Cash payment or payment to be made 36 months in 18 instalments

Receivables that have not yet become definite or that form the subject of disputes with ongoing lawsuit process (in summary, receivables where the tax amount is definite, and which have been made subject of dispute by way of filing lawsuits):

  Tax reduction Penalty reduction Late payment interest Payment method
Disputes before tax court (pre-appeal) 50% reduction 100%

Instead of late payment interest, interest calculated based on Domestic  - Producer Price Index

(50% reduction for this portion in cash payment)

Cash payment or payment to be made in 36 months in 18 instalments

Receivables at the appeal stage (that have been resolved by tax court) which have not become definite or that form the sujbect of disputes with ongoing lawsuit process (in summary, the lawsuit is at the appeal stage, and dispute has not been finalized):

  Tax reduction Penalty reduction Late payment interest Payment method
If the tax court ruling is in favor of the taxpayer 80% reduction 100%

Instead of late payment interest, interest calculated based on Domestic Producer Price Index

(50% reduction for this portion in cash payment)

Cash payment or payment to be made in 36 months in 18 instalments
If the tax court ruling is against the taxpayer "0" reduction 100%

Instead of late payment interest, interest calculated based on Domestic Producer Price Index

(50% reduction for this portion in cash payment)

Cash payment or payment to be made in 36 months in 18 instalments
If the tax court ruling has been finalized by the Regional Administrative Court or State Council against the taxpayer 50% reduction 100%

Instead of late payment interest, interest calculated based on Domestic Producer Price Index

(50% reduction for this portion in cash payment)

Cash payment or payment to be made in 36 months in 18 instalments
If the final decision is partial approval (against the taxpayer) and partical reversal (partially in favor of taxpayer) "0" reduction for the tax amount approved through ratification, 80% reduction for the amount partially reversed through ratification by amendment 100%

Instead of late payment interest, interest calculated based on Domestic Producer Price Index

(50% reduction for this portion in cash payment)

Cash payment or payment to be made in 36 months in 18 instaments

Finally, the bill would introduce a corporate income tax exemption for the establishment of regional headquarters and management centers in Turkey. To benefit from the exemption, all costs of these structures must be covered by foreign corporations and not financially associated with the accounts of a resident or non-resident entity in Turkey. The law would also offer payroll tax exemptions for the employees registered in these structures.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

³The minimum increas in the amount of tax base, as presented above, will alternatively apply if there is no tax base in that year due to carried forward tax attributes, deductions, exemptions etc.

Applicable if; relevant years' tax returns are declared and paid on time and no application is made under the Law with respect to definite/indefinite/disputed tax receivables.

© 2020 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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