Deloitte SA Blog

Global Tax Compliance & Reporting

The search for a more effective delivery model

There have been significant changes in the business landscape over the last 10 years,  which have materially affected the global tax compliance and reporting processes  for corporate tax payers. These include changes in regulation and tax laws,  electronic filing requirements, risk-based assessment techniques, and advances  in tax technology solutions among others.

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

Commercial objectives

Recent research commissioned by Deloitte, which included 250 interviews with the tax directors of 250 global organisations, shows that the principal commercial objectives for global tax directors are managing or reducing Effective Tax Rate and ensuring sound risk management. Other objectives include a desire for operational efficiency or cost reduction but these are of less importance.

Likewise, where metrics are in place to measure the performance of the tax department, these are based on managing the Effective Tax Rate in the vast majority of cases.

Resourcing and management

The resourcing of global tax functions appears to vary significantly.

What is clear is that outside of the headquarter location there are often inconsistent levels of in-house tax expertise. As tax directors seek to assert more control over global compliance, making sure there is sufficient expertise is very rarely a straight choice between in-house management and outsourcing. Instead, hybrid models prevail with the ultimate requirement being to ensure there is sufficient tax expertise at each stage of the process, regardless of whether it is resourced in-house or externally. However, where resource and expertise does allow, overall there appears to be a preference for in-house management over outsourcing. 65% of the researched companies manage indirect tax compliance solely in-house, 52% manage statutory accounts in-house and 73% manage the global tax provision in-house. Only when it comes to corporate income tax compliance, a minority of companies manage it in-house (36%).

Across every area of compliance and reporting, where management is not solely in-house, total outsourcing is marginal and ‘co-sourcing’ is far more prevalent. This demonstrates the requirement to bring in external expertise mainly to fill the gaps around in-house capability.

Shared services

There is evidence that as part of the in-house management of global compliance and reporting, businesses are using their own shared service centres. 55% of multinationals state that they operate a shared service centre for finance and in just over half of these, some compliance and reporting work is carried out. However, qualitative assessment suggests that only certain data related tasks reside within the service centres and there is no significant tax expertise apparent.

Technology

Conceptually, the potential benefits of technology in compliance and reporting are well acknowledged: only 13% of global tax directors believe that they could not do more with technology.

However, deeper questioning suggests there are barriers to adoption when it comes to new technology. Typically, these revolve around perceptions that implementation will entail significant disruption, the cost is too high, and there is insufficient return on investment or a view that major technology projects are not something that tax functions would embark upon unilaterally within the business.

Compliance and reporting service provider delivery models

Tax directors show a general preference for external expertise delivered at a local level. When asked whether central service centres or local teams work better, 75% express a preference for local teams while 19% think that central service centres work better. The hypothesis here is that more ‘progressive’ global businesses are seeking to outsource non-core business functions or to achieve integration with their own shared service centres.

The three methods of compliance and reporting delivery are:

Decentralised

Delivered and managed locally

All services are managed and delivered locally. This approach relies on local control and responsibility.

Coordinated

Delivered locally, managed centrally

This method involves local delivery of service but introduces a strong element of central coordination and management. This brings greater efficiency, better control, and less risk.

Centralised

Delivered and managed centrally, supported locally

This method shifts the emphasis toward central delivery as well as coordination and management. Crucially, though, local activity, relationships, and support are also maintained.

It is important that whichever model is adopted it should grow and evolve with the organisation to meet their needs now and in the future, wherever they are on the spectrum. Standardised processes and methodologies underpinned by common technologies and tools are essential in this regard. Tools such as Microsoft Office-based solutions (Excel and Word) that have been in widespread use no longer match much better tax technologies in the market for example MS Dynamics NAV (for data management and statutory accounting), 3rd party tax software (for due date tracking, VAT return production and tax provisioning) and web-based dashboard portals.

Benefits

An organisation should ensure it selects a delivery model and service provider that at a minimum provide the following benefits:

• Increased visibility, transparency, and control over global compliance and reporting
• Flexibility to maximize use of in-house resources, respond to shifting priorities and the ability to provide expertise at the global and local level
• Integration and efficiency to control costs, increase accuracy, minimize risk and to respond to regulatory changes
• A path to improvement without the introduction of significant risks
• Insight to make informed strategic business decisions

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

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Unlocking tangible value from your ERP implementation

Enterprise Resource Planning (“ERP”) provides an opportunity for companies to track and monitor business flows. While this creates a significant benefit across the highly regulated and diverse landscapes in which companies operate, there is additional value to be unlocked through a carefully designed ERP system.

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

Organisations in the midst of implementing or upgrading an ERP system often overlook the importance of the tax department as stakeholders of the system. The organisations invest in deep operational improvements, but ignore broader issues of structural tax planning or they make supply chain decisions without understanding their full tax implications.

Taxes are directly affected by a company’s overall operating model and as such, constitute a structural cost. The choices made today – how contracts are negotiated, who controls manufacturing processes, how inputs are sourced, how products are distributed – determine the structural tax obligations in future. Only when strategic tax planning forms an integral part of the overall business vision will it be possible to drive down a company’s structural tax rate.

However, effective and long term tax planning requires an understanding of the group’s strategic objectives, goals and constraints. Simultaneously, businesses increasingly require their tax functions to provide insight for critical decisions. Fast, accurate delivery of the tax provision and tax calculations for financial reporting purposes, as well as reporting on tax compliance filings and for management decision making, are all minimum expectations today.

Frequently, the unique needs and requirements of the tax function are not adequately addressed when implementing an ERP system, as the current “as is” tax structure is implemented with the new ERP system, relinquishing potential tax benefits and forcing the tax department to continue inefficient manual processes for tax compliance, planning and forecasting.

Therefore, according to Forrester, “Smart (technology) buyers have started to include a new factor in their sourcing decisions: tax implications. Understanding how taxes will be affected can help companies make better sourcing decisions and fund new projects.” In many cases cash tax savings can often deflect the cost of the overall ERP system implementation.

Tax Enabled ERP Solutions: Direct and Indirect Tax Benefits

A well designed Tax Enabled ERP Solution can increase speed, accuracy and data integrity — all of which are important, particularly when working through last minute updates at either quarter-end or year-end.

These improved data collection processes also help companies better manage workflow, which in turn increases visibility. Furthermore, it provides greater control over information and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities such as strategic income tax planning.

A large building materials company recently implemented SAP globally. Tax SAP specialists conducted a systems audit of tax processes, including reviewing and documenting the tax processes end to end, highlighting any controls and training needs going forward and recommending changes required to reduce the risk of tax mis-declarations.

Deficiencies were identified in the following areas: missing/duplicate SAP master data, ownership of processes/data, limited documentation / training, manual processes without robust controls and incorrect tax coding within the Shared Service Centre.

A Tax Enabled ERP Solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations such as: maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.

By considering the tax implications during the ERP design or transformation process, companies are able to ensure that the ERP system produces the critical tax-relevant data and information needed to streamline tax compliance processes, more effectively identify and implement tax savings strategies, and provide better audit support. Currently many ERP-systems do not give visibility of many indirect taxes (VAT and Customs) which results in much data manipulation outside the system to effectively manage these taxes.

A Tax Enabled ERP Solution should be designed and configured to easily provide financial information that may historically have been inaccessible and enable improved capture processing and reporting throughout the financial and tax processes. In addition, it should enable improved data collection processes, allowing the tax department to work more efficiently and to deliver value to the organisation in new ways.

A large international retailer serving over 200 million customers weekly was suffering from tax issues that included inability to track provisions in sufficient detail, lack of fixed asset information and insufficient P&L granularity. Tax SAP specialists were brought in to run the full tax work stream with the responsibility for all tax design, build, testing, remediation and go-live activities with the end result of Tax savings running into the millions.

As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that at best, do not enhance the tax reporting process, and at worst: actually impede access to tax-sensitive information and do not take advantage of potential tax savings.

Tax Enabled ERP Solutions: Overcoming the Challenges Faced by Global Organisations

Operating a global organisation poses very specific challenges in the area of tax management and reporting. These may include unusual taxes being imposed (such as withholding taxes on administrative and technical fees); regulatory approval that is required for certain types of transactions, combined with a lack of relief in terms of double tax agreements. Group Tax Managers need to constantly be up to date with the issues existing in those countries to avoid lengthy delays in payments and penalties. While it is not possible to foresee all challenges, organisations that have, or intend having, a multinational presence can reduce one of their significant risks by ensuring that their ERP solution is tax enabled.

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

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As consumers worldwide shift their media consumption from the tangible to the digital, they are taking their books, movies and music with them on one device, and leaving behind a tangle of tax implications – particularly when it comes to VAT in South Africa. That is why businesses that sell or distribute electronic products to overseas consumers via the Internet would benefit from a clear understanding of their increasing regulatory and financial exposure, as well as a strategy to turn these changes into a competitive advantage.

If you have any questions or require a more detailed discussion, contact Severus Smuts (Director – Value Added Tax at Deloitte South Africa) at ssmuts@deloitte.co.za

European countries have been slowly clarifying their position in relation to this type of service.  In November 2011, Iceland became the latest country to tax the electronic supply of services by non-resident businesses to domestic consumers. Norway introduced a similar rule in July 2011 and Switzerland at the beginning of 2010, as did the European Union (“EU”) in 2003. Additionally, tax authorities in other jurisdictions with a VAT or Goods and Services Tax system are looking to Europe with a keen eye on whether such steps would be practical in their own jurisdiction. Financial executives of global businesses, regardless of where they are based, should understand the compliance and planning implications of these new rules or suffer adverse financial consequences.

South Africa is one of those countries looking at what Europe is doing.  The present position in South Africa is one of uncertainty because there are no clearly defined rules and promises of clarity have been made but not fulfilled for a number of years. However, the legislation is so unclear that it is not possible to make any definitive statements for these global businesses except to say that they are likely to have a VAT liability in South Africa. It may be possible to obtain a ruling in certain circumstances that says otherwise.  One of the main issues for the tax authority in South Africa (SARS) is how to enforce the payment of VAT when the consumer is an individual not registered for VAT.   Strictly speaking under the terms of the present legislation, the individual should voluntarily pay the VAT owing where the purchase exceeds ZAR 100.  It is easier for the authorities to say that the global business should register and pay the VAT, which means that the ZAR 100 threshold will not apply.

Defining electronically supplies services

In South Africa there is no legislative definition of electronically supplied services for VAT purposes.  In South Africa it is clear that intangible goods are defined as services for the purpose of the VAT Act but that is as far as it goes.

In the EU, electronically supplied services include those which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology. The definition of services is wider than an ordinary definition and includes digitized products and what may be referred to as “intangible goods,” such as electronic publications, applications (or “apps”), and software.

The South African definition of services will cover the following affected businesses within the media and entertainment industries which include, but are not limited to:

• Publishers or distributors of electronic publications such as books, magazines or video content
• Suppliers of visual or audio media over the Internet

VAT and online gaming

Business scenario:

Video game suppliers regularly fall under the provisions of the electronically supplied services rules, even when supplying the actual game free of charge. While the games are free to play, players are often given the option to purchase additional credits – often referred to as “in-app purchases”– virtual currency or items that are supplied to continue game play.

Activity in this area has increased exponentially with the surge in sales of tablet devices such as the Apple iPad and the countless apps that market content directly to consumers.

VAT implications:

While the original supply of the game may not be subject to VAT, it is likely that for the purposes of South African legislation these are “imported services” and the unregistered individual is liable for the VAT.  However, the distributor could possibly also be liable for VAT registration and VAT at 14% if the business is carrying on an “enterprise” in South Africa.  The reasoning behind this is that the services are consumed in South Africa and VAT is a tax on consumption.  However, it could be argued that the services are not performed in South Africa (unless the server is here) and the activity is a passive one.  In that instance perhaps the liability should only fall on the individual.  It is important to determine who was liable to account for the VAT as the recipient may as a defence argue that the supplier was liable to collect the VAT.  While specific place of supplies are not forthcoming it would be prudent to obtain a ruling from SARS when these services are marketed to consumers in South Africa.

If there is a liability to account for the tax on these intangible goods by the business in question, it may fall on either the producer or distributor of the content depending on the distribution model – whether the distributor is acting as a disclosed agent or an undisclosed agent or commissionaire.

If you have any questions or require a more detailed discussion, contact Severus Smuts (Director – Value Added Tax at Deloitte South Africa) at ssmuts@deloitte.co.za

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This Deloitte paper presents the results of surveys and interviews, conducted amongst leading global market analysts, about the impact that leadership can have on share price. Deloitte believes that the results of the survey may help quantify the risks of a leadership deficit to an organisation.

The Leadership Premium – How companies win the confidence of investors

“Based on our research, we have developed some practical recommendations for businesses on how they can enhance their leadership effectiveness and demonstrate it to the financial markets, their stakeholders and, ultimately, their wider stakeholders.

As a firm, we believe that leadership can be developed, that organisations can be set up to create long-term, sustainable leadership capability, and that doing so can improve bottom line results and increase shareholder value.

In compiling The Leadership Premium, we’ve combined survey data and perspectives from interviews with analysts with our own expertise and experience. We hope that the result is a  blueprint for successful leadership”.

Download the Deloitte paper . . . .  The leadership premium – How companies win the confidence of investors

If you have any questions or require a more detailed discussion, contact  Jack Sellschop at jsellschop@deloitte.co.za.

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by Coenrad Alberts and Georgina Stubbs of Deloitte Consulting

There has been talk about the demise of Enterprise Resource Planning (ERP), however the ERP industry is thriving. Major ERP vendors are reporting healthy profits and organisations globally are currently implementing or re-implementing ERP systems or going through the planning phase.

The playing field has changed however. There are fewer ERP software vendors and the ERP solutions out there are robust, rich in functionality and stable. Organisations no longer have to make grudge purchases (classic example was the millennium bug) and are a lot more tech-savvy. ERP investments now have to be backed with a solid and sound business case.

This paper provides insight into the key cost considerations of an ERP investment and some of the crucial decisions that should be considered regarding the organisation’s ERP strategy going forward – in order to implement a sustainable, scalable and cost-effective solution that will cater for the organisation’s future growth and requirements.

Here are 8 key drivers to consider when reviewing your enterprise resource planning investment strategy:

1. Software

Select the right solution for the right job.

Vendors no longer advocate ERP solutions as cure-alls. They rather recommend that organisations implement ERP solutions to provide core enterprise functionality and select best-of-breed point solutions to meet specific requirements, e.g. specific billing requirements.

The advent of SOA has made integration of multiple systems easier and more efficient. It is, therefore, often advisable to implement a solution that fits the problem rather than to manipulate both the solution and the problem in an effort to make them fit, sometimes at the expense of critical business requirements.

By carefully selecting a hybrid of solutions that will directly address best-practice business requirements, the initial implementation effort will be reduced, user adoption will be increased and because customised development will be reduced, so will the ongoing cost of ownership.

Investigate Software as a Service offering.

Many ERP software vendors these days offer “Software as a Service” (SaaS).

By subscribing to a SaaS application, rather than purchasing licences outright, you avoid the initial overhead associated with implementing conventional software. You don’t incur the capital investment of a typical software implementation, such as purchasing and maintaining servers, housing them securely, and installing and maintaining the software – an overhead that can be four to five times the cost of the original licence fees.

SaaS applications also leverage economies of scale achieved by “multi-tenancy”, because many customers can run their applications on the same unit of software and even on the same infrastructure, e.g. advances in security and virtualisation make it possible for multiple customers to share databases.

When you subscribe to a SaaS application, you pay a monthly or annual subscription fee. Compared to a traditional software licence, this subscription payment structure can work to your advantage. An ongoing monthly expense is often easier to incorporate into your budget than a large one-time outlay, and if you cancel or change your subscription, you do not lose a large initial investment. And, as SaaS subscriptions are based on metered usage, you pay for what you use.

Another key aspect of SaaS is that you gain immediate access to the latest innovations and upgrades, however the potential downside of SaaS is that you cannot customise the solution to meet your specific requirements.

2. Hardware and Infrastructure

Consider hosting.

Even if you don’t subscribe to SaaS, one option to contain your investment in hardware and infrastructure is hosting, whereby you rent servers and the associated infrastructure from a third party and pay on a monthly basis, rather than investing in the equipment upfront.

Reputable hosting service providers offer holistic IT infrastructure support, meaning that your organisation can have access to a fully redundant IT infrastructure, including disaster recovery facilities, delivered on the latest technology platform and maintained by highly skilled IT technicians, without the associated costs and risks. Service providers guarantee uptime to suit your requirements and often offer other services such as domain management and registration, internet connectivity, 365/24/7 operations monitoring of your servers, physical and information security services, UPS and generator power, daily tape back-up facilities, provision of statistics, reports on bandwidth and network utilisation, fault correction initiation, encryption and LAN and WAN support.

Not only do these services reduce your investment in the actual infrastructure, they also reduce the need for your organisation to have a large IT department with the expertise to service all the different components of the infrastructure, and the availability to provide 24/7 support.

The duration of your implementation is also reduced, as the hardware infrastructure is already in place.

3. Implementation costs

Investigate available industry-specific preconfigured solutions.

By selecting an industry-specific preconfigured solution, you can reduce the impact on your business, the implementation costs and the duration of the implementation, while ensuring that your solution is based on industry best practices. The customisation effort is also reduced because industry specific components are already pre-built, e.g. specific costing models, data templates and load programmes, banking interfaces and workflow.

Quality preconfigured solutions provide organisations with an accelerated implementation that starts with a working and fully pre-documented and preconfigured system, which can be rapidly configured into a productive solution.

These solutions have been developed based on years of hands-on industry experience and are based on best practices which are continually refined over the years.

Choose your implementation partner with care.

Ensure that you have consultants who understand your business and industry and are “business led, but also technology enabled”. Consultants that understand your industry will be able to facilitate design discussions and make meaningful contributions to functional and technical documentation. They will also be better equipped to anticipate and manage scope changes based on a deeper understanding of industry-specific requirements.

4. Training and change management

Ensure that your investment in training and change management provides a real return.

Although it is strongly recommended that you do not reduce the investment in training and change management, it is also important to ensure that the return on that investment adds tangible value to the implementation project and the organisation. Don’t be afraid to ask your service provider for detailed training and change plans that identify clear deliverables aligned to tangible and measurable outcomes.

It is also critical to ensure that you don’t pay lip service to these items and that there is executive sponsorship, without which your investment will be wasted.

5. Ongoing maintenance

Consider outsourcing to meet ongoing maintenance requirements.

By outsourcing the management and maintenance of your applications, you will reduce the need to build, maintain and train a team of specialised and senior application consultants, which is becoming a more cumbersome task as organisations implement a hybrid of solutions, thereby increasing the diversity of skills required.

Ensure that your application management service providers proactively add value through their support services, rather than just react to problems. By providing you with statistics on which types of problems occur frequently, value adding service providers enable you to address those problems at source, i.e. by identifying the root cause – for example: where more training is required or where a different solution should be considered. These statistics can also be used to optimise your support contract by reducing the support hours required over a period, as the solution beds down or your users become more skilled.

6. Process efficiencies

Measure potential process efficiencies.

Effective business process design, based on industry best practices (such as the Deloitte best practice IndustryPrints), is essential to ensure that process efficiencies are achieved and to reap the real benefit of your ERP implementation.

Processes can be measured, costed, benchmarked to similar organisations and then mapped to solutions to identify where real process efficiencies will be achieved, and where manual manipulation, duplicate transaction processing, etc. can be eliminated.

When considering the ERP investment, this tangible benefit should be accounted for.

7. Tax efficiencies

Don’t overlook potential tax efficiencies.

A well-designed, tax-enabled ERP Solution can increase speed, accuracy and data integrity, all of which are important, particularly when working through last-minute updates at either quarter-end or year-end. These improved data collection processes also help companies better manage workflow, which, in turn, increases visibility. Furthermore, it provides greater control over information, and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities, such as strategic income tax planning.

A tax-enabled ERP solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations, such as maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.

As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that, at best, do not enhance the tax reporting process and, at worst, actually impede access to tax-sensitive information and do not take advantage of potential tax savings.

8. Shared services

Ensure that you implement the most efficient and effective operating model.

A large number of support processes in IT, finance, procurement and HR (including payroll) are repetitive and not unique to the individual business but rather add value through operational excellence, delivering zero defect at the lowest cost. Other processes are more ad hoc and knowledge involved, adding value through maximum benefits at appropriate cost, only when necessary. Both transactional and knowledge-involved processes can take advantage of benefits through a shared services model, either internal or outsourced.

An example of such a model is the Deloitte Mining Shared Services (DMSS) platform, which provides cost-effective back-office process support to mining companies with a need to focus on core business operations and also to create a low, fixed-cost overhead structure.

This service delivery model allows mining companies to co-source and/or outsource transactional and knowledge processes and take advantage of the cost benefits offered by consolidating and streamlining back-office processes. While the shared services centre runs these processes, mining companies retain some functionality based on the individual organisation’s requirements and business case.

Summary

So – far from dying – ERP is alive and well and back on the Executive Committee’s agenda. But the conversation today is very different to that of 10 to 12 years ago. Traditionally, organisations invested time and money selecting the right ERP solution to meet their needs; however, nowadays there are fewer Tier 1 products to choose from – and most of them offer similar functionality with some minor variations in their value propositions.

This means that, while it is important to select the right product (whether an organisation is considering an upgrade, reimplementation or replacement), there are other discussions to be had and decisions to be made. The decisions will have a more significant impact on the initial and ongoing cost of the investment and the impact to the business.

These decisions need to consider all the innovative and varied options available to finance this investment, and derive maximum value, and this is what will drive the business case. And, whereas a robust business case was not a requirement when the implementation of a new ERP was not an option, it has now become critical to justify this semi-discretionary investment.

If you have any questions or require a more detailed discussion, contact Coenrad Alberts at calberts@deloitte.co.za or Georgina Stubbs at gstubbs@deloitte.co.za

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Is your organisation’s strategy yielding results?

Most organisations are currently seeking growth, be it growing into new premises and new markets (particularly across Africa) or growing in terms of adopting new methods of working, that requires a mind-shift in how their workforces operate in an increasingly connected and digital world.

With regulatory, technological, consumer behaviour and workforce changes afoot, organisations are increasingly finding that getting to the ‘heart of the change’ is of paramount importance to drive sustainable strategy realisation. Strategic projects are the engines of growth, while people are the engine of projects, says Vanessa Vermeulen, Executive Lead at Deloitte Consulting.

Deloitte has experienced that most projects fail due to people problems more than technical problems. People within large, complex organisational structures are often exposed to organisational processes and policies that are counterproductive, which in turn makes them change apprehensive. Programme Management Offices (PMOs) are often perceived as adding administrative costs and bureaucracy without a clear correlation to business benefits. Furthermore, the ability to achieve strategic alignment and integrate results from strategic imperatives has proven to be very challenging.

Results Management Offices (RMOs) strip away the inessentials, minimise the hierarchical approach to projects and embraces communities of practice (COPs) to develop pragmatic methods that are consistent, measurable and effective. The RMO provides a foundation to deliver integrated and strategy-aligned programmes and projects, through improved strategic and tactical decision-making, as well as greater transparency to business benefits and decisions. The project managers remain responsible for execution; however, the RMO will actively support results-driven execution by embedding strategy into operations and budgets, managing the critical path and outcomes, ensuring organisational readiness and measuring shareholder return.

If you would like to discuss the Results Management Office in more detail, contact Vanessa Vermeulen at vvermeulen@deloitte.co.za. If you want to learn more, download the Results Management Office infographic and the “Moving from Process to Outcome Management” article. 

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This comprehensive, 40-page report, produced by Deloitte’s Chinese Services group examines all announced mergers and acquisitions undertaken between bidders located in the Greater China region and targets located in Brazil, Russia, India and South Africa for the period 1 January 2005 to 31 December 2011.

For the purposes of this report, the Greater China region consists of the People’s Republic of China, Hong Kong Special Administrative Region, Macau Special Administrative Region and the Republic of China.

Regional leaders from Deloitte’s Chinese Services Group have presented their individual perspectives. They are Ricardo de Carvalho of Brazil (Page 5), Oleg Berezin of Russia (Page 10), Atul Dhawan of India (Page 14), Lawrence Chia and Ronald Chao of China (Page 18) and Mark Casey of South Africa (Page 25).

If you have any questions relating to the report, feel free to contact Mark Casey (South and Southern Africa leader for Deloitte’s Chinese Services Group) at mcasey@deloitte.co.za

Download the full report . . . . China outbound mergers and acquisitions activity into BRICS (40 page pdf)    

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I have provided an introduction below to a publication (which applies to all members of the C-Suite) prepared by the Deloitte Integrated Reporting and Sustainability team, which discusses the state of Integrated Reporting practices in South Africa. The publication contains the key findings of the empirical research conducted on 100 companies listed on the Johannesburg Stock Exchange.

The analysis covered 7 subjects, 58 principles and 160 questions seeking to assess actual performance against good practice. The publication includes practical observations on certain topical subjects which appear to be a challenge for companies. I have provided an excerpt below and will send you the full report upon request.

If you would like to discuss the contents of the report in more detail, please contact Bertie Loots (bloots@deloitte.co.za), Nina le Riche (nleriche@deloitte.co.za), Johan Erasmus (jerasmus@deloitte.co.za) or Jaco Pretorius (japretorius@deloitte.co.za).

Integrated Reporting: Navigating your way to a truly Integrated Report

Integrated Reporting is the new kid on the block … and like many new kids there are great hopes for its future including the ultimate achievement of embedding a strategy that preserves long-term value, simplifying reporting and adding more meaningful information to a wide range of users. But where does the idea come from? What is it trying to do? And what is the current state of development?

And before you think this is just for the accountants, think again. Integrated Reporting aims to incorporate everything from strategy through to risk management; from financial reporting to the inclusion of usage of other capitals (think societal and environmental impacts). And it aspires to meet the needs of a wider group of stakeholders – employees, customers, suppliers and others. So everyone associated with an organisation in a significant way is likely to be touched by it.

At Deloitte, we see Integrated Reporting as enabling a process which enhances and preserves long-term sustainability in all its dimensions, without unduly sacrificing short-term performance. The Integrated Report is in turn an annual report that comprises a holistic and integrated representation of the entity’s efforts to enhance and preserve long-term sustainability in all its dimensions, without unduly sacrificing short-term performance.

Deloitte has released its second quarterly report on the state of Integrated Reporting in South Africa. The report reveals that Integrated Reporting standards have been adopted by more than half of South Africa’s listed companies. Although it is now necessary for these JSE-listed companies to include a statement of compliance with the principles set out in the King Code on Governance Principles (King III) in their annual reports, many companies are still scoring surprisingly low on corporate governance matters.

Download the publication . . . .  Integrated Reporting – Navigating your way to a truly Integrated Report

We value your comments and feedback. If you have any questions, do not hesitate to contact us!

by Dr Jacek Guzek, Director at Deloitte Consulting

For more information or a detaled discussion on the subject, contact Abrie Olivier (Mining Industry Leader) at aolivier@deloitte.co.za  or +27 (0)82 874 6040 and Jacek Guzek (Associate Director) at jguzek@deloitte.co.za or +27 (0)82 940 6896.

Who actually benefits from mining?

Although the tide of resource nationalism has risen globally, with countries from Africa to Australia, Brazil, Canada, Chile and India considering options to increase state interventions in the mining sector, nowhere is the debate as high-profile, emotionally charged, divisive and potentially damaging as in South Africa.

The country is admittedly sitting on a mineral treasure trove second to none: 52 commodities reside under its surface, including the world’s largest reserves of platinum, manganese, chrome, vanadium and gold, and major reserves of coal, iron ore, zirconium and titanium minerals – all at an estimated in-situ value of $2,5 trillion¹. It is evident that the South African mining and minerals sector has immense value generation potential.

But in spite of its mineral (and other) riches, the country has been criticised for being seemingly slow in addressing what Mineral Resources Minister, Susan Shabangu, called South Africa’s “evil triplets”, namely: poverty, inequality and unemployment. Against this context, the proponents of a radical state intervention into the South African mining industry assert that the mineral wealth of the country ends up in the pockets of “monopoly capital” rather than benefiting its population at large. Who actually benefits from mining, they ask, and is it at the expense of those who truly should be benefitting? Let’s examine the question simply from the high-level value creation (or destruction) point of view.

Each (not only) mining opportunity has an inherent, or “in-situ”, value, which could eventually end up in the pockets of enterprising investors, if not for various concessions necessary to convert it into a commercial value all along the life-cycle of the project. These concessions, at a very high level, could include: R&D capital, investment capital, operating costs (including salaries of employees and procurement from suppliers), time value of money, royalties and taxes, etc. (refer to figure 1 below).

In the end, only a small residual portion of the inherent value of an opportunity finds its way to original private shareholders. In our experience, there are many successful mining projects where this residual value is only a lower single-digit percentage of the primary in-situ value. The remainder, in fact the lion share of the inherent value of any commercial opportunity, ends up in the economy at large, either through state treasury or through private sector spending, where it benefits all and translates into wealth and jobs.

Citigroup Global Markets² estimates that “only 7% of the value generated by SA miners gets distributed to shareholders i.e. the entrepreneur and risk taker. The biggest beneficiaries are in fact suppliers to the industry, mining sector employees and the government. To turn opportunity into this value (and many fail along the way) requires substantial upfront investment capital and specialised and scarce skills.

Figure 1: In-situ value graph

The question remains, why would government want to assume full risk of a complex entrepreneurial activity for such an incremental value, given the significant investment requirement?

In spite of some notable exceptions, governments’ track record in managing commercial entities the world over is, at best, inconsistent³. One can therefore question what value will ultimately accrue to society by replacing the role of the entrepreneur with a government institution. Transferring ownership from private shareholders to the state, to ensure “fair” distribution of generated value, creates a different set of incentives for public sector entities, potentially resulting in consequences contradictory to the primary intentions. While maximising shareholder value is what drives the management of private companies, the definition of objectives for a state principal is a lot more complex and politically charged. Alternatives such as financial sustainability, job creation, fair distribution, or community development often require trade-offs between efficiency and policy imperatives, blurring the overall mandate. In addition, performance of managers in the public sector companies is not always subject to the same level of scrutiny as is standard in the private sector. Furthermore, public firms do not face take-overs or bankruptcy, with all their threatening but performance-enforcing consequences.

On the other hand, for a relatively small reward or incentive, private investors shoulder the entire burden of risk in developing and managing complex opportunities. They are also usually willing to wait for returns throughout volatile economic and commodity
cycles. But any entrepreneur has to be assured that this risk is worth taking, considering the alternatives to deploy their capital in the most productive manner, and the security of tenure is the very basic consideration.

It therefore appears that the intensity and profile of the debate on nationalising the mining industry in South Africa is far out of proportion with respect to the actual value that its resolution is capable of generating or redistributing.

Rhodes University economists, Gavin Keeton and Greg White, estimated in 20104 that had the nationalization of the South African mining industry been carried out then, the bill to the government would be around R850bn (i.e. the market value of listed SA mines).

If the government were to borrow this sum at the current interest rates, annual interest payments would amount to R72bn, almost 8% of total state spending. Even if state ownership had been limited to 51% and nationalisation without compensation was considered, the interest payments would still be close to R20bn, as foreign owners of SA mining assets would have to be compensated based on international and

bilateral investment treaties. In return, the government would gain some R20bn of extra after-tax profits of nationalised companies belonging to the state. Claims that nationalisation will enhance the state’s “fiscal capacity” are therefore false.

“It therefore appears that the intensity and profile of the debate on nationalising the mining industry in South Africa is far out of proportion with respect to the actual value that its resolution is capable of generating or redistributing”

Historically, metals and mineral resources seem to have been the favourite nationalisation targets – especially at the peak of commodity cycles when windfall profits have been evident. Only the banking sector can be said to have been targeted for nationalisation with similar resolve. What is conveniently forgotten is that the global mining industry goes through alternating cycles of poor- and super-profitability, and a steady stream of positive free cash flows is not guaranteed.

The South African mining industry, although neither the biggest contributor to domestic product nor the largest employer, cannot be underestimated in terms of its importance to national economy or, indeed, to national identity. It is only natural that a society with the South African level of inequality, debates the best use of its resources. However, the focus of such a debate should rather
shift from re-distribution of relatively insignificant residual value to identifying and removing impediments to growth of the mining industry, which has the potential to generate far greater wealth than is presently the case. More so, considering that efficiency, diversity, and the competitiveness of the mining sector are not questionable.

In the words of the State President, Jacob Zuma: “The state prepares the environment for economic growth and provides support to the private sector by providing enablers and removing obstacles” (a speech prepared for delivery at the World Economic Forum in Davos, Switzerland, January 2012). In such an environment both the state and the private mining sector have at their disposal multiple instruments and tools to optimize components of the industry value graph, which can forward the developmental agenda of the government as well as accommodate just rewards for entrepreneurial risk. Exactly who benefits from mining is as important a question as who would lose on its nationalisation.

For more information, please contact Abrie Olivier (Mining Industry Leader) at aolivier@deloitte.co.za  or +27 (0)82 874 6040 and Jacek Guzek (Associate Director) at jguzek@deloitte.co.za or +27 (0)82 940 6896

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1. Chamber of Mines, Facts & Figures 2010

2. Nationalisation – killing the goose that lays golden eggs, 29 June 2011

3.“The return of state-owned enterprise: should we be afraid?”, A. Musacchio and F Flores-Macias, Harvard International Review, 31/07/2009

4. Nationalising the mines will be an expensive business, Business Day, 20/09/2010

This paper, written by Deloitte Consulting, provides board members and executive leaders with a practical approach and framework to evolve their relationship and optimise governance effectiveness. If you have any questions, contact Gert de Beer at gedebeer@deloitte.co.za, Garth Bell at gbell@deloitte.co.za or Carla Clamp at cclamp@deloitte.co.za.

Boards and Management renew their vows – A new era of collaborative leadership

A renewal of vows is a symbol of a renewed commitment between two parties. Sometimes parties renew their vows to celebrate relationship milestones and reaffirm their commitment to each other; other times, they renew their vows after a challenging period in their relationship, when their commitment to each other and their relationship has been tried and tested.

Arguably, the Board–Management relationship has been through a challenging time. It suffered a protracted period of scrutiny and tension due to various scandals over the past decade resulting from lack of oversight and accountability (Enron and Worldcom being the most notorious). This has resulted in corporate governance reform across a number of national and international jurisdictions, with a specific focus that boards and executive management be held increasingly accountable for the actions of their organisations. This heightened accountability has put a strain on the Board’s relationship with Management, a strain that has intensified during the recent financial crisis and which has resulted in the increase in Board oversight and involvement in corporate strategy, risk management, executive compensation and achieving sustainable, high-performance cultures. Although increased Board scrutiny on these dimensions is likely to improve business performance and better serve the interests of the shareholders, managing such a large agenda is challenging, and Boards cannot do it in isolation. The reality in this day and age is that Boards must work with Management to both inspire organisational performance and address the expanding accountability agenda. A significant challenge in this regard is the Board’s ability to engage and collaborate in a way that does not compromise its objectivity and independent oversight role.

To achieve the desired Board–Management relationship, a change from the status quo is most likely required for most private and public enterprises. For those organisations that aspire to strengthen longer-term performance and optimise governance effectiveness, the starting point is to understand the current governance culture and the Board–Management relationship, and how they need to evolve.

With this strategic opportunity in mind, this paper will provide Board members and executive leaders with a practical approach and framework to evolve their relationship and optimise governance effectiveness. Furthermore, it outlines an approach to collective leadership which should ultimately enhance organisational performance, increase shareholder value and address the need for increased accountability for inspiring and optimising the commitment of employees to strategic direction and operational performance.

Read the full article . . . . Boards and management renew their vows

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