The Organization for Economic Co-Operation and Development (OECD) defines base erosion and profit shifting (BEPS) as “tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations”. This is a massive focus area, with more than 80 countries having been involved with the OECD/G20 BEPS Project. This project developed an action plan of 15 actions in relation to BEPS.
South Africa has had a long journey in implementing the OECD recommendations. There is, however, more work to be done, some of which was highlighted in the Budget Review 2017 as imminent.
In the Budget Review 2017, South Africa’s current position and planned future actions were summarised, in relation to each of the 15 action items. This is set out in the table below. From this, the critical areas where one can expect draft legislation later this year, or publication of new practices, are:
· Controlled foreign companies: Specific countermeasures are proposed to curb abuse where foreign companies are held by interposed trusts, as originally announced in the 2015 Budget review.
· Interest deductions and other financial payments: The current interest limitation rules will be revised to further curb what is viewed by government as “excessive debt financing, which erodes the tax base”.
· Transfer pricing: An updated Transfer Pricing Practice Note from SARS is imminent, including new guidance on the arm’s length principle and an agreed approach to ensure appropriate pricing on intangibles that are difficult to value.
TABLE OF BEPS ACTIONS
|
Action |
Action item |
South Africa’s current position |
Future actions |
|
1 |
Digital Economy |
VAT: Foreign businesses supplying digital services in South Africa are required to register as VAT vendors.
|
VAT: current regulations for digital services are under review. Income tax: No specific current actions. (Task Force for the Digital Economy, of which South Africa is a member, plans to release its report by 2020.) |
|
2 |
Hybrid Mismatch Arrangements |
The multilateral instrument will contain recommendations on transparent entities. South African tax law currently limits double deductions, and deductions with no inclusions, and indirect deduction with no inclusion situations. |
No specific current actions. Further refinements may be considered in future. |
|
3 |
Controlled Foreign Company Rules |
South Africa has well designed controlled foreign company rules that were recommended by the OECD as one of three options for countries to implement. |
Specific countermeasures are proposed to curb abuse where foreign companies are held by interposed trusts, as originally announced in the 2015 Budget review. |
|
4 |
Interest Deductions & Other Financial Payments |
Deductibility of financial payments is governed by the general transfer pricing legislation. In practice, SARS regularly adopts an approach on a similar basis to the interest limitation rules in section 23M and 23N of the Income Tax Act, which in general terms currently allows an interest deduction of approximately 44% of EBITDA (earnings before interest, depreciation and amortisation). |
The current interest limitation rules will be revised to further curb what is viewed by government as “excessive debt financing, which erodes the tax base”. |
|
5 |
Harmful tax practices |
South Africa is currently in line with other OECD member countries after participating in the Forum on Harmful Tax Practices and recently completing its self-review of preferential regime. |
No specific current actions. |
|
6 |
Treaty Abuse |
On “treaty shopping”, South Africa has chosen the principal purpose test, as it is to a large extent aligned with our domestic general anti-avoidance rules (GAAR). This approach denies benefits under a tax treaty where one of the principal purposes of entering into a transaction or arrangement was to obtain a treaty benefit. |
New treaty negotiation will follow the minimum OECD standard and the multilateral instrument will take care if the existing treaties. The principal purpose test will be applied, in cases of apparent “treaty shopping”. |
|
7 |
Permanent Establishment |
South Africa agrees with the OECD recommendations in relation to limiting opportunities for avoidance of a permanent establishment. |
Future tax treaty negotiations will aim to have a broader definition of permanent establishment, to counter “splitting” of activities into separate entities and use of the specific activity exemptions. |
|
8-10 |
Transfer Pricing alignment of outcomes with value creation |
As set out under action 13 below, regulations for country-by-country reporting were gazetted in December 2016. SARS has updated the corporate income tax return to include important disclosure requirements in respect of transfer pricing, including more transactional data in relation to associated party payments for interest, royalty and service fees. This information will assist with transfer pricing enforcement. |
An updated Transfer Pricing Practice Note from SARS is imminent, including new guidance on the arm’s length principle and an agreed approach to ensure appropriate pricing on intangibles that are difficult to value. |
|
11 |
Measuring and Monitoring BEPS |
Action 11 is different from other BEPS action items as it is focused on measuring BEPS activity rather than correcting it. South Africa is in agreement that it is important to continually measure and monitor BEPS activity through improved statistics and evaluation in order to curb base erosion and profit shifting. |
No specific current actions. |
|
12 |
Mandatory Disclosure Rules |
South Africa has well designed reportable arrangements provisions, which were used as a benchmark in the final BEPS Action 12 recommendations. |
No specific current actions. |
|
13 |
Transfer Pricing Documentation |
The term “international tax standard” has been included in the Tax Administration Act, covering country-by-country reporting. Regulations were gazetted in December 2016, for country-by-country by multinational enterprises with fiscal years starting on or after 1 January 2016. The first country-by-country reports will be required to be filed with SARS from 31 December 2017. |
No specific current actions. |
|
14 |
Dispute Resolution |
South Africa accepts in principle that its treaty model should incorporate the minimum standards as set out in the OECD final recommendations, however South Africa has not committed to mandatory binding mutual agreement procedure arbitration. |
South Africa will update its treaty model to incorporate the relevant minimum standards (but not mutual agreement procedure arbitration). |
|
15 |
Multilateral Instrument |
South Africa adopted the multilateral instrument in November 2016. |
No specific current actions. |
Written by Noxolo Ntombela, Bowmans
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