South Africa’s Minister of Finance set out South Africa’s (SA) position on the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action items in the 2017 Budget Review delivered on 22 February 2017.1
Action 1: Digital economy
Foreign businesses supplying digital services in SA are already required to register as value added tax (VAT) vendors. The regulations are under review. SA is a member of the new Task Force for the Digital Economy, which will investigate direct taxes.
Action 2: Hybrid mismatches
Recommendations on transparent entities are being incorporated into the multilateral instrument. SA law has measures to limit double deductions, income exclusions where there is no corresponding deduction, and deductions with no inclusions. Further refinements may be considered in future.
Action 3: Controlled foreign company rules
SA’s controlled foreign company rules have been internationally acknowledged as being well designed and were recommended as one of three options for countries to implement.
Action 4: Interest deductions
The SA Government is strengthening its efforts to curb excessive debt financing, which erodes the tax base, and will review the current limitation in light of OECD recommendations.
Action 5: Harmful tax practices
SA participated in the Forum on Harmful Tax Practices and recently completed its self-review of preferential regimes, bringing it in line with OECD member countries.
Action 6: Treaty abuse
On treaty shopping, SA has chosen the principal purpose test because it is to a large extent aligned with its domestic general anti-avoidance rule. Under this test, the benefits of a tax treaty are denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of entering into any arrangement or transaction.
Action 7: Permanent establishment status
SA’s future tax treaty negotiations will take the recommendations dealing with fragmentation of activities and avoidance of permanent establishment status through specific activity exemptions into account. The aim is to prevent entities artificially avoiding their status as a permanent establishment (a fixed place of business) by breaking up their cohesive business into smaller operations.
Action 8 – 10: Transfer pricing (alignment of outcomes with value creation)
The South African Revenue Service (SARS) is updating the Transfer Pricing Practice Note in line with OECD Transfer Pricing Guidelines to include new guidance on the arms-length principle and an agreed approach to ensure appropriate pricing on intangibles that are difficult to value.
Action 11: Data analysis (measuring and monitoring)
SA shares the view that effective measuring and monitoring through improved statistics and evaluation is important for curbing BEPS, and it will continue to work with other countries.
Action 12: Mandatory disclosure
The Tax Administration Act (2011) contains rules dealing with reportable arrangements. These rules require taxpayers who have entered into reportable arrangements to report the details of these arrangements to SARS. They set out information to be submitted and who must disclose or submit the information. The SA reportable arrangement rules have been used as a benchmark in the final BEPS Action 12 recommendations.
Action 13: Transfer pricing documentation
The Tax Administration Act provides the legal basis for country-by-country reporting (CbCR), where the term “international tax standard” has been included, covering CbCR. Regulations were gazetted in December 2016. For multinational enterprises with fiscal years starting on or after 1 January 2016, the first CbCR will be required to be filed with SARS from 31 December 2017.
Action 14: Dispute resolution
The SA treaty model will be updated to incorporate the minimum standards. However, like other developing countries participating in the G20/OECD project, SA has not committed to mandatory binding mutual agreement procedure arbitration.
Action 15: Multilateral instrument
SA is among more than 100 countries and jurisdictions that have reached consensus on the multilateral instrument capable of incorporating tax treaty-related BEPS measures into the existing network of bilateral treaties. The multilateral instrument was adopted in November 2016. South Africa is expected to sign the multilateral instrument on 7 June 2017.
1. See EY Global Tax Alert, South Africa’s Finance Minister delivers 2017 Budget Review, dated 22 February 2017.
EYG no. 00891-171Gbl