BEPS refers to tax planning strategies, primarily by multinational enterprises (“MNEs”), that supposedly exploit loopholes in tax rules so as to shift profits to jurisdictions where there is allegedly little real activity but taxes are low, resulting in low overall corporate taxes being paid. Although such strategies are not generally illegal, the OECD claims that BEPS distorts competition – giving MNEs an advantage over local operations. It is also claimed that it results in economic inefficiency as investment decisions are made for tax (as opposed to commercial) reasons, and that it undermines voluntary compliance, as “ordinary” taxpayers will see this advantage given to MNEs as being unfair.
In July 2013, the OECD issued its BEPS Action Plan setting out 15 actions to be taken by member states to combat BEPS. The OECD plans to issue reports in the latter half of 2014 and in 2015, outlining detailed recommendations for the implementation of these actions.
While South Africa is not a member state of the OECD, it informally follows its guidelines, and actively participates in its initiatives. Thus, South African tax policy is influenced by this initiative. Late last year, Finance Minister Pravin Gordhan placed on record his view that South Africa, and Africa as a whole, are negatively affected by base erosion behaviour by MNEs. The Davis Tax Committee, which is currently examining whether South Africa’s tax system supports its economic objectives and policies, has, as one of its terms of reference, highlighted the need to address concerns relating to BEPS. Consequently, it is widely expected that, at the least, some BEPS–related changes will be made to the South African tax system in the February 2014 Budget.
One certain change relates to the digital economy. Goods and services are now traded freely over the internet, a business mechanism that was not foreseen when existing international tax rules were originally instituted. The OECD BEPS Action Plan urges member states to address the tax avoidance opportunities that e-commerce affords MNEs and it is highly likely that South Africa will follow their lead. Already, in recent South African tax legislation, there have been moves to compel foreign enterprises supplying digital goods and services to South African residents to register as vendors for Valued Added Tax (“VAT”) purposes. In the 2014 Budget, more such measures can be expected, as well as new laws to define the circumstances under which such international businesses create presence in South Africa for income tax purposes. This may take the form of new place of supply rules and a review of South African source rules for income tax purposes.
Other changes related to BEPS are far less certain.
The BEPS Action Plan recommends that OECD member states should limit tax erosion through interest deductions and other financial payments. However, South Africa has already introduced a host of legislation that provides for such limitations so it is unclear whether more will be introduced in the 2014 Budget.
A further campaign championed by the BEPS action plan is the need for improved transparency in tax matters. It is understood that exchange of tax information between countries will assist with determining whether tax is paid on the income in the other countries. South Africa is already subject to many tax treaties which permit such exchanges, so any further changes to our administrative rules to effect disclosure may not be necessary.
Certainly, any legislation that is put in place will need to balance the authorities’ commitments under such treaties with the need to respect taxpayer rights and privacy.
Given the newness of the BEPS initiative and the fact that reports identifying issues, and possible actions to address issues, are, in most instances, only expected later this year or even next year, it may be prudent for South African tax authorities to wait for direction from the OECD before making unilateral changes to our law which may dissuade investment from MNEs.
Even if there are no immediate changes as a result of BEPS in the 2014 Budget, it can be expected that it will play some part in shaping South African tax policies in years to come.