Taxpayers with a global footprint are going to require the assistance of reputable international tax experts for the foreseeable future to help them navigate their intragroup dealings.
One thing is certain. We are no longer simply talking about the OECD’s base erosion and profit shifting (BEPS) project in South Africa; we are living in this newly established ‘BEPS era’. Just to recap, in 2015 the OECD released 15 BEPS related action plans in response to the global realisation that multinational entities (MNEs) were not paying their fair share of tax in the jurisdictions in which they were operating. As a result, the international tax landscape has changed fundamentally and will continue as such for many years to come.
The OECD has strived to ensure that governments (which participate in the BEPS project and adopt the BEPS package) are in a better position to know what MNEs’ activities actually are globally − via the transparency created by the sharing of country by country (CbC) information discussed below − and that MNEs are regulated by a single set of global tax rules − via relatively uniform transfer pricing legislation based on the OECD’s standards. However, this proposed state of certainty can be undermined in the way it is implemented in each jurisdiction, which can lead to uncertainty for taxpayers when applying all these new BEPS requirements. Let’s analyse how South Africa is faring in this regard …
The Davis Tax Committee (DTC) confirmed that South Africa will have to develop a balanced approach as it responds to BEPS challenges. In doing so, South Africa has recently adopted some of the fundamental BEPS principles, especially Action Plan 13. Even though section 31 of the Income Tax 58 of 1962, which is South Africa’s transfer pricing provision, has been in place since 1995, transfer pricing documentation was never mandatory before. However, this has all changed.
- On 28 October 2016, SARS issued a public notice requiring documentation to be retained by South African residents in relation to affected transactions which exceed R100 million in years of assessment commencing on or after 1 October 2016.
- On 23 December 2016, SARS issued the CbC regulations for MNEs, which confirmed South Africa’s commitment to participate in the joint BEPS project of the G20 and the OECD and further confirmed that South Africa’s Competent Authority had signed the Multilateral Competent Authority Agreement on the Exchange of CbC reports on 27 January 2016. The CbC regulations require (inter alia) that the ultimate parent entity of an MNE group which is tax resident in South Africa and with a consolidated group turnover in excess of R10 billion must file a CbC report for years of assessment commencing on or after 1 January 2016 within 12 months of the MNE’s financial year-end.
- On 20 October 2017, SARS issued another public notice stipulating the form and manner of the CbC return to be submitted and clarified that a CbC report, master file and local file would be required for years of assessment commencing on or after 1 January 2016, by the ultimate parent entity of an MNE group, whereas other residents which are not the ultimate parent entity of an MNE group but have affected transactions in excess of R100 million, would only be required to submit a master file and local file for years of assessment commencing on or after 1 October 2016.
Even though SARS has been criticised for the way in which these requirements have been implemented, since insufficient notice was given to MNEs regarding the requisite CbC reporting and the SARS’s CbC reporting platform has had its fair share of teething problems, MNEs in South Africa are now subject to the same transfer pricing documentation requirements as their global competitors. This sounds like certainty, doesn’t it? It is, but sadly only to a limited extent, since only the documentation requirements have now been covered. The actual transfer pricing principles to be applied by MNEs in ensuring the arm’s length nature of their intra-group transactions would need to be in accordance with the OECD’s principles and guidance in order for MNEs in South Africa to have real certainty when selecting and implementing appropriate transfer pricing methodologies. However, even though SARS has indicated that it will follow the OECD’s guidance in this regard, it has not yet clarified for taxpayers exactly which of the OECD’s principles will be applicable and which won’t when applying section 31 of the Act. One can only hope that when SARS’ Transfer Pricing Practice Note 7 is finally revised, SARS’ stance on the OECD commentary will be clarified, enabling taxpayers to implement their transfer pricing policies in accordance with SARS’ expectations, with certainty.
In a further attempt to provide certainty to taxpayers, since the binding private ruling system does not cater for transfer pricing rulings, SARS has reiterated to taxpayers that they have the option of requesting a non-binding opinion in circumstances where they are unsure of the exact application of any of the transfer pricing principles. While this option will go a long way in providing taxpayers with an indication of what SARS’ view is in relation to a particular set of facts, there is no guarantee that SARS will actually issue an opinion at the end of the day and if they do, it is non-binding after all. Once again, we are faced with the uncertainty of what appears to be a somewhat certain option.
The ultimate chapter in creating certainty in the BEPS landscape has been the creation of the Multilateral Instrument (MLI) in accordance with BEPS Action Plan 15, which assists in modifying numerous bilateral double taxation treaties (DTAs) without the need for countries to renegotiate every DTA in force. On 7 June 2017, 67 countries, including South Africa, signed the MLI and South Africa’s reservation and notification statement was issued on the same day. The MLI adopts certain of the BEPS action plans and updates DTAs, as follows:
- Action 2 on the introduction of anti-treaty abuse provisions in relation to hybrid mismatch arrangements
- Action 6 on the introduction of anti-treaty abuse provisions
- Action 7 on changes to the definition of a permanent establishment, and
- Action 14 on improvements to dispute resolution procedures
The MLI will coexist with the majority of South Africa’s DTAs, since the MLI will only update a particular DTA when each country’s reservation and notification statement is agreed to by both parties and then ratified in its own jurisdiction. Therefore, the MLI has the potential to create immense certainty by updating an entire DTA network by the mere signature thereof but taxpayers will have no certainty on any given day as to which articles in a particular DTA actually apply until both jurisdictions have ratified the MLI (which means that taxpayers will need to constantly check the status of the MLI in their own jurisdiction, as well as the other applicable DTA jurisdictions).
Therefore, the only thing that is certain in our new BEPS landscape in South Africa is that taxpayers with a global footprint are going to require the assistance of reputable international tax experts for the foreseeable future to help them navigate their intragroup dealings. This is probably the only way to obtain a measure of certainty in the application of South Africa’s DTAs going forward (since merely downloading a DTA from the SARS website without considering the impact of the MLI entered into with the other jurisdiction may result in an incorrect interpretation and application of the DTA) and in the appropriate application of OECD-based transfer pricing principles in order to be certain (or at least on a ‘more likely than not’ basis) that the penalties imposed by section 31 of the Act have been successfully avoided.
Tracy Brophy CA(SA), Chairperson of SAICA’s National Tax Committee and Head of Tax Risk Management at FirstRand Bank.
This article was originally published in the August 2018 issue of ASA.