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BEPs: The South African Experience

BEPs: The South African Experience. ATAF CONSULTIVE CONFERENCE 18-19 March 2014. Presented by: Sunita Manik Group Executive : SARS Large Business Centre. Introduction to the BEPs Initiative. SA is an associate member of OECD for BEPs We participate in the working parties and fora

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BEPs: The South African Experience

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  1. BEPs: The South African Experience ATAF CONSULTIVE CONFERENCE 18-19 March 2014 Presented by: Sunita Manik Group Executive: SARS Large Business Centre

  2. Introduction to the BEPs Initiative SA is an associate member of OECD for BEPs We participate in the working parties and fora SA has membership of the Bureau Plus and the CFA Bureau Plus Work of the committees and outputs for the 15 action items is steered by the Bureau Key decisions linked to the BEPs outcomes is made by the CFA Bureau Plus Major deliverables due in September 2014 and by September 2015

  3. Significance of BEPs • BEPs is a serious and growing issue facing both developed and developing countries. Recent outcry against Starbucks, Google, Apple etc. • Erosion of sovereign tax base • A disconnect exists where business activities are taking place and where the profits are being posted • Taxpayers use unacceptable transfer pricing, treaty abuse and the deliberate creation of hybrid entities to minimise or eliminate tax obligations. • It’s less about double taxation but more double non taxation! • The whole tax system becomes unstable and unsustainable • The BEPs initiative is a response to these challenges 3

  4. Base eroding and profit shifting in SA • Transfer pricing, treaty abuse and offshore structuring are areas where our tax base is being eroded • Our reality • Billions of Rands exit the country annually through service payments, the bulk being in the form of management fees. • We pay a significant amount for offshore technical services • Royalty payments also pose a challenge. • Treaty abuse - certain practices have resulted in arbitrage flowing from differences in domestic legislation with other countries 4

  5. Base erosion and profit shifting in SA • Structured transactions • Hybrid branch structures that notionally move taxable income to low-tax jurisdictions and return it as exempt income (with STC credits) • Funnel/loop structures that notionally move taxable income to Mauritius via Namibia and return it as exempt income, and • STC credit generator structures that exploit treaty provisions 5

  6. Key areas we are looking at • Transfer Pricing • Fragmentation of the supply chain globally • Interposition of companies in low/ favourable tax jurisdictions • E.g. Mining company with off shore marketing company has significantly eroded the tax base • E.g. We are also looking at the treatment of intangibles – charging of royalties • International Tax • Permanent establishments • Hybrids 6

  7. Some considerations when dealing with these challenges • Transfer Pricing • Issue of appropriate comparables • Safe harbour limitations • Information flows between SARS and the taxpayer/representative • Timing/prescription matters 7

  8. What's in the pipeline • Insurance is a big issue - foreign companies offering such services and offshore reinsurance • Exploring withholding on payment for services • FHTP Application - review of current legislation to determine whether we have harmful practices 8

  9. Framing our response to this reality • Strategic • Target high impact cases in terms of value and materiality • Settlement vs. Litigation • Use of legal counsel 9

  10. Framing our response to this reality • Legislative • Strengthen domestic legislation • Specific anti avoidance and GAAR, CFC legislation, treaties that look at limitation of benefits and main purpose test interest limitation rules, Hybrid mismatch rules etc. • Reportable arrangement (RA) regime • Residence approach, use of deeming provisions • In response to the digital economy challenges, SA has introduced a requirement for foreign enterprises providing electronic services to SA residents to register for VAT

  11. Framing our response to this reality • Enhancing our risk based approach • Case selection must be defensible • Building capability • Project approach • Use anchor specialists

  12. Conclusion • The BEPs initiative can be a game changer in reducing base erosion and threats to our sovereign tax base • It may be useful to review domestic legislation in the light of the current discussions and direction as OECD outcomes is only soft law • Some of the work being undertaken at OECD is a confirmation of previous work which poses a challenge for non OECD members • We can constructively utilise ATAF to advance the developing country context and ensure that the BEPs response is appropriate for our reality 12

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