BEPS: the OECD releases the first round of recommendations that are intended to bring about the most significant reform of the international tax system since the 1950s


OECD image 1The Base Erosion and Profit Shifting (BEPS) Project is high on the agenda of the South African Government. Senior government officials, including Deputy President Cyril Ramaphosa, political parties and senior South African Revenue Service (SARS) officials have all publically indicated that BEPS remains a matter of concern. In response, the Davis Tax Review Committee has been tasked to evaluate the South African tax system against internationally accepted tax practices and specifically the OECD’s BEPS project. The committee is expected to produce a report later this year.

Currently, the effect of BEPS is already being felt in areas where discretionary powers are exercised by SARS, for example, transfer pricing assessments and advance tax rulings. Also, in the tax policy arena, the suggested BEPS proposals have had an influence on policy makers designing South Africa’s tax laws – this can be expected to increase following the release of the first BEPS deliverables by the OECD on 16 September 2014.  These developments are happening despite the fact that South Africa is not an OECD member country (although part of the G-20) and that the BEPS action points are not legally binding on South African taxpayers or SARS.

In September 2013, G20 Leaders fully endorsed the OECD Action Plan to address Base Erosion and Profit Shifting (‘BEPS’). The Action Plan provides for 15 actions to be delivered by 2015, with 7 actions to be delivered in September 2014. True to this timeline, on 16 September 2014 the OECD released the first 7 deliverables, together with an official explanatory statement.

The 7 topics covered by the 16 September reports are:
· The Tax Challenges of the Digital Economy
· Hybrid Mismatch Arrangements
· Harmful Tax Practices
· Tax Treaty Abuse
· Transfer Pricing & Intangibles
· Transfer Pricing Documentation and Country-by-Country Reporting
· The Feasibility of Developing a Multilateral Instrument on BEPS

It is clear that the detailed proposals released by the OECD on 16 September 2014, comprising some 340 pages, will have a significant effect on the international tax system, including that of South Africa.  Some of these reports specifically indicate the position adopted by South Africa, for example in regard to new detailed country-by-country transfer pricing documentation requirements.  This dovetails with recent requirements for non-residents providing services in South Africa to register for tax in South Africa regardless of whether they have a taxable presence (after tax treaty relief).