On 22 August 2016 the OECD released Public Discussion Draft: BEPS Action 2 – Branch Mismatch Structures (Discussion Draft), which identifies and analyses mismatches that may arise through the use of branch structures. The Discussion Draft sets out preliminary recommendations for domestic rules, based on those proposed in the OECDs Final Report on BEPS Action 2 – Neutralising the Effects of Hybrid Mismatch Arrangements (2015 Final Hybrids Report), which will hopefully neutralise the mismatches in tax outcomes arising from the exploitation of branch structures. To contextualise the Discussion Draft, it is necessary to summarise briefly the BEPS risks that BEPS Action 2 seeks to address.
Category: OECD – BEPS Project
OECD Request for Input on the development of a multilateral instrument to implement tax treaty BEPS measures
Author: Elsabe Strydom (ENSafrica). The Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Project identified 15 actions based on the following three key themes, being: the introduction of coherence in the domestic rules that affect cross-border activities; the reinforcement of substance requirements in the existing international standards; and the improvement of transparency and certainty. In particular, the final BEPS package, released on 5 October 2015, represents a substantial overhaul of the international tax rules and once the measures become applicable, it is expected that profits will need to be reported where the economic activities that generate them are carried out and where value is created.
Can a controlled foreign company have more than one foreign business establishment?
In terms of the South African controlled foreign company (“CFC“) legislation contained in section 9D of the Income Tax Act, 58 of 1962 (the “Act“), where South African residents directly or indirectly hold more than 50% of the total participation rights (essentially, the right to participate in the benefits of the rights attaching to a share) in a foreign company, a proportional amount of the net income of that foreign company (as a CFC) will be included in the income of those residents. In determining the net income of the CFC, section 9D(9)(b) of the Act exempts, inter alia, any amount which is attributable to any foreign business establishment (FBE) of that CFC.
Pension funds and BEPS
Author: Magda Snyckers (Tax Director at ENSafrica). Is the current international tax focus on base erosion and profit shifting (BEPS) relevant for tax-exempt pension funds? In particular, should the trustees and/or administrators of pension funds take note of the finalisation by the Organisation for Economic Co-operation and Development (OECD) of the 15 point action plan to address BEPS?
Transfer pricing – Consequence of year end adjustments
As all multinational groups of companies should be aware transfer pricing is a significant tax issue when operating cross border in multiple tax jurisdictions. Transfer pricing legislation exists in most established tax regimes and is becoming more and more prevalent in countries previously considered less tax sophisticated. In the context of South Africa, transfer pricing legislation has been present in the Income Tax Act, 1962 (the Act) for a number of years and was significantly revised in 2012 to better align with the Transfer Pricing Guidelines issued by The Organisation for Economic Cooperation and Development (OECD).
Draft regulations for the implementation of Country-by-Country reporting published in South Africa
Author: Arnaaz Camay (Tax Executive at ENSAfrica). The South African Revenue Service (SARS) is, in accordance with section 3(2)(j) of the Tax Administration Act, 28 of 2011 (the TAA), responsible for giving effect to the Country-by-Country Reporting Standard for Multinational Enterprises (the CbC Reporting Standard) which was developed under the Organisation for Economic Co-operation and Developments (OECDs) base erosion and profit shifting (BEPS) Action Plan 13 Re-examine Transfer Pricing Documentation. The OECDs recommendation under Action Plan 13 was that all countries should adopt a standardised approach to transfer pricing documentation which follows a three-tiered structure consisting of a master file, a local file, and country-by-country (CbC) report.
International Tax – DTA with Hong Kong
The Tax Treaty (and Protocol) between Hong Kong and South Africa has been ratified by both countries with the date of entry into force from 20 October 2015. In South Africa, it was published in the Government Gazette No. 39444 on 24 November 2015. The provisions of the treaty will apply in Hong Kong for years of assessment beginning on or after 1 April 2016. In South Africa, it applies from 1 January 2016 for amounts held at source, and for years of assessment beginning on or after 1 April 2016 in respect of other taxes. In general, the treaty follows the OECD Model Tax Convention. We highlight below some of the departures from the Model and other notable clauses.
OECD Proposed expansion of permanent establishment definition
Author: Annalie Pinch and Nicolette Smit. During October 2015, as part of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Project, the OECD issued its final report in respect of Action 7 Preventing the artificial avoidance of permanent establishment status (BEPS Report). In terms of Article 7(1) of the OECDs Model Tax Convention on Income and on Capital (Model Tax Convention), a Contracting State will only have taxing rights in respect of the business profits of a foreign enterprise which is a resident of another Contracting State if the enterprise has a permanent establishment (PE), as defined in Article 5, in that State to which such profits are attributable.
Budget 2016 – BEPS front and centre
The Minister endorsed the work of the Davis Committee and reiterated South Africas commitment to the work of the Organisation for Economic Cooperation and Development (OECD) and G20 on base erosion and profit shifting (BEPS). He announced that South Africa would continue to measure its tax system against internationally accepted tax trends, principles and practices, and keep pace with international initiatives to improve tax compliance and deal with problems of base erosion.
Is the OECDs base erosion and profit shifting action plan on transfer pricing flexing the arms length principles muscles; or proposing a different pricing standard under the guise thereof?
Using South Africa as our departure point, s31 of the Income Tax Act, No 58 of 1962 (Act) provides that the tax payable in respect of international transactions is to be based on the arms length principle. In brief, s31 of the Act provides that: where any transaction, operation, scheme, agreement or understanding (hereinafter, transaction) constitutes an affected transaction has been concluded between connected persons; and such transaction contains a term or condition which differs from any term or condition that would have existed had the parties to the transaction been independent vis-ą-vis one another and transacting at arms length; and the term or condition results in a tax benefit for a party to the transaction; then the tax payable by the benefitting party must be calculated as if the transaction had been concluded between independent parties transacting at arms length.