Dis­sect­ing avoid­ance frame­work

Davis com­mit­tee forced into an OECD strait­jacket to find base ero­sion through OECD lens

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - KEITH EN­GEL

THE Davis Tax Com­mit­tee is to be com­mended for per­form­ing the Her­culean task of fully re­view­ing the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment (OECD) base ero­sion and profit shift­ing (BEPS) re­ports de­spite the short time frame and lack of ex­ten­sive staff sup­port.

The scale of the project is mas­sive, and one can see that the com­mit­tee has made an ex­haus­tive at­tempt to cover all as­pects of the OECD work. The com­mit­tee is also to be com­mended for seek­ing lo­cal eco­nomic data.

Although the com­mit­tee worked hard to con­tex­tu­alise the BEPS de­bate so that the de­bate had a South African flavour, the real prob­lem for the com­mit­tee was the man­date it­self. The ac­tion points of the OECD clearly have a strong Euro­pean flavour. For in­stance, the com­mit­tee right­fully points out that man­age­ment and tech­ni­cal fees pose a greater threat to the South African tax base than the OECD fo­cus on in­tel­lec­tual prop­erty fees.

As a re­sult, the com­mit­tee was wrong­fully forced into an OECD strait­jacket to find base ero­sion through an OECD lens. This is not to say that SA does not have base ero­sion — just that South African base ero­sion is prob­a­bly oc­cur­ring from a dif­fer­ent source.

In­deed, the com­mit­tee’s in­for­ma­tion on man­age­ment and re­lated ser­vice fees high­lights this fact, but the OECD ac­tion points un­for­tu­nately do not specif­i­cally ad­dress th­ese con­cerns be­yond im­proved gen­eral doc­u­men­ta­tion as­so­ci­ated with trans­fer pric­ing.

The com­mit­tee’s fo­cus on tax treaties was right­fully iden­ti­fied as a prob­a­ble con­cern. How­ever, the ac­tual avoid­ance at stake within SA needs to be clar­i­fied. For in­stance, treaty shop­ping in terms of div­i­dend pay­ments via coun­tries such as Mau­ri­tius are not re­ally an is­sue be­cause the Mau­ri­tian treaty div­i­dend rates match the rates found in most treaties (and div­i­dends do not cause base ero­sion in the OECD sense be­cause div­i­dend pay­ments by a South African com­pany are not de­ductible). The big­ger con­cern is in­ter­est, ser­vice and roy­alty pay­ments when ap­plied in the case of tax treaties in­volv­ing low-tax ju­ris­dic­tions. If rev­enue is to be pro­tected, a more com­pre­hen­sive pol­icy strat­egy needs to be con­sid­ered, fo­cus­ing specif­i­cally on low-tax ju­ris­dic­tions that have an ad­verse im­pact on the South African tax base, and spe­cific in­for­ma­tion re­lat­ing to th­ese out­flows would have been help­ful. Un­for­tu­nately, the for­mat of the OECD ac­tion points do not fa­cil­i­tate this ap­proach — in­stead seek­ing a generic re­sponse for all tax treaties.

That said, the com­mit­tee’s over­all em­pha­sis on clar­i­fy­ing the ap­pli­ca­tion of the do­mes­tic gen­eral anti-avoid­ance rule and sup­port of sub­jec­tive an­ti­avoid­ance rules within treaties them­selves prob­a­bly can be sup­ported as a rea­son­able generic re­sponse.

Within the in­tro­duc­tory note, the com­mit­tee strongly raises the point that anti-avoid­ance must be mea­sured against South Africa’s need for com­pet­i­tive­ness. Most prac­ti­tion­ers will un­doubt­edly take com­fort that the com­mit­tee recog­nises the need for this bal­ance and, in­deed, the over­all tone of the re­port takes a very mea­sured re­sponse. Nonethe­less, I ex­pect some com­men­ta­tors to crit­i­cise the re­port for its fail­ure to dis­cuss the is­sue of tax and com­pet­i­tive­ness (other than a brief dis­cus­sion of the head­quar­ter com­pany is­sue). To be fair to the com­mit­tee, the is­sue of com­pet­i­tive­ness is out­side the core man­date of the OECD re­port, mean­ing that the is­sue of tax and com­pet­i­tive­ness has to be an item re­served for an­other day. The line be­tween an­ti­avoid­ance and com­pet­i­tive­ness can be pre­served as long as anti-avoid­ance mea­sures do not in­ad­ver­tently im­pact non-tax mo­ti­vated com­mer­cial trans­ac­tions (eas­ier said than done).

In terms of trans­fer pric­ing, the com­mit­tee again took a bal­anced ap­proach. While SA will clearly fol­low in­ter­na­tional trends in this re­gard, many busi­nesses will un­doubt­edly sup­port an ap­proach that pro­vides doc­u­men­ta­tion re­lief in terms of ma­te­ri­al­ity. The in­ter­na­tional “pa­per/sys­tems bur­den” of com­pli­ance in the tax and reg­u­la­tory arena is quickly be­com­ing a heavy ex­pense for many com­pa­nies, and com­pany re­sources ded­i­cated to th­ese ef­forts are fall­ing short of in­ter­na­tional de­mand. The ques­tion is how to sim­plify in­for­ma­tion re­quests while en­hanc­ing gov­ern­ment ac­cess to use­ful in­for­ma­tion, some­thing clearly re­quir­ing an en­hanced dia­logue be­tween gov­ern­ment and tax­pay­ers.

All-in-all, prac­ti­tion­ers should wel­come the com­mit­tee’s thought­ful and open ap­proach in the de­bate even if cer­tain points may be of con­cern. One would hope that prac­ti­tion­ers will re­spond con­struc­tively with ad­di­tional in­for­ma­tion and that the gov­ern­ment will prop­erly take into ac­count the mea­sured na­ture of the com­mit­tee’s ap­proach when for­mal­is­ing pro­pos­als (with­out one-sided cherry-pick­ing).

From a larger per­spec­tive though, one does won­der whether the BEPS re­port was the best use of com­mit­tee re­sources in a time-pe­riod when the gov­ern­ment is seek­ing to raise sig­nif­i­cant rev­enues via closing loop­holes. Although the clo­sure of some loop­holes raised by the com­mit­tee us­ing the OECD lens may raise small pock­ets of rev­enue, a com­mit­tee man­date start­ing with a more South African-cen­tric fac­tual/legal par­a­digm would prob­a­bly have been more fruit­ful.

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