New weapon in the war on tax ero­sion

The Star Early Edition - - NEWS - Amanda Visser

SOUTH Africa is now one of 70 coun­tries that will use an in­ter­na­tion­ally de­vel­oped in­stru­ment to im­ple­ment tax­treaty mea­sures to pre­vent the ero­sion of its tax base.

The mul­ti­lat­eral in­stru­ment (MLI), which was signed into use by the coun­tries ear­lier this month, is one of 15 ac­tion plans de­vel­oped by the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) to pre­vent base ero­sion and profit shift­ing.

The in­stru­ment amends all of South Africa’s dou­ble-tax­a­tion treaties and aims to elim­i­nate “treaty shop­ping”, whereby tax­pay­ers ar­range their af­fairs in or­der to de­rive the most ben­e­fit from a tax treaty with­out hav­ing a sub­stan­tive pres­ence in a coun­try.

Ernest Mazan­sky, a di­rec­tor at Werks­mans Tax, says the in­stru­ment will pro­duce a “mo­men­tous change” to the way in which in­ter­na­tional tax plan­ning and struc­tur­ing is un­der­taken.

There are still many unan­swered ques­tions, but it will be a new world for in­ter­na­tional tax plan­ners, says Mazan­sky.

Robyn Berger, the in­ter­na­tional cor­po­rate tax di­rec­tor at KMPG, says the MLI sets min­i­mum stan­dards to pre­vent abuses and de­fines what con­sti­tutes a tax­able pres­ence in a treaty coun­try.

“South African busi­nesses need to ur­gently re­view all of their cross-bor­der trans­ac­tions where they rely on the pro­vi­sions of an ex­ist­ing dou­ble­tax agree­ment to avoid dou­ble tax­a­tion, or which may im­pact the rate of tax payable. This is to en­sure their in­ter­na­tional op­er­a­tions are not ad­versely im­pacted by the changes.”

The G20 fi­nance min­is­ters man­dated the OECD sev­eral years ago to ad­dress base ero­sion and profit shift­ing.

The or­gan­i­sa­tion de­vel­oped the 15 ac­tion plans to as­sist govern­ments with do­mes­tic and in­ter­na­tional in­stru­ments to ad­dress tax avoid­ance and to en­sure that prof­its are taxed where eco­nomic ac­tiv­i­ties gen­er­ate the prof­its. The MLI is one of those ac­tion plans.Mazan­sky says that, from a South African per­spec­tive, the most sig­nif­i­cant change will prob­a­bly be the much stricter pro­vi­sions against treaty shop­ping.

“Hith­erto it has not been dif­fi­cult to re­duce with­hold­ing taxes by in­ter­pos­ing com­pa­nies in tax-friendly ju­ris­dic­tions with favourable tax treaties,” Mazan­sky says.

“Now, through one or other method, the tax author­ity in the pay­ing coun­try could deny the lower with­hold­ing rate un­der the treaty con­cluded with the coun­try of the in­ter­posed en­tity, if it (the com­pany) was in­ter­posed as a treaty-shop­ping ex­er­cise.”

Mazan­sky says that South Africa has adopted the “prin­ci­pal pur­pose test”, in terms of which if one of the prin­ci­pal pur­poses of in­ter­pos­ing the foreign share­holder, cred­i­tor or li­cen­sor com­pany was to ben­e­fit from the treaty, as op­posed to hav­ing a com­mer­cial pur­pose, the treaty’s ben­e­fits can be de­nied.

The OECD says the in­stru­ment al­lows coun­tries to up­date tax treaties with pro­vi­sions re­flect­ing in­ter­na­tion­ally agreed stan­dards on tax avoid­ance.

More than 1 100 of the 2 300 treaties be­tween the sig­na­tory coun­tries will be mod­i­fied by the MLI. It is likely that the first mod­i­fi­ca­tions will be­come ef­fec­tive next year.

Berger says if coun­tries had to rene­go­ti­ate each dou­ble-tax­a­tion agree­ment sep­a­rately, it would take years. “The MLI has the ef­fect of amend­ing all the agree­ments sub­ject to it. This al­lows for a quick so­lu­tion to in­tro­duce base ero­sion and profit-shift­ing changes into dou­ble-tax agree­ments.”

She says the MLI in­tro­duces mea­sures that curb abuse by tax­pay­ers who im­ple­ment ar­ti­fi­cial struc­tures prin­ci­pally to ac­cess dou­ble-tax­a­tion agree­ments to elim­i­nate or re­duce tax. Al­though South Africa al­ready has ef­fec­tive anti-avoid­ance mea­sures to curb such struc­tures, the MLI pro­vides more spe­cific mea­sures.

Berger says the ap­pli­ca­tion of the MLI is com­plex, re­sult­ing in un­cer­tainty.

“Not all dou­ble-tax agree­ment part­ners agree to in­sti­tute the same base ero­sion and profit-shift­ing mea­sures. Coun­tries have the op­tion to opt out of cer­tain mea­sures, or to se­lect spe­cific ways in which to in­tro­duce other mea­sures.”

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.