In Dialogue with
ATAFMr Thulani Shongwe
Mr Ted Silkiluwasha
Davis Tax
Commission Professor Annet Oguttu
SARSMs Sunita Manik,
Ms Nishana Gosai
OECD Transfer Pricing
Guidelines in the Spotlight
Guest Speakers
Professor Annet
Oguttu Chairman of the
BEPS Sub-
Committee
Thulani Shongwe
Specialist: Multi-
Lateral Co-operation
Africa Tax
Administration Forum
Nishana Gosai
Transfer Pricing
Manager
South Africa
Revenue Services
Sunita Manik
Group Executive at
the Large Business
Centre
South Africa
Revenue Services
Ted SilkiluwashaCross Border Taxation
Technical Committee at
Africa Tax
Administration Forum
Africa Tax Administration Forum
Thulani Shongwe
Head of Multi-Lateral
Co-operation at
Africa Tax
Administration Forum
Ted Silkiluwasha
Cross Border
Taxation Technical
Committee at Africa
Tax Administration
Forum
AFRICAN TAX ADMINISTRATION FORUMLeading Africa in tax administration
BEPS AND THE OECD ACTIONS: APPLICATION TO AN AFRICAN CONTEXT
Ted Silkiluwasha & Thulani Shongwe
UNECA Sub-Regional Workshop on IFFs
IDENTIFYING AFRICAN BASE EROSION
Much focus is on the OECD / G20 BEPS Action Plan and the 15 Action Points but there are key African issues that result in base erosion.
African BEPS
Trade mis-invoicing
Tax incentivesTransfer of
assets
Taxation of High Net
Worth Individuals
UNECA Sub-Regional Workshop on IFFs
AFRICAN GAINS IN THE OECD BEPS PROCESS
• EBIDTA & Group Ratio Rules
• The original OECD proposal was this should be a mandatory part of the best practice approach.
• The ATAF Technical Committee did not think it appropriate for it to be mandatory as African tax administrations would find it difficult to obtain the information form outside the home country to verify the information provided to it.
Action 4 – Interest Deductions
• Adjustments to Article 5(4) In order to ensure that profits derived from core activities performed in a country can be taxed in that country.
• Modified to ensure that each of the exceptions included in that Article is restricted to activities that are of a “preparatory or auxiliary” character
• Adjustments to Article 5(5) artificial avoidance of PE status through structures such as “commissionaire” arrangements is no longer possible Stronger PE Rules
Action 7 – PE Status
UNECA Sub-Regional Workshop on IFFs
AFRICAN GAINS IN THE OECD BEPS PROCESS
• Revisions made to Chapter 7 of OECD TP Guidelines
• Excessive payments by African taxpayers and MNEs for intra-group services are a major risk to their tax base
• These changes will assist African countries ensure the inclusion of a threshold to the level of service charges where a country adopts the elective simplified approach for low value adding services. This threshold will assist African countries to mitigate the risk from excessive service payments.
Action 7 – Intra-group services
UNECA Sub-Regional Workshop on IFFs
AFRICAN GAINS IN THE OECD BEPS PROCESS
• Revisions made to Chapter 1 of OECD TP Guidelines
• MNEs controlled their foreign subsidiaries without allocating risk to those subsidiaries. This is a threat to tax base of African countries where most subsidiaries are located.
• These changes will assist African address artificial profit shifting by MNES by allocating the risk to the entity where the risks are managed and controlled and there is the financial capacity to assume the risk.
Action 9 – Transfer Pricing on Allocation of Risk
UNECA Sub-Regional Workshop on IFFs
AFRICAN GAINS IN THE OECD BEPS PROCESS
• Revisions made to Chapter 2 of OECD TP Guidelines
• ATAF intervention vital in adopting a Chapter on Commodities
• Use of the CUP Method to assess commodity transactions
• These changes will assist African countries to address abusive transfer pricing practices relating to cross border commodity transactions.
Action 10 – Transfer Pricing on Commodities
UNECA Sub-Regional Workshop on IFFs
AFRICAN GAINS IN THE OECD BEPS PROCESS
• Radical approach taken by ATAF on pricing rule
• MNEs select the date / price at which they deem the commodity to be worth when it leaves the country.
• ATAF approach was to give a pricing rule to tax administrations
• OECD reached consensus to use pricing date
• These changes will assist African tax administrations reduce the burden of proof on when the date of the transaction is. This aspect is NB because companies can manipulate the date / price. New provisions will place burden of proof on MNEs.
Action 10 – Transfer Pricing on Commodities
2nd ATAF International Conference on Tax in Africa
COUNTRY-BY-COUNTRY REPORTING STANDARDS
• This is a crucial aspect to many African countries and it has been raised by the HLP Report
• While to OECD has adopted CbCR a threshold has been set for companies to provide the report. A threshold of €750 000 000 has been set.
• BUT even if the CbCR was with a lower threshold countries need to have EOI to make it work. Nigeria for example has 13 agreements.
• As this is of importance to African countries and to the recommendations of the HLP Report, ATAF has requested for a review and inclusion in the development of the toolkit First review of the threshold will take place in 2020.
SAIT Transfer Pricing Summit 2015
ATAF PRODUCTS TO ASSIST IMPLEMENTATION OF HLP RECOMMENDATIONS
Country Programmes
(TP)BEPS Toolkits
Tax Incentives Code of Conduct
Interest Deductions
Survey
Increased participation
in WPs
Model TP Legislation for
Africa
Risk Assessment Tool for TP
UNECA Sub-Regional Workshop on IFFs
THANK YOU FOR YOUR ATTENTION
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Thulani ShongweMultilateral Cooperation
Chairman of the BEPS Sub-Committee
19 © 2015 Deloitte Touche Tohmatsu Limited
Professor Annet Oguttu
BEPS AND TAX TREATIES
BEPS:
MNE manipulate gaps in the interaction of different tax systems to artificially reduce taxable income or shift profits to
low-tax jurisdictions in which little or no economic activity is performed
Causes of BEPS: International corporate tax framework not kept pace with changing business environment
Result - encourages tax avoidance by MNE - to minimise global tax exposure
Main Concern: corporate income tax is at stake
OECD BEPS solution: - ensure profits are taxed where economic activities generating those profits are performed &
where value is created
BEPS – and treaty implications
Treaties form a big part of international corporate taxation framework
Expected results of BEPS 15 Point Action Plan span three different areas:
Changes in OECD Model Tax treaty
Changes in internationally agreed guidance on implementation (e.g. OECD transfer pricing guidelines)
Recommendations for domestic law and administrative polices (best practices)
Action points that directly impact on tax treaty provisions:
Action 2: Hybrid entity mismatches and dual resident entities – Article 4(3) OECD MTC
Action 6: Prevent Treaty Abuse – Commentary on article 1 OECD MTC
Action 7: Prevent artificial avoidance of PE Status – Article 5 OECD MTC
Actions 8,9,10, 13 on Transfer pricing – Article 7, 9 OECD MTC
Action 14: MAP – Article 25 OECD MTC
Article 15: Multilateral instrument
BEPS & TAX TREATIES
Factors that exacerbate BEPS in a treaty context
Tax laws not sufficiently developed to counter BEPS
DTA negotiation dynamics
Limited tax administrative capacity
Model used has an impact on ability to effectively curtail BEPS
OECD MTC – favours capital exporting countries
UN MTC between Developed & Developing Countries - Favours capital importing countries
US Model
Country models - South Africa’s MTC - basis for treaty-negotiations: Key features
Art 11: Interest taxed only in recipient’s residence state if the recipient is beneficial owner of the interest;
Art 10 & 12: No source limit on rate on dividends and royalties
Art 5: furnishing of services & performance of professional services
No time limit for building or construction site before it will constitute a PE
ACTION 2: NEUTRALISE THE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS
OECD:
Develop treaty provisions & design domestic rules to neutralise hybrid instruments mismatch
arrangements involving:
hybrid entities
hybrid instruments (includes hybrid transfers)
Targets payments that:
deduction/no inclusion or D/NI outcomes
Hybrid instrument: neither debt nor equity, but possess characteristics of both debt and equity
Treated or classified differently for tax purposes - gives rise to a mismatch in tax outcomes
OECD recommendation: Develop hybrid mismatch linking rules
Hybrid entity: treated as a corporation in one jurisdiction & as a transparent entity in another
common hybrids involve partnerships and trusts (e.g. UK Limited liability partnership, US Limited Liability
Company - Concerns:
double taxation or double non-taxation
duplicate deductions or deduction/no inclusion outcomes
Provisions in SA on hybrid entities:
Definition of “foreign partnership” in s 1 of ITA
Provisos to the definitions of “person” and “company” in s 1 of ITA
S 24H of ITA amended to ensure similar tax treatment of “foreign partnerships”
Definitions: “permanent establishment” & “qualifying investor” - “foreign partnership”
ACTION 2: NEUTRALISE THE EFFECTS OF HYBRID MISMATCH
ARRANGEMENTS – TAX TREATY IMPLICATIONS FOR HYBRID ENTITIES
Hybrid mismatch arrangements can result when dual resident companies create double
deductions, in jurisdiction of incorporation & in POEM
Current tiebreaker rule for entities:
Art 4(3) OECD MTC - dual resident co. resident in POEM - para 24 commentry on art 4(3): meaning of POEM
Recommendation in OECD 2015 Final Report :
Art 4(3) OECD MTC to be revised: No POEM
To be solved on a case-by-case basis, by mutual agreement taking into account various relevant factors
including POEM
If no mutual agreement is reached – no treaty benefits
Examples of other factors:
Where BoD meetings are usually held
Where CEO and other senior executives usually carry on their business
Where senior day-to-day management is carried on
Where the HQ are located
Which country’s laws govern the legal status
Where accounting records are kept
Risk of improper use of provisions of the DTT
Recommendations for SA:
SA legislation on hybrid entities still behind G20
Further reform needed to prevent double non-taxation or double taxation
Use dual resident entities to avoid taxes - SA will have to adopt OECD changes to MTC
ACTION 6: PREVENT THE GRANTING OF TREATY BENEFITS IN
INAPPROPRIATE CIRCUMSTANCES
Treaty shopping
Residents of non-treaty country to obtain treaty benefits not supposed to be available to them
Domestic provisions:
General anti-avoidance provisions - para 7.1 of the Com’try on article 1
Specific treaty provisions
Look through approach - para 13 and 14 of the Com’try on article 1
Subject-to-tax provision - para 15 of the com’try on Article
Limitation-of-benefits provision - para 20 of the Comm’try on article 1
Beneficial ownership provision - Paragraph 10 of the Commt’y on article 1
Meaning of beneficial owner - Not explicitly defined in OECD MTC or its Commentary
Art 3(2): where a term is not defined unless the context otherwise requires, use meaning in domestic
tax laws to which Convention applies
Para 12 Commentary on article 10: term should not be used in a narrow technical sense
OECD envisaged international meaning, not narrow technical meaning
ACTION 6: PREVENT THE GRANTING OF TREATY BENEFITS IN
INAPPROPRIATE CIRCUMSTANCES
Clues to meaning of ‘beneficial ownership’ in OECD Commentary
Nominee; agent; person with very narrow powers (mere fiduciary or administrator) – not BO
Effectiveness of BO questionable in light of certain international cases
Prevost Car Inc v Her Majesty the Queen; Velcro Canada Inc v The Queen
OECD carried out work on clarify term - changes to com’try on art 10, 11 &d 12 in 2014 OECD MTC
Relevant changes – e.g. para 12.5 of com’try on article 10 - beneficial ownership:
is limited in addressing various form of treaty-shopping
can’t deal with other cases of treaty shopping – doesn't restrict application of other approaches
OECD: Action 6 called for work to:
Develop treaty provisions & domestic rules to prevent granting of treaty benefits in inappropriate circumstances
Clarify that tax treaties are not to be used to generate double non-taxation
Identify tax policy considerations countries should consider before signing DTAs
With respect to developing model treaty provisions & designing domestic rules to prevent treaty shopping:
For circumventing domestic tax law to gain treaty benefits - apply domestic anti-abuse rules
For circumventing limitations in DTA - apply treaty anti-abuse rules - OECD recommends three-pronged approach:
Title & preamble of DTAs - DTA not intended to create opportunities for non-taxation or reduced taxation through
treaty shopping
Inclusion of LOB rule
PPT rules
ACTION 6: PREVENT THE GRANTING OF TREATY BENEFITS IN
INAPPROPRIATE CIRCUMSTANCES
Examples of treaty shopping in South Africa:
Companies registered in Mauritius under Global Business Licenses 1
Mauritius’ extensive tax treaty network - investors use Mauritius as an intermediary to invest in
Africa
Conduit companies in low tax countries (Netherlands/Switzerland) - used to dispose
assets in African countries
Low interest & dividend withholding tax rates in treaties with Netherlands & Switzerland - treaty
shopping
Tax sparing provisions in African tax treaties encourage treaty shopping
Developed countries amend their taxation of foreign source income to allow their residents who
invest in developing countries to retain advantages of tax incentives provided by those
countries
Generous tax sparing credits in DTAs can encourage treaty shopping
ACTION 6: PREVENT THE GRANTING OF TREATY BENEFITS IN
INAPPROPRIATE CIRCUMSTANCES
Inappropriate granting of granting of treaty benefits – implications on s 6quin
African countries incorrectly claiming source jurisdiction on services sourced from SA
s 6quin - to relieve taxpayer the administrative challenges and double taxation concerns
BEPS concern: s 6quin contravene international tax and tax treaty principles
NT concerns - some taxpayers were abusing the relief offered by the section
MAP ought to be used to solve such problems
DTC recommendation: Need for a coherent policy in respect of treaty negotiation and interpretation
TLAB 2015: 6quin credit to be repealed – deduction to be granted under s 6quat(1C)
Recommendations in DTC Interim report
Strengthen treaty negotiating capacity
Proper background research needs to be done on potential treaty partner
Tax treaties with zero or low withholding tax rates should be re-negotiated
Re-negotiating and remove tax sparing provisions in some DTT
Careful consideration on how to adopt OECD BEPS recommendations on Action 6
Complex USA type LOB provision not feasible - simplified approach
PPT test/GAAR – PPT in SA’s treaty with Brazil
ACTION 7 - PREVENT ARTIFICIAL AVOIDANCE OF PE STATUS
The PE Concept - article 5
Basic nexus to determine if country can tax business profits of foreign enterprise
OECD: Challenges of applying PE concept - splitting of contracts to avoid PE status
Splitting of contracts to take advantage of PE 12 months time limits
Art 5(3) PE rule for building, construction and installation sites – Contractors on continental shelf
UN MTC Art 5(3)(a): assembly projects or supervisory activities in connection therewith – 6 month
Splitting of contracts in service activities – consultants, engineers etc
UN MTC Art 5(3)(b): PE rule for furnishing of services > 183 days in 12-months
Service PE Case in South Africa: AB LLC and BD Holdings Tax Court Case number 13276 February 2015
(Articles 5(1) and 5(2) of the DTA between South Africa and USA)
OECD Recommendation
PPT - Action 6 will address BEPS concerns related to such abuses
For States that are unable to address the issue through domestic anti-abuse rules, a more automatic
rule will be included in the Commentary and used in treaties that do not include the PPT or as an
alternative provision to be used by countries specifically concerned with the splitting-up of contracts
issue.
ACTION 7 - PREVENT ARTIFICIAL AVOIDANCE OF PE STATUS
Exclusions to PE concept – Art 5(4)(a)-(f)
Use of “’delivery’ in art 5(4)(a) & (b) of OECD MTC
UN MTC: Delivery not used
BEPS concern: stock of goods or prompt delivery of sales products from warehouses can be a source of BEPS
Art 5(4)(c) – stock of goods or merchandise of the enterprise for processing by another enterprise
BEPS issue: enterprise’s stock of goods maintained and processed by toll-manufacturer
Art 5(4)(d) - FPOB for purchasing goods or merchandise or of collection of information
BEPS concern: digital companies collect user data in one country & sell it to advertisers in other countries
Art 5(4)(e) & (f) – exception for preparatory & auxiliary activities
E.g. maintenance of FPB solely for advertising or supply of information or for scientific research
» Modern business models - scientific research & innovation - key value driver
OECD recommendation: Art 5(4) is modified to ensure that each of the exceptions included therein is restricted
to activities that are of a “preparatory or auxiliary” character
Exclusions to PE concept – Art 5(4)(f) MNE - any combination of activities
Allows fragmentation of activities between related parties
OECD recommendation: - Anti-fragmentation provision to be included in art 5(4)
ACTION 7 - PREVENT ARTIFICIAL AVOIDANCE OF PE STATUS
Art 5(5) deemed PE dependent agent – challenge - Commissioner arrangements
UN MTC - 5(5)(b): “the maintenance of a Stock of goods or merchandise belonging to the enterprise
from which he regularly delivers goods or merchandise on behalf of the enterprise”
OECD recommendation on abuse of agency PE & commissioner arrangements:
regular conclusion of contracts by a foreign enterprise creates PE unless activities in course of independent
business
Insurance companies (not addressed in OECD BEPS project)
Para 39 of OECD Commentary on art 5 acknowledges
Insurances agencies - independent agents - large-scale business in source state – avoiding PE status
Decision to include provision on PEs for insurance companies left to contracting states
Art 5(6) UN Model
Deemed PE for insurance enterprise (except for re-insurance) if it collects premiums or insures risks through a
dependent agent
Art 5(7): subsidiary company not PE of its parent company Exceptions: Art 5(1): if space at its disposal in the subsidiary’s place of business ; Art 5(5): if dependent agent
BEPS concern: Encourages “entity isolation” (not addressed in BEPS project)
Associated entities don’t operate as independent entities
Valuable intangible property assigned to affiliate in low tax jurisdiction
ACTION 7 - PREVENT ARTIFICIAL AVOIDANCE OF PE STATUS
PEs, BEPS & the digital economy
PE concept based on physical presence as the primary basis for taxation
Nowadays - heavy involvement in economic life of another country, without taxable presence
Current OECD guidance in Com’try in art 5:
Internet website - intangible property - not PE
Location of computer equipment may constitute a PE - requirements of art 5 must be met
Server operated by enterprise – PE -
Hosting enterprise’s website on server of ISP – not at disposal of enterprise - ISP are independent
agents:
OECD BEPS concerns: Taking advantage of exclusions to PE concept
Art 5(4)(b): Maintenance of stock of goods solely for purpose of storage, display or delivery
digital companies maintain extensive inventory in target country - delivery of products to customers from a local
ware house that is not under its control - avoiding PE status
Art 5(4)(d) - Maintenance of FPB solely for collection of information for the enterprise
digital companies collect user data in one country and sell it to advertisers in other countries
Concern: previously preparatory or auxiliary activities nowadays core business activities
Solution: Art 5(4) to be modified - each of exception is restricted to activities of a “preparatory or auxiliary”
character
ACTION 7 - PREVENT ARTIFICIAL AVOIDANCE OF PE STATUS
Addressing avoidance of PE status in SA Previously tax policy - emphasis on outward bound investments more than inward bound
Risk: non-resident temporary activities – consultants, engineering services
• Service PE Tax Court Case in South Africa: AB LLC and BD Holdings Case number 13276 February 2015
(Articles 5(1) and 5(2) of the DTA between SA & USA) – company created PE in SA.
Risk: Non-residents preparatory or auxiliary activities - representative offices
Non-residents required to submit tax returns for trade carried on through PE in SA
Lack of data on inbound flows - little evidence indicating tax abuse.
SARS is now working hard to determine when a PE exists
Tax treatment of branches - art 24 discrimination issues – BEPS concerns
BEPS & TAX TREATIES: TRANFER PRICING
BEPS Action 8, 9 & 10 require TP out comes to be in line with value creation
To prevent TP, OECD recommends ALP - Art 9
OECD: Although ALP effectively & efficiently allocates income of MNE, in some instances MNE misapply the rules
to separate income from economic activities that produce income & shift it low-tax jurisdictions
Action 8: develop rules to prevent BEPS resulting from moving intangibles among MNE
group members - Chapters I, II & VI - OECD Transfer Pricing Guidelines revised Clarifies definition of intangibles
Identifies transactions involving intangibles
Determination of arm’s length conditions for transactions involving intangibles
Distinguish intangibles from location savings & other local market features
OECD recommendation in final 2015 report:
legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the
exploitation of the intangible.
The group companies performing important functions, controlling economically significant risks and contributing
assets, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate
return reflecting the value of their contributions
ACTION PLANS 9: ASSURE TRANSFER PRICING OUTCOMES ARE IN LINE
WITH VALUE CREATION WITH REGARD TO RISKS AND CAPITAL
Action 10: develop rules to prevent BEPS that result from transferring risks among,
or allocating excessive capital to, group members
OECD recommendation in its final report:
Revised guidance: In the situation where a capital-rich member of the group provides
funding but performs few activities
If the associated enterprise does not in fact control the financial risks associated with its funding
(for example because it just provides the money when it is asked to do so, without any
assessment of whether the party receiving the money is creditworthy), it will not be allocated the
profits associated with the financial risks and will be entitled to no more than a risk-free return, or
less if, for example, the transaction is not commercially rational and therefore the guidance on
non-recognition applies.
BEPS AND TAX TREATIES IN AFIRCA: ACTION PLAN 10: ASSURE THAT
TRANSFER PRICING OUTCOMES ARE IN LINE WITH VALUE
CREATION/OTHER HIGH-RISK TRANSACTIONS
Action 10 requires countries to adopting TP rules that:
clarify the circumstances in which transactions can be re-characterised
clarify the application of transfer pricing methods, in particular profit splits, in the context of
global value chains
provide protection against common types of base eroding payments, such as management fees
and head office expenses
Action 10 base eroding payments in Africa: Management fees
MNE keep claiming deductions for management, technical & service fees
Responses to the challenge of base eroding management fees Treaties with articles on services, management & technical fees
Deviating from OECD & UN MTC – not addressed in OECD BEPS project
No standard way of drafting these articles - creates uncertainties
OECD countries oppose such article – prefer PE taxation under art 5 and 7 or “fixed base” – art 14 UN MTC
2012: UN proposed new article on technical services fees
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN 10
CONT.
Action 10 base eroding payments: Head office expenses - attribution of profits to Pes
Art 7(1) OECD MTC - Foreign enterprise only taxable in source state if PE is created - only profits
attributable to PE may be taxed
Art 7(2) - OECD authorised approach for attributing profits to PEs
Functionally separate entity - internal dealings of PE recognised without regard to the actual profits of the
enterprise of which the PE is a part
Allows deductions for notional internal payments that exceed expenses actually incurred
Differs from approach in UN MTC & 2008 version of OECD MTC
Single entity approach - only actual income & expenses of PE allocated
Developing countries sceptical about adopting OECD approach
South Africa has reserved the right to use version of art 7 OECD MTC prior to July 2010 update
OECD comments in 2015 Final report:
follow-up work on attribution of profits issues related to Action 7 will be carried on with a view to
providing the necessary guidance before the end of 2016, which is the deadline for the negotiation of
the multilateral instrument
ACTION 13: GUIDANCE ON TRANSFER PRICING DOCUMENTATION AND
COUNTRY-BY- COUNTRY REPORTING – TREATY IMPLICATIONS
OECD: Enhancing transparency for tax administrations by providing them with adequate information to
conduct transfer pricing risk assessments & examinations is essential to preventing BEPS
Chapter V Transfer Pricing Guidelines revised - sets out objectives of transfer pricing documentation
rules
To achieve these objectiveness: countries to follow a three-tiered documentation structure consisting
of:
A master file
containing standardised information relevant for all MNE group members
A local file
referring specifically to material transactions of the local taxpayer
A country-by-country report
containing information on global allocation of MNE’s income & taxes paid together with
certain indicators of the location of economic activity within the MNE group
Guidelines on compliance matters
ACTION 13: GUIDANCE ON TRANSFER PRICING DOCUMENTATION
AND COUNTRY-BY- COUNTRY REPORTING
Developing country concerns on CbyC country reporting:
SA & other emerging economies require additional transactional data (beyond that in the master file and local
file for transactions of entities operating in their jurisdictions) regarding related party interest, royalty & service
fee payments so as to perform risk assessments where it is challenging to obtain information on the global
operations of a MNE group headquartered elsewhere
OECD to review implementation of above views no later than end of 2020
SA should monitor OECD’s final recommendations in this regard and implement as appropriate
Reporting threshold - 750 million euros - would exclude companies in smaller economies
DTC recommendation: Preparing a master file, local file & CbyC reporting should be compulsory for large
Multinational businesses over R1 billion group turnover
Effectives of CbyC reporting relies on a treaty framework for the reports to be exchanged
Lack of extensive treaty network for some countries may impact on effectiveness
The rules prioritize filing with the MNE’s home country tax authority
home countries have to adopt the necessary legislation to obtain and share the reports
Complex arrangements for filing forms will limit dissemination developing countries.
ACTION 14: MAKE DISPUTE RESOLUTION MECHANISMS MORE EFFECTIVE
No international court to deal with treaty disputes
Art 25 OECD MTC: MAP – competent authorities (CA) to settle disputes
Art 25(1): if actions contracting state(s) results in taxation not accordance with treaty, a person
may irrespective of domestic remedies, present his case before the CA of their country of
residence (or state of nationality) within 3 years
Art 25(2): CA shall endeavour to resolve the matter, if it can’t, resolve by MA with other CA
Art 25(3): CAs may consult each other to resolve any difficulties
Concern over the years - lack of requirement for CA to reach agreement.
Art 25(4): CAs may communicate thru directly/joint commissions to reach agreement
Art 25(5): binding arbitration clause – introduced 2008
If CA unable to reach agreement to resolve case within two years from the presentation of the case,
unresolved issues shall be submitted for arbitration if the aggrieved party so requests, taxpayer has no
express right to participate in arbitration
arbitration decision binding on both contracting states and shall be implemented notwithstanding the time
limits in the domestic laws of the contracting states.
decision not necessarily binding on aggrieved person - can still approach domestic courts to settle the
issue
ACTION 14: MAKE DISPUTE RESOLUTION MECHANISMS MORE EFFECTIVE
Majority of the treaties since 2008, do not contain arbitration provision
Some older treaties re-negotiated - added arbitration clauses
Challenges in effectiveness of MAP
Difficulties of interrelationship between MAP and domestic court decisions
2013 OECD Report on dispute resolution
• Most obstacles are procedural, practical or administrative nature
• lack of resources, empowerment of competent authorities to reach principled case resolutions
• development of competent authority relationships based on mutual trust.
• Takes a long time to conclude
OECD: binding arbitration can speed up the resolution of disputes considerably.
MAP in Africa
• Not very effective among many African countries
• Generally underdeveloped and uncertain among many African countries
• Lack of capacity & capability to practically manage the MAP process
• Little awareness amongst African MNE of the MAP process and the role played by tax authorities
• Since process takes long, taxpayers often avoid initiating MAP
• Most African countries are not keen on arbitration in tax treaties: Concerns
o Less skilled than developed countries in negotiating tax treaties
o Most treaties are skewed in favour of developed countries - fears of losing all revenue
o Lack of neutrality – unequal arbitration strength
o The cost of arbitration
o Concerns about effectiveness of arbitration – rules not clear, open or transparent
o Loss of tax sovereignty with mandatory arbitration
BEPS AND TAX TREATIES: ACTION 14: MAKE DISPUTE RESOLUTION
MECHANISMS MORE EFFECTIVE
OECD recommendations to strengthen the effectiveness & efficiency of MAP
Developed a set of minimum standards for the resolution of treaty-related disputes
Objectives - countries should ensure that:
treaty obligations related to MAP are fully implemented in good faith & that MAP cases are resolved in a
timely manner;
administrative processes promote the prevention & timely resolution of treaty-related disputes; and
taxpayers that meet the requirements of Article 25(1) can access MAP
The minimum standard is complemented by a set of MAP best practices
The OECD developed a framework for implementing the minimum standards
20 countries committed to mandatory binding MAP arbitration to guarantee that treaty
disputes will be resolved within a specified timeframe
Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United
Kingdom and the United States
BEPS AND TAX TREATIES: ACTION 15: DEVELOP A MULTILATERAL
INSTRUMENT
Some solutions to BEPS require changes to DTAs
DTA network & their number would make updating burdensome, time
consuming & expensive
Action 15 - explore feasibility of multilateral instrument – effective as
simultaneous renegotiation of thousands of DTAs
Experience: Multilateral Convention on Administrative Assistance (OECD &
Council of Europe) amended by a Protocol in 2010 and opened all countries
In 2011, South Africa signed, but has not yet ratified the Multilateral Convention
Many developing counties have not benefited from the experience – administrative
capacity needed before admission - similar concerns for OECD multilateral
instrument
BEPS AND TAX TREATIES: ACTION 15 - MULTILATERAL INSTUMENT
Concerns of developing countries regarding the Multilateral instrument
Interests of developing may not be addressed in a multinational instrument.
OECD MTC favours capital exporting countries, UN MTC favours capital importing
countries
Experience could be gained through regional multinational treaties: ATAF, SADC & EAC
(yet to be finalised)
Caution:
IMF: developing countries should be cautious about tax treaties
OECD BEPS Action Plan 6 - OECD will “identify the tax policy considerations that
countries should consider before deciding to enter into a tax treaty with another country
SARS Representatives
Nishana Gosai
Transfer Pricing
Manager
South Africa
Revenue Services
Sunita Manik
Group Executive at
the Large Business
Centre
South Africa
Revenue Services
Your Lead Panellists
Professor Annet
Oguttu Chairman of the
BEPS Sub-
Committee
Thulani Shongwe
Specialist: Multi-
Lateral Co-operation
Africa Tax
Administration Forum
Nishana Gosai
Transfer Pricing
Manager
South Africa
Revenue Services
Sunita Manik
Group Executive at
the Large Business
Centre
South Africa
Revenue Services
Ted SilkiluwashaCross Border Taxation
Technical Committee at
Africa Tax
Administration Forum
Deloitte Africa Transfer Pricing Leader Deloitte Africa Transfer Pricing Western Cape Lead
Billy Joubert
Tel/Direct: +27 (0)11 806 5352
Fax: +27 (0) 86 522 2908
Email: [email protected]
Karen Miller
Direct: +27 (21)427 5484
Main: +27 (21)427 5300
Fax: +27 (21)441 1057
Email: [email protected]
Deloitte Africa Taxation Services Associate Director Deloitte Africa Transfer Pricing KZN Lead
Carla van der Merwe
Tel/Direct: +27 (0)11 806 5230
Fax: +27 (0)11 388 3051
Email: [email protected]
Bradley Pearson
Tel/Direct: +27(31) 560 7426
Email: [email protected]
Deloitte Africa Transfer Pricing
Contacts
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