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IBFD 1st AFRICA TAX SYMPOSIUM
“A CRITCAL ANALYSIS OF WHAT AFRICA’S RESPONSE
SHOULD BE TO THE OECD BEPS ACTION PLAN”
Prof Annet W Oguttu
University of South Africa
INTRODUCTION
BEPS: Tax avoidance by multinational enterprises that makes use of 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
2013 OECD 15 Point Action Plan - to ensure profits are taxed where economic activities generating
the profits are performed & where value is created.
BEPS arises because:
International corporate tax framework not kept pace with changing business environment
Old business models - lower degree of economic integration across borders
Modern business models - Global taxpayers; MNE value drivers - IP; information & communication technologies
Result - encourages tax avoidance by MNE - to minimise global tax exposure
Exploitation of legal arbitrage opportunities & boundaries of acceptable tax planning;
Exploiting gaps in interaction of different tax systems - artificial reduction of taxable income
Shifting profits to low-tax jurisdictions where little or no economic activity is performed
Businesses integrate across borders - tax rules remain uncoordinated - technically legal structures devised to
take advantage of asymmetries in domestic & international tax rules
What is at stake is the corporate income tax (CIT)
CIT among OECD countries not high - average about 10% of total tax revenues
CIT important source of revenue in Africa - average 29% - revenue from individuals & consumption taxes limited
African countries have more at stake in an effective international tax system - their development depends on it
BEPS IN AFRICA
Concerns about BEPS are not new in Africa
For decades:
Money has been shifted from developing to developed countries & tax haven jurisdictions
There are some MNE whose business transactions in Africa are generally straight, but there is
circumstantial evidence that some are involved in aggressive tax avoidance: E.g.
Action Aid report exposing tax dodged by SABMiller in Africa
Global Financial Integrity – estimates amounts shifted out of Africa and provides a proxy for BEPS
behaviour by equating BEPS to illicit finical flows
o “the tide of tax and illicit capital flight from African economies is estimated between $50billion and
$80 billion per annum and in some cases revenue lost exceeds the level of aid received by
developing countries”
OECD failed to acknowledge that its member nations have benefited from and had dealings with
tax havens & lent them credibility
There was no political will to deal with the tax haven problem
Rise of political begun:
In the wake of the global financial crisis
Propelled by media reports engineered by non-governmental claiming that MNEs holding money
in tax haven & not paying their fair share of taxes
Response: In 2013, the OECD at behest of G20 issued a 15 point BEPS Action Plan
WHAT SHOULD AFRICA’S RESPONSE BE TO THE OECD BEPS ACTION PLAN?
Although OECD BEPS Action Plan may have been well-intentioned, its been criticised:
Not drawn up jointly with developing countries - does not address their immediate BEPS concerns
Agenda driven by the concerns of developed countries
OECD only engaged with developing countries after BEPS agenda was drafted & closed
The regional consultations have only served as orientations to a pre-existing plan
Most Action Plans will likely benefit developing countries in the long term – with economic &
administrative advance
2 year time scale, does not consider administrative, economic & systemic challenges faced by African
countries
It does not explore certain practical measures more suitable for African countries in addressing BEPS
How should Africa respond be to the OECD BEPS Action Plan?
No African country is a member of the OECD - not bound to follow the OECD recommendations
OECD’s primary focus - member countries but its additional goals of contributing to the expansion of
world trade & development of the world economy, affect non-members as well
BEPS is a global challenge - requires global solutions
All countries have a shared interest in strengthening the integrity of the international tax system
WHAT SHOULD AFRICA’S RESPONSE BE TO THE OECD BEPS ACTION PLAN?
Address the critical issues that exacerbate BEPS in Africa
Most African countries’ tax laws not sufficiently developed to counter BEPS
Historically, most African countries didn’t encouraged investment aboard - enforced strict exchange controls
Economic growth policy: domestically owned firms to produce goods & services for domestic consumption
Tax systems prioritised domestic taxation residents - development of international tax laws lagged behind
Globalisation – African countries can no longer isolate their tax systems
Large resource bases exploited by foreign investors
Foreign investors: Africa is the new frontier of the global economy
OECD: Africa is the new emerging markets investment frontier
MNE management structures: from country-specific operating models to global models
Need for international tax laws to address BEPS
DTA negotiation dynamics - DTA an important aspect of international tax laws Few DTAs signed - some political gestures - no significant capital flows
Historically - views that DTA not needed - result in giving up taxing rights/bondage to restrictive DTA provisions
Change - acknowledgments that DTAs facilitate capital inflows - increasing DTA net work
Challenge - in absence of countering measures – abuse of DTAs - BEPS
Cause: Signing treaty provisions not in country’s favour - developed countries better skilled in negotiating tax
treaties
Lack of administrative capacity to negotiate tax treaties in Africa
Weak DTA negotiation teams - reflecting strong position of the other state
DTA can’t impose tax if income is not subject to tax under domestic legislation
However tax laws of most African not sufficiently developed to prevent BEPS
WHAT SHOULD AFRICA’S RESPONSE BE TO THE OECD BEPS ACTION PLAN?
Address the critical issues that exacerbate BEPS in Africa continued:
Limited tax administrative capacity
Hampers ability to implement & gain full benefits of international tax reforms
Note: Levels of economic development & administrative capacity in Africa vary
To curtail BEPS - re-vamp administrative capacity – measures required:
Competent tax officials who can understand & administer complex international tax laws
Continuous training on international developments
Ability to hire & retain specialised tax officials - accountants, lawyers & economists
Expert retention policy – payment of salaries comparable to those in private sector
Technical expertise to carry out tax audits
Electronic & technological advancement of tax systems - AEOI
Integrity of tax official enhances collections - large discretion powers encourage corruption
Note: A number of countries are introducing reform programs:
o Ethiopia - enhancing capacity of revenue authority, central to public sector reform
o Cameroon – 2004 administrative reforms; 2007 Fiscal Reform Commission
o Tanzania - reforms to strengthen tax administration, & address corruption
WHAT SHOULD AFRICA’S RESPONSE BE TO THE OECD BEPS ACTION PLAN?
African countries should not be passive to the OECD BEPS Action Plan
They should take advantage of:
Current international political will to address long standing BEPS concerns
MNEs have pulled back on aggressive tax avoidance - reputational risks
International initiatives to capacitate developing countries tax systems
UN: Participates in OECD work – provides insight into developing country concerns – UN Questionnaire
on priority BEPS concerns (in Africa, reposes from Zambia & SA)
OECD: committed to reinforce support to developing country revenue authorities - Tax Inspectors without
Borders initiative
G20: helping developing countries build administrative capacity & effective tax systems to reap full
benefits of international tax reforms
• Development of tax laws & administrative capacity varies in Africa – case by case assessments
• “G20 Development Working Group” on BEPS: involved with tax & economic organisations - ATAF (advisory and
in- kind support)
• G20 initiatives e.g. in Tanzania, Kenya, Uganda, Rwanda, Ethiopia
• capacity development - shaping the fundamental building blocks of tax policy and administration
• Voluntary availing of tax policy and administration experts - based on resource needs
Important initiatives needed in Africa:
Regular & proactive engagement on BEPS under regional organisations to ensure their views are taken into
account in the design and implementation of reforms
Change of attitude from views of being instruction takers not decision makers
Raise awareness of the significance of BEPS issues at political levels - with Ministries of Finance and other
relevant Ministries
WHAT SHOULD AFRICA’S RESPONSE BE TO THE OECD BEPS ACTION PLAN?
Examples of proactive initiatives to address BEPS in Africa – should be associated with or emulated
Regional initiatives: ATAF - promotes & facilitates mutual cooperation among African tax
administrators
2014 conference on the Global Tax Agenda for Heads of African Tax Administrations and Ministries of Finance
Participants from 29 African countries and OECD officials
Conference Outcomes Document:
o need to improve administrative capacity, broaden the tax base, and increase tax revenue as a proportion of GDP
o development of rules for global taxation should address the concerns of all countries
o African countries should be involved in the BEPS process - shape the issues in the 15 Action Points in this
project to address Africa’s concerns
o Formation of “Cross Border Taxation Technical Committee” - to provide guidance on an African BEPS approach
and give input into the OECD BEPS process
April 2015 conference on Cross Border Taxation in Africa
Focused on an African position on BEPS Action points
Collaboration with OECD & G20 in advocating African countries’ BEPS interests
African countries should draw on the expertise & representative nature of ATAF
Initiatives at national level: Measures in Tanzania, Kenya, Uganda, Rwanda, Ethiopia – collaborating in G20 capacity building projects
South Africa - Davis tax committee appointed by Minister of Finance in 2013
In December 2014, the DTC released its first Interim Report for public comment
South Africa is a member of the G20 and a member of the OECD BEPS Committee.
Although SA’s above memberships is not representative of African countries, as a major African power it ought to
champions the cause of Africa in the OECD BEPS committee, and convey Africa’s views at G20
RESPONDING TO OECD BEPS ACTION PLAN FROM AN AFRICAN
PERSPECTIVE
BEPS Action Plans: Pertinent issues from an African perspective can be divided
into three categories: BEPS Action Plans that are of priority in Africa
BEPS Actions Plans that are not of high priority in Africa
BEPS concerns relevant to African but not covered in the OECD Initiative
Even though BEPS is a global concern: Nature of BEPS concerns not uniform for all countries
BEPS concerns developed countries face, not necessarily the same for developing countries
BEPS schemes that undermine European/American tax base often don’t work in African paradigm
The G20 Development Working Group states:
Due to economic & administrative challenges of developing countries, their highest priority Action Plans are:
Actions 4, 6, 7, 10, 12 & 13 - discussed below
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA
Action Plan 4: Limit Base Erosion via Interest Deductions and Other Financial
Payments
Excessive deductions of interest by MNEs a major BEPS concern in Africa
Thin capitalisation schemes - Co. equity capital small in comparison to debt capital
Interest on loan capital is a deductible expense: in computing taxable
Dividends distributed from equity capital not deductible - distributions of profits - taxed
MNE ensure subsidiaries financed with increased levels of debt as compared to equity
OECD: Use “arm’s length principle” to curb thin capitalisation
If loan exceeds arm’s length lending situation, lender taken to have an interest in profitability of
the enterprise and the loan
Interest rate in excess of the arm’s length amount, is taken to have been designed to procure a share in
the profits
African countries should put in place provisions to prevent base erosion via interest deductions
Thin capitalisation provisions
The challenges of applying the arm’s principle to TP also apply to thin capitalisation
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA CONT.
Action Plan 6: Prevent Treaty Abuse Entails “treaty shopping” - use of DTT by the residents of non-treaty country to obtain treaty benefits
not supposed to be available to them
Done by interposing conduit company in one of contracting states to shift profits out of those states
Action Plan 6 deals with 2 cases:
Circumvention of domestic tax law to gain treaty benefits - apply domestic anti-abuse rules
Circumvention of limitations in DTA - apply treaty anti-abuse rules - OECD three-pronged approach:
Title & preamble of DTAs - DTA not intended to create opportunities for non-taxation or reduced taxation through
treaty shopping
Inclusion of a specific limitation-of-benefits provisions (LOB rule)
Principle purpose test (PPT rules) - treaty abuse not be covered by LOB rule
Treaty shopping has not received much attention in many African countries
Uganda: Sec 88(5) of Income Tax Act (Cap. 340, as amended)
In treaty negotiations –use of conduits for tax avoidance not taken full account of
African tax officials deal with MNE treaty shopping - companies registered in Mauritius under Global Business
Licenses 1; companies in Netherlands or Switzerland as means of disposing of assets in offshore jurisdictions
African countries should strengthen their treaty negotiating capacity
Research on potential treaty partner
Complex USA type LOB provision not feasible for African countries
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA CONT.
Action Plan 7: Prevent the Artificial Avoidance of PE Status
PE concept - crucial element of DTAs – article 5
Fixed place of business through which enterprise's’ business is wholly or partly carried out
Special rules for building & constructions cites
Deemed PE - dependent agents
Exclusions: preparatory & auxiliary activities
Basic nexus to determine if country can tax business profits of foreign enterprise
Foreign enterprises should create significant & substantial economic presence
Article 7(1) - only profits attributable to PE taxed by source state
Challenges of applying PE concept
MNE can artificially fragment operations among multiple group entities to qualify for PE exclusions
Manipulation of PE time limits
Non-residents service activities – consultants/engineers allege services of temporary nature
Exclusions – art 5(4)(f) - any combination of activities - creates nexus that is not preparatory or auxiliary
Challenges posed by digital economy
The PE issue concerning for developing countries
Base erosion if foreign investors avoid PE status
Yet its not in the interest of developed countries to expand PE concept
African countries should sign article 5 based on UN MTC:
Art 5(3)(a): building site, construction, installation projects extends to “assembly projects or supervisory activities in
connection therewith” – time limit 6 month unlike 12 month in OECD MTC
Art 5(3)(b): PE rule for furnishing of services - consultancy services through employees or other personnel engaged by
the enterprise - activities must continue (for the same or a connected project) > 183 days in 12-months
Art 5(5)(b): Dependent agent includes “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”.
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA CONT.
Action Plan 10: Assure that transfer pricing outcomes are in line with value
creation/other high-risk transactions BEPS Action 8, 9 & 10 require TP out comes to in line with value creation
Meaning of TP:
Manipulation of prices of transactions between connected entities to reduce profits or increase profits artificially
To prevent TP, OECD recommends ALP
When conditions between two associated enterprises in their commercial/financial relations differ from those
between independent enterprises, any profits which would have accrued, but haven’t because of those
conditions, may be included in the profits of the enterprises and taxed
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
Value creation TP priority concern for African countries: Action 10 - 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.
o These factors are analysed below from an African perspective
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN
10 CONT.
Clarify the circumstances under which transactions can be re-characterised
African countries'’ concern – preserving tax on foreign dividends distributed by local subsidiary to
parent company
If subsidiary funded by equity capital, dividends not deductible: if by loan capital interest - deductible
Companies often characterise dividends as interest
To address potential for BEPS, African countries should:
Deny/limit interest deductions if the payee has no global taxable income.
Rebalance the profit so the profit arises where the true economic substance lies
Levy withholding tax on dividends at the shareholder level, in treaty context, tax is reduce to 5 or 10 percent% -
African countries to limit the application of treaties
Clarify application of TP methods, in particular profit splits, in global value chains
Although some African countries have transfer pricing legislation
Applying OECD Transfer Pricing Guidelines is challenging for African countries
Difficult to find African comparables - few organised companies in any given sector; no African databases
European comparables used - these need to be adjusted to suit African market business.
With challenges of applying ALP developing countries have placed emphasis on profit split methods
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN
10 CONT.
Provide protection against base eroding payments: Management fees
MNE keep claiming deductions for various management, technical & service fees
Little or no tax paid in source countries – allegations of making losses year after year
Profits shifted to low tax jurisdiction while taxes are minimized in source state
Response – treaties with articles on services, management & technical fees - deviating from OECD
& UN MTC – not addressed in OECD BEPS project
Generally defined as payments of any kind to any person, other than an employee of the person making the
payments, in consideration for any services of a managerial, technical or consultancy nature, rendered in a
contracting state
Fees may be taxed in resident state but also in source if beneficial owner is a resident of other state
Fee not to exceed a certain percentage
Examples:
Royalty & service fees - Ghana’s treaties with Germany & Netherlands;
Technical fees – Uganda’s treaties with South Africa, Mauritius & UK;
Management fees – Ghana’s treaties with Italy & Belgium; US-India treaty
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” – UN MTC
2012: UN proposed new article on technical services - allows country to tax service provider even if no physical
presence is created
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN 10
CONT.
Provide protection against 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 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
Non-actual management expenses, notional interest & royalties from head office may be charged on the PE
Notional payments for financial services on internal loans & derivatives involving PEs
Differs from approach in UN MTC & 2008 version of OECD MTC
Single entity approach - only actual income & expenses of PE allocated
Developing countries very sceptical about adopting OECD approach MNEs often avoid PE taxes - claiming deductions of fees charged to headquarter office
Disallowance of notional head office expenses should be maintained to preserve source tax bases
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA CONT.
Action Plan 12: Require taxpayers to disclose their aggressive tax planning arrangements
Comprehensive & relevant information on tax planning strategies often unavailable to tax administrations.
Audits not sufficient for the early detection of aggressive tax planning techniques
Action Plan 12 calls on countries to:
require taxpayers to disclose their aggressive tax planning arrangements;
improve information flow about tax risks to tax administrations and tax policy makers.
develop mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures
Ensure information sharing for international tax schemes between tax administrations.
develop measures on co-operative compliance programmes between taxpayers & tax administrations
Strengthening EOI will help African countries to identify offshore investments that should be subject to tax
New standard: Automatic EOI could potentially lead to increased tax revenues
Detecting: tax evasion & offshore wealth; strengthening compliance with domestic tax rules
Challenges:
balancing taking part in AEOI with other tax priorities
Capacity to comply with the AEOI
Concerns about reciprocity
Solutions: G20 DWG working with OECD Global Forum to: identify obstacles to AEOI in developing countries and how
to solve them
Collaboration with ATAF to enhance & building awareness of AEOI reforms in Africa
Disseminating tools & resources
Getting feedback on implementation AEOI, e
Ensuring Africa’s views are taken into account in the design and implementation of reforms
G20 pilot projects with African countries: participating as information exchange partners; providing technical advice, financial
support & capacity building in understanding international tax reforms
BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA CONT.
Action Plan 13: Re-examine Transfer Pricing Documentation OECD: Asymmetry of information between taxpayers & tax administrations undermines administration of TP rules &
enhances BEPS - Tax administrations don’t have “big picture” view of MNE global value chain
When OECD developed TP Guidelines in 1995, tax administrations & taxpayers had less experience in creating and
using transfer pricing documentation
Guidelines emphasised reasonableness & cooperation in the documentation process for taxpayers & tax administrations:
avoid excessive documentation compliance burdens and ensure provision of adequate information to apply ALP reliably.
No list of documents to include in TP documentation package
Countries have adopted TP own documentation rules thus: increase in the volume & complexity of TP issues, compliance
costs for taxpayers; TP documentation inadequate for tax enforcement & risk assessment
In African countries
Absence of documentation requirements; inability to enforce existing ones
Lack of resource & technical capacity to process data & evaluate information
Action Plan 13: Revision of Chapter V of TP Guidelines relating to TP documentation rules.
The OECD recommends that countries should follow a three-tiered documentation structure consisting of:
Master file: contains standardised information relevant for all MNE group members.
Local file: referring specifically to material transactions of the local taxpayer.
A country-by-country report: containing information relating to the global allocation of the MNE’s income and taxes paid,
together with certain indicators of the location of economic activity within the MNE group.
Action 13 also covers compliance matters
With enhanced tax administration capacity, African countries should be able to benefit from this three tired approach
OECD: CbC report to be submitted by MNEs with annual consolidated group revenue in preceding fiscal year of € 750
Concern: high reporting threshold would exclude many companies whose presence in smaller economies is significant
The complex arrangements for filing could restrict dissemination to developing countries.
BEPS ACTION PLANS THAT ARE NOT A HIGH PRIORITY IN AFRICA
Action 1: Address the tax challenges of the digital economy
Taxing the digital is not an immediate concern
Many African countries do not want to stifle the development of badly needed electronic advancement
Most internet companies in Africa remain small and relatively unprofitable
Africa yet to see the rise of local e-commerce businesses from aboard (e.g. Amazon)
Action 2: Neutralise the effects of hybrid mismatch arrangements
Most African countries don’t have the relevant legislation in place
Action 3: Strengthen controlled foreign companies rules
South Africa only SADC country with comprehensive CFC rules - reasons for a country not having CFC rules
Lack of strongly committed to the principle of “capital export neutrality” - resident taxpayers should pay the same tax
on their domestic and their foreign source investment income.
Amount of domestic tax avoided through the use of non-resident entities does not warrant additional administrative
costs and complexity associated with such legislation
Action 5: Counter harmful tax practices , taking into account transparency & substance
African countries with tax regimes that could be harmful: Mauritius, Botswana, SA’s head quarter company regime
African countries interest is persevering competiveness of their economies to attract FDI
Action 8: Assure transfer pricing outcomes are in line with value creation: intangibles
Excessive royalties charges associated with IP don’t a major concern in Africa
Exchange Control provisions in many African countries provide some protection
Action 9: Assure transfer pricing outcomes are in line with value creation: risks and capital
Action 11: Establish methodologies to collect & analyse data on BEPS & the actions to address it
BEPS ACTION PLANS THAT ARE NOT A HIGH PRIORITY IN AFRICA CONT.
Action Plan 14: Make Dispute Resolution Mechanisms More Effective
Article 25 OECD MTC: Mutual Agreement Procedure, which contains an arbitration clause
MAP is not very effective among many African countries
Transfer pricing disputes are the most common subject for which MAPS
Concerns about effectiveness of arbitration
Action Plan 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
Interests of developing may not be addressed in a multinational instrument.
Currently two main MTC: OECD MTC favours capital exporting countries, UN MTC favours capital importing countries
Concerns on how these diverging interests will be captured in a single multinational instrument
Some African countries have signed regional multinational treaties: ATAF, SADC & EAC treaties
Gauge effectiveness of regional treaties before joining worldwide multinational instrument
Develop strong coordination and cooperation; share best practices; develop strong collective position on African interests to
table for multinational instrument
Heed caution by:
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
BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT
ADDRESSED IN THE OECD ACTION PLAN
Strengthen source taxation by enhancing withholding taxes (WHT)
OECD BEPS Project: doesn’t cover taxing rights between residence & source countries
This a fundamental BEPS issue - harmful tax competition & “race to the bottom”
An effective tax system requires the right basis for taxing income: Two main bases:
Territorial (source) – tax income derived from the territorial – most developing countries - easier to administer
Worldwide (residence) – residents taxed on worldwide income – most developed countries - administrative
capacity to caste tax net worldwide
Normally both bases applied in hybrid form - some countries lean towards territoriality, others towards residence
Historically countries’ tax policies generally territorial but had international dimension
Globalisation of trade – shift to worldwide systems to preserve tax bases – offshore investments
To lessen global tax exposure, taxpayers employ global tax avoidance strategies
Countries enact anti-avoidance legislation - taxpayers a step ahead - cycle
Tax policy issue: Should countries’ resources be used to tax worldwide & prevent offshore tax
avoidance; or should resources be used to effectively tax domestic income & encourage
competiveness of domestic enterprises
To remain competitive, reduce administrative costs, ensure simplicity - many developed countries (e.g. Japan &
UK) have migrated to largely territorial systems
27 of 34 OECD countries employ some form of territoriality system - ‘a pragmatic response to the practicalities in
a world where competition is fast moving and truly global.’
African countries should place emphasis on strengthening source basis
BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT
ADDRESSED IN THE OECD ACTION PLAN CONT.
Strengthen source taxation by enhancing withholding taxes (WHT)
Practical way to enhance source taxation - not addressed in OECD Action Plan
Impose WHT on interest, dividends & royalties paid to non-residents
Alleviates difficulties in collecting tax from non-residents
Resident appointed as non-resident’s agent – obliged to withhold % of tax from payments to
non-resident
Failure to comply - personal liability imposed on resident agent
MNEs find WHT a major loss of revenue - flat rate on gross income
DTAs can reduce WHT
Treaty negotiations:
Developed countries - gross tax wipes out profits – impacts on importation of capital &
technology
Developing countries have to fight for WHT in DTA negotiations
Pressure to reduce WHT rates to zero/near zero or to give up their right to tax these payments
Developing countries also contribute to the earning of this income – WHT should be used to
strengthened source taxation
BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT ADDRESSED
IN THE OECD ACTION PLAN CONT. A practical way to deal with transfer pricing: Unitary taxation (UT) with formulary appointment (FA)
OECD recommends use of ALP to prevent TP
Conceptual & practical difficulties in applying ALP
Requires matching comparable transactions between non-arm’s length entities & arm’s length entities
MNE transactions often not comparable to those between arm’s length parties
MNEs don’t operate as if their subsidiaries were separate enterprises
Difficulties of applying OECD Transfer Pricing methods
Commentators suggest unitary taxation - treats related parties as part of a single enterprise
FA: MNE taxed on global income - each country’s tax depends on fraction of economic activity therein
Addresses economic reality of MNEs - highly integrated with operations in different regions
Fixed formula for profit attribution - administrable
OECD BEPS rejects radical switch to FA- advocates ALP approach
Objections to FA
Requires countries to agree on a fixed formula
Relies heavily on access to foreign-based information
Profits attributed to each member may differ from income in its books of account
Difficult to apply with respect to intangibles
The case for FA: overcomes the challenges of ALP
Art 7(4) 2008 version OECD MTC permitted customarily use of apportionment formulae
Some OECD TP methods (profit splits) entail apportionment of profits
APAs often use FA
Developing countries lack data bases for comparables: FA - clearer & easier to administer
Access to foreign-based information – addressed in UN Transfer Pricing Manual & BEPS Action plan 13
Varied use of FA: American Federal States; Brazil - varying approaches not good for international trade
OECD should developing guidance on FA - Convergence between ALP & FA needed
With potential strength of FA, its varied use, ALP problems - FA important in international tax
BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT
ADDRESSED IN THE OECD ACTION PLAN CONT.
Develop Guidelines on granting tax incentives (TI) TIs considered a tool for encouraging FDI – However:
TI distort resource allocation, lead to sub-optimal investment decisions; harmful to long term growth
TI not primary determinant of investment decisions
Internationally not much guidance on granting TI
Treaty context – some guidance on tax sparing provisions between developing & developed countries
To prevent elimination or reduction of TI offered to foreign investor by his residence country – credit method
Developed countries allow residents to retain TI – tax is spared
However: tax sparing can lead to tax abuse (e.g. transfer pricing, round tripping and treaty shopping)
Inevitably results in the direct loss of revenue for the foregone tax
Developing countries have to make concessions to obtain tax sparing
1998 OECD Report on Tax Sparing - recommendations on tax sparing
Tax incentive should be defined precisely - no open-ended tax sparing
Set maximum tax rate for the tax sparing credit
Inclusion of anti-abuse clauses
Time limitations or sunset clauses
Restrictions to business income not passive income
Guidelines on TI should be developed – building on the above on tax sparing
2015: G20, IMF, OECD, UN & World Bank to work jointly on options for efficient & effective use of TI for
investment
Use of multilayered structures to indirectly dispose of valuable underlying assets of
businesses situated in Africa to tax havens Ugandan: Heritage & Gas Limited v Uganda Revenue Authority – disposal of mineral licensing rights
2004: Joint Operating Agreement between Heritage Oil & and Tullow Uganda Ltd
Licence granted by UG Gov’t to explore, develop & produce petroleum in designated areas where oil was discovered
Heritage sold to Tullow its 50% participation in the oil exploration license - Heritage resident in Mauritius
URA issued assessment of US$ 404, 925,000 on Heritage for CGT on sale of immovable property
URA: Sec 79(g) UG ITA - income from disposal of an interest in immovable property located in UG, sourced in UG
Heritage: No definition of immovable property in ITA - interest in immovable property not taxable in UG
Held: Sec 88 ITA, UG/Mauritius DTA forms part of ITA
Art 6 UG/Mauritius DTA: immovable property includes “property accessory to immovable property”
Proceeds from the disposal of immovable property were taxable in UG
Ugandan: Zain International BV v Com General of URA - disposal of telecommunications shares
2010: Zain International BV disposed of its shares in Zain Africa BV to Bharti Airtel International BV
Zain Africa BV had equity interests in Celtel UG Ltd
URA issued assessment - shares disposed were held indirectly by Zain International BV in Celtel UG Ltd
Zain International BV objected: No shares of Celtel UG Ltd were disposed of; transaction was between Zain International
BV and Bharti Airtel International BV - a Netherlands entity so income sourced in Netherlands not UG
URA: Art 13 Netherlands/UG treaty - gain arising from the disposal of an interest in immovable property located in UG
taxable in UG
High Court: UG had no jurisdiction to tax Zain International BV – URA appealed
Court of Appeal: UG has jurisdiction to tax
The taxpayer intends to apply for MAP in Netherlands .
Zain case similar to Indian Vodafone case – could occur in other African countries with similar legislation
Need for countering legislation
BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT
ADDRESSED IN THE OECD ACTION PLAN CONT.
BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT
ADDRESSED IN THE OECD ACTION PLAN CONT.
Transfer pricing in the extractive sector
Not a transfer pricing focus area in the BEPS Action Plan
African countries incur tax loss from:
commodities exported at under value to tax havens
goods imported at inflated prices from companies in tax havens – tax loss - excessive tax
deductible depreciation charges
Interposing entity between MNE mining company in Africa & market in low tax jurisdiction
African country receiving discounted price on end market price or contract price
Often interposed entity has little or no substance in low tax jurisdiction
Difficulties in obtaining information on substance of foreign entity
Lack of comparable data on extractive sector
Domestic statutory provisions required in African countries to address this concern
AEOI could help