Base erosion and profit shifting - new regulations

International tax issues have never been more prevalent than in today's integrated economic environment and international markets. As the world becomes increasingly globalised and cross-border activities become the norm, the current international tax rules have been put under strain and tax administrations need to work in unison to ensure that taxpayers are compliant in their tax obligations.

Weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created.

Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, the Organisation for Economic Co-operation and Development (OECD) and G20 countries, to which South Africa is a member, adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars, namely: 

  • Introducing coherence in the domestic rules that affect cross-border activities.
  • Reinforcing substance requirements in the existing international standards.
  • Improving transparency as well as certainty.
With the promulgation of The Automatic Exchange of Information and its adoption by more than 80 jurisdictions around the world, tax authorities globally have identified the necessity for exchanging taxpayer information. 

Action Point 13 follows this approach in that it provides for the "Country-by-Country Reporting Standard for Multinational Enterprises (MNEs)". It requires jurisdictions who are party to the project develop "rules regarding transfer pricing documentation to enhance transparency for tax administrations..." This will require MNEs to provide all relevant governments with information on their global allocation of the income related activity and taxes paid among countries according to a common template.

To comply with this requirement a "three-tiered standardised approach" to transfer pricing documentation has been adopted that comprises of a "master-file", which is intended to provide tax administrations with a high-level overview regarding an MNE's global business operations and transfer pricing policies; a “local file” that provides more detailed information; and the country-by-country report (CbC) that requires the following information from MNEs: 

  • Information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. 
  • Annual reports for each tax jurisdiction in which they do business, the amount of revenue, profit before income tax and income tax paid and accrued.
  • To report their total employment, capital, retained earnings and tangible assets in each tax jurisdiction.
South Africa has finalised the Regulations for the implementation of BEPS Action Point 13 into our domestic law on 23 December 2016 in Government Gazette No 40516 (the Regulations).

Essentially, the Regulations for CbC stipulate that where the ultimate parent company of an MNE is tax resident in South Africa, and has an annual gross consolidated turnover in excess of ZAR10 billion during the 2015 financial year, it will be required to prepare the CbC report for the financial years starting after 1 January 2016. Article 4 of the Regulations stipulates what information is to be submitted in the report and is consistent with what is required by the OECD. 

The South African Revenue Service (SARS) has additionally confirmed that the threshold will not be applicable to South African intermediary holding companies. There may, however, be circumstances where the South African entity may be required to submit the CbC report even though it is not the ultimate parent company of the MNE group. This applies to the so-called "constituent entities" and the threshold that is applicable in these circumstances is EUR750 million. 

South Africa is one of the countries that signed a multi-lateral competent authority agreement for the automatic exchange of CbC reports. This international agreement will facilitate the exchange of the MNEs’ transfer pricing information between the relevant tax jurisdictions. 

This standardised approach will impose an obligation on taxpayers in the relevant jurisdictions to submit to the applicable tax authorities detailed information regarding their cross-border business operations, transfer pricing policies and related party transactions. 

This consequently allows the relevant tax authorities to more easily identify whether companies have engaged in illicit practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.

With these new reporting provisions being implemented, companies will be discouraged from engaging in undesirable transfer pricing and other practices, and tax authorities will be in a better position to address BEPS.

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