Faculty of Commerce, Law and Management (ETDs)

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    After the 2021 amendments to section 23M, what further amendments are required in section 23M to align with BEPS Action 4 recommendations?
    (University of the Witwatersrand, Johannesburg, 2023) Busakwe, Ndawoyakhe; Kolitz, Maeve
    Debt financing is an essential source of investment in South Africa as a country importing capital. As much as an economy in a good state depends on investments, taxpayers can use debt financing to create opportunities for base erosion and profit shifting (National Treasury, 2020a:5). The use of interest deductions to fund tax-exempt income and tax relief obtained on the deduction of interest expense which is higher than the net interest expense of a group can also create opportunities and ways in which taxpayers erode the tax base (OECD, 2015:16). Kruger (2015:12) noted that revenue authorities worldwide have been concerned for many years about the tax effect of debt financing, particularly what they perceive as debt funding that taxpayers utilise for tax avoidance and erosion of the tax base. In order to combat base erosion, several foreign jurisdictions have enacted interest deduction limitations and anti-hybrid instrument provisions, and the Organisation for Economic Co-operation and Development (OECD) raised this issue as one of its focus areas on Base Erosion and Profit Shifting (BEPS) (Kruger, 2015:12). Section 23N and s 23M became effective in the Income Tax Act 58 of 1962 (the Act) in South Africa between 2014 and 2015 respectively. Both of these provisions applied an interest limitation based on the ratio between the particular interest and a tax proxy for adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) (Van der Zwan, Schutte and Krugell, 2018:1). Kruger (2015:11) stated that: ‘fiscal authorities around the world have been concerned for some time that excessive debt funding could lead to tax avoidance which is caused by a mismatch between the tax treatment of interest incurred and interest received, which could result in excessive deduction of interest expense.’ In the South African context, National Treasury also acknowledged in the 2013 Budget Review that, although debt financing might have a positive impact on a iii healthier economy, taxpayers often use it to erode the South African tax base (National Treasury, 2013a:55). In order to protect the South African tax base as far as excessive interest deductions are concerned, National Treasury introduced s 23M through the 2013 Taxation Laws Amendment Act No 13 of 2013, with effect of 1 January 2015. In a joint project by the OECD and Group of Twenty (G20) on BEPS, it was identified that the deductibility of interest for purposes of calculating taxable profits should be one of the focus areas in order to counter BEPS, which was followed by the analysis and release of the final report titled OECD/G20 Base Erosion and Profit Shifting Project: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4: 2015 Final Report (BEPS Action 4 Final Report) (Van der Zwan et al., 2018:1). BEPS Action 4 contains recommendations for jurisdictions to implement the measures proposed to address the risks by interest payments and the related tax deductions to the corporate tax base (Van der Zwan et al., 2018:1). The purpose of this report is to examine how closely the South African interest limitations rules contained in s 23M align with BEPS Action 4 recommendations and to the extent that s 23M and BEPS Action 4 are not aligned, the report will determine further amendments that are required in s 23M of the Act to align with the BEPS Action 4 recommendations. The research includes a comparison of s 23M and BEPS Action 4 recommendations before the 2021 amendments to s 23M; discussion of the 2021 amendments to s 23M; analysis of the current differences and similarities between s 23M and BEPS Action 4 recommendations; and discussion of what further amendments are required in s 23M to align with BEPS Action 4 recommendations.
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    The South African Headquarter Company Regime: A critical examination
    (University of the Witwatersrand, Johannesburg, 2023) Motsatsi, Boitumelo Agatha; Kolitz, Maeve
    National Treasury, through the ‘Explanatory memorandum on the taxation laws amendment bill of 2010’ stated that: South Africa’s location, its sizable economy, political stability, strength in financial services as well as the many treaties the country held with many countries across the globe, made it a natural holding company gateway into Africa (National Treasury, 2010a: p.77), (Lourens, 2019: p.30). The South African government realised that funds which were received from foreign locations could not be channelled through the country to other foreign locations without explicit exchange control approval. In an effort to enhance its attractiveness as a viable and effective location from which businesses could extend their African operations the government reviewed its tax rules and proposed measures that would provide relief from foreign exchange control and tax. (National Treasury, 2010: p.78). Section 9I of the South African Income Tax Act 58 of 1962 (the Act) was inserted in the Act with effect from years of assessment commencing on or after 1 January 2011 (Taxation Laws Amendment Act, 2010: s 6(1)(o)). The purpose of this report is to examine how problems with the South African headquarter company regime taxation rules in s 9I (Crowley, 2020) can be resolved in an effort to make South Africa’s headquarter company regime more attractive to foreign investors. The report will firstly identify the foreign investors that South Africa wants to target through the headquarter company regime in s9I. Secondly, the headquarter company regime taxation rules in s 9I will be analysed in detail. Thirdly, weaknesses in the headquarter company taxation rules will be identified and thereafter, the researcher will identify the remedies which can be applied to the aforementioned weaknesses in order to make the headquarter company regime more attractive to foreign investors (Lourens, 2019: p.25). The critical examination has led the researcher to conclude that redefining the tax policies of South Africa’s headquarter company regime in s 9I through the application of the proposed remedies to the weaknesses found in the above- mentioned regime taxation rules, may boost South Africa’s appeal as a preferred location for foreign investors to establish their headquarter companies
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    An analysis of whether the Two‐Pillar Solution is an equitable solution for developing countries in addressing tax challenges of a digital economy
    (University of the Witwatersrand, Johannesburg, 2022) Van Dyk, Tertia; Blumenthal , Roy
    The purpose of this research report is to determine whether key elements of the Organisation for Economic Co‐operation and Development (OECD) Two‐Pillar Solution are equitable to developing countries. The key principles contained in the Two‐Pillar Solution will be critically discussed to determine whether these rules are designed in a manner that: I. Allows for appropriate and acceptable tax competition for developing countries to fairly compete with larger economies; and II. Ensures that multinational enterprises pay adequate tax in the developing countries where they operate, extract value and generate profits. The report seeks to understand who the key role players are, what base erosion and profit shifting (BEPS) challenges have arisen caused by the digitalisation of the global economy, and how the OECD Two‐Pillar Solution seeks to address these challenges. This analysis is conducted through the lens of developing countries, which are vulnerable to inequitable allocation of taxing rights. The report seeks to assess whether the key elements of the Two‐Pillar Solution are consistent with existing international tax rules that govern the allocation of taxing rights and, in some instances, challenges whether the existing rules on international tax are equitable to developing countries in the first place. The role of tax policy and tax competition from the perspective of developing countries will be discussed. Finally, the effectiveness of alternative mechanisms to address tax abuse will be assessed, including digital services tax and controlled foreign company rules, will be examined. Key Words: Multinational enterprises, base erosion and profit shifting, BEPS, inclusive framework, Global Anti‐Base Erosion Model, developing countries, tax incentives, controlled foreign company rules, effective tax rate, low‐taxed income, G20, digital services tax, Organisation for Economic Co‐Operation and Development
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    Neutralising the effects of branch mismatch arrangements: a South African perspective
    (2019) Lindeque, Anlia
    Base erosion and profit shifting (BEPS) has become an increasingly important matter for both multinational enterprises (MNEs) and the countries in which they operate. The tax avoidance strategies used to exploit gaps and mismatches in tax rules have become progressively complex and advanced over the past decade. The aim of this research report is to determine the importance and relevance of addressing BEPS via branch mismatch arrangements, as proposed by the Organisation for Economic Co-operation and Development (OECD), to an emerging economy such as South Africa. The report discusses and analyses the concept of branch mismatch arrangements, the concerns and challenges arising from the use of these arrangements, the recommendations from the OECD in addressing these mismatches and the approaches taken by selected countries. Current domestic legislation is contrasted with international approaches and the recommendations by the OECD. The outcome of adoption or non-adoption of the recommendations will be investigated.