Faculty of Commerce, Law and Management (ETDs)

Permanent URI for this communityhttps://hdl.handle.net/10539/37778

Browse

Subject: search.filters.subject.Base erosion and profit shifting

Search Results

Now showing 1 - 5 of 5
  • Thumbnail Image
    Item
    A comparative analysis and subsequent recommendations for improvement of the draft advance pricing agreement legislation in South Africa
    (University of the Witwatersrand, Johannesburg, 2023-06) Carvalho, Monique Fernandes; Blumenthal, Roy
    When dealing with multinational enterprises (MNEs) which are connected parties and located within in different jurisdictions, they must transact with each other and set prices at which they transfer goods or services1 between each other on an arm’s length basis (Ernst & Young (EY)(2021); United Nations (UN)(2021: 29)). According to the Organisation for Economic Co-operation and Development (OECD), the arm’s length principle (ALP) assists MNEs to identify the price at which a transaction would take place, had its members in fact been subject to market forces. In other words, the transfer price set for those transactions between unconnected persons should be used as a benchmark against which to appraise those transactions taking place between connected persons; any identified discrepancies may thereafter lead to a potential future adjustment which gives rise to transfer pricing disputes between taxpayers and the tax authorities. (South African Revenue Service (SARS) (1999: 8).) In order to minimise these transfer pricing disputes, the OECD emphasised the need for a more proactive, clear, effective discussion to take place between taxpayers and the tax authorities. The OECD has identified and communicated a proactive, upfront dispute resolution mechanism, known as advance pricing agreements (APAs). APAs are a tool that attempts to prevent disputes from arising through the proactive, upfront engagement betweenthe taxpayers and tax authorities. (Organisation for Economic Co-operation and Development (OECD)(2016: 7 – 8); OECD (2022 a: 213).) APAs are not yet governed under South African (SA) legislation; however, although the South African Revenue Service (SARS) has submitted draft legislation on APAs for public comment, nevertheless no further steps have yet been taken to date (SARS (2021)). One of the biggest challenges of APAs which far removes their practically is the period within which they take place until completion. Statistically, there is a limitation in the amount of data which is available when dealing with APAs as a topic in isolation. The author selected a number of OECD member countries from which she was able to retrieve a limited but relevant amount of data from reliable sources, which clarifies the average time period it takes to complete an APA from start to end. The author selected both the United States of America (USA) and United Kingdom (UK) for reasons which are set out below in this research report. This research report provides a comparative analysis of the draft APA legislation submitted by SARS in SA, in comparison with the APA legislation promulgated and followed in the USA and UK. Subsequently, suggested improvements to the draft APA legislation in SA by reference to the APA legislation followed both in the USA and UK are further provided.
  • Thumbnail Image
    Item
    A critical analysis of the foreign business establishment exemption and its role in the prevention of base erosion and profit shifting
    (University of the Witwatersrand, Johannesburg, 2023) Vally, Ra’eesah
    Section 9D of the Income Tax Act 58 of 1962 sets out the controlled foreign companies rules. This section contains anti-avoidance provisions that seek to prevent South African tax residents shifting their taxable income to foreign countries by way of a controlled foreign company. In terms of section 9D the net income of controlled foreign companies is taxed in the hands of the South African residents in proportion or their shareholding, unless the amount is subject to one of the specific exemptions. One such exemption is the foreign business establishment exemption. This exemption has been criticised as the definition of foreign business establishment is not adequate. The criticism arises from the fact that many controlled foreign companies meet the definition of a foreign business establishment by default even though they do not constitute a bona fide foreign business establishment. This paper critically evaluates this exemption considering the OECD BEPS Pillar Two Rules, the Income Tax Act 58 of 1962 and the Mauritian and UAE substance standards and whether the rules of this exemption should be more specific and stringent. The substance standards were found to be more stringent in comparison to the FBE definition and therefore enhanced the FBE definition. The scope of the Pillar Two blueprint meant that many South African companies would more likely than not be scoped out of its realms and therefore would not assist in enhancing the FBE definition
  • Thumbnail Image
    Item
    Anti-avoidance provisions limiting interest deductions: a comparative analysis between the OECD and South Africa
    (2021) Williams, Nebresca
    Companies have two options to finance their operations: equity injections from their shareholders or loans (SARS, 2013, p. 3). The cash outflows as a result of these two methods of financing are dividends and interest respectively (SARS, 2013, p. 3). Since dividends are not allowed as a tax deduction in South Africa, it is clear that companies would benefit by financing their businesses with debt rather than equity since the interest expense on a loan is deductible for tax purposes under s 24J of the Income Tax Act 58 of 1962 (the Act)(SARS, 2013, p. 3). A study completed by de Mooij, R. & Hebous, S. suggests that debt/asset ratios increase by at least 0.14% -0.46% for corporations every time there is a 1% increase in the tax rate, which proves company tax bias towards debt (Hebous & de Mooij, 2017). Using debt rather than equity also allows for the existing owners in a company to raise funding without the possibility of losing control of the company, which may be the case when equity instead of debt funding is utilised (Halka, et al., 2017, pp. 182-183).For multinational enterprises, it may be easier to raise debt funding from a company within the same group of companies versus debt obtained from external parties such as banks as they can take advantage of internal synergies (Reynolds & Wier, 2016, p. 4) this creates a problem for tax authorities in certain instances. The reason for concern is that some multinational enterprises choose to engage in excessive debt financing particularly from companies within their group to charge high interest rates to those branches situated in high tax jurisdictions (Palanský, 2019). Some groups issue loans from a company based in a low-tax jurisdiction allowing the borrower to deduct their interest costs in the high tax jurisdiction resulting in large interest deductions that lower not just the net tax bill for the group but also erodes the tax base in the high-tax jurisdiction (OECD, 2017a, p. 23). This research report will review how multinational enterprises use debt funding as an opportunity to avoid tax and what the regulations are in South Africa to protect the tax base in comparison with the recommendations from the Organisation for Economic Co-operation and Development. Section24J of the Act governs the fundamentals of interest deductibility. Section 31(2) of the Act limits interest deductions to the arm’s length amount of cross-border debt and interest. Section 23N of the Act limits interest deductions by a company on debt obtained to purchase assets or shares in reorganisation and acquisition transactions. Section 23M limits the deductibility of interest on debt from a foreign person that is not subject to tax in South Africa and is in a controlling relationship with the resident borrower
  • Thumbnail Image
    Item
    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.
  • Thumbnail Image
    Item
    An analysis of the deductibility of interest expenditure rules in South Africa
    (2019) Pillay, Kerusha
    Taxpayers are broadly financed in two ways, namely through the use of debt and equity. The returns on capital and debt are treated differently from an income tax perspective (SARS 2013). The interest expense incurred by taxpayers in the production of income by a person carrying on a trade, are deductible in determining taxable income, subject to certain conditions and limitations. The number of provisions contained in the Income Tax Act of 1962 (the Act) which deal with the tax treatment of interest income and interest expenditure have gradually increased over time. There are numerous aspects to be borne in mind by resident and foreign companies when considering the income tax and withholding tax implications which may arise in respect of transactions giving rise to interest income and interest expenditure (SAICA 2015). This is affirmed by the number of provisions in the income tax act dealing with the deductibility of interest primarily dealt with in section 24J of the Act as well as indicated by the 2014 amendments to section 8F, the introduction of section 8FA, sections 23M and 23N into the legislation. The purpose of this report is to assess whether the Department of National Treasury (National Treasury) have taken the number of provisions of the deductibility of interest too far.