In Dialogue with. ATAF Mr Thulani Shongwe Mr Ted Silkiluwasha. Davis Tax Commission Professor Annet Oguttu. SARS Ms Sunita Manik, Ms Nishana Gosai

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1 In Dialogue with ATAF Mr Thulani Shongwe Mr Ted Silkiluwasha Davis Tax Commission Professor Annet Oguttu SARS Ms Sunita Manik, Ms Nishana Gosai OECD Transfer Pricing Guidelines in the Spotlight

2 Welcome Address Nazrien Kader Deloitte Africa Tax Leader Deloitte Touche Tohmatsu Limited

3 Deloitte Africa Transfer Pricing Leader Billy Joubert Deloitte Touche Tohmatsu Limited

4 Guest Speakers

5 Guest Speakers Thulani Shongwe Specialist: Multi- Lateral Co-operation Africa Tax Administration Forum Ted Silkiluwasha Cross Border Taxation Technical Committee at Africa Tax Administration Forum Professor Annet Oguttu Chairman of the BEPS Sub- Committee Sunita Manik Group Executive at the Large Business Centre South Africa Revenue Services Nishana Gosai Transfer Pricing Manager South Africa Revenue Services

6 Africa Tax Administration Forum Presentation Mr Thulani Shongwe Mr Ted Silkiluwasha

7 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

8 AFRICAN TAX ADMINISTRATION FORUM Leading Africa in tax administration BEPS AND THE OECD ACTIONS: APPLICATION TO AN AFRICAN CONTEXT Ted Silkiluwasha & Thulani Shongwe

9 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. Tax incentives Transfer of assets Trade misinvoicing African BEPS Taxation of High Net Worth Individuals UNECA Sub-Regional Workshop on IFFs

10 AFRICAN GAINS IN THE OECD BEPS PROCESS Action 4 Interest Deductions 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 7 PE Status 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 UNECA Sub-Regional Workshop on IFFs

11 AFRICAN GAINS IN THE OECD BEPS PROCESS Action 7 Intra-group services Revisions made to Chapter 7 of OECD TP Guidelines Excessive payments by African taxpayers and MNEs for intragroup 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. UNECA Sub-Regional Workshop on IFFs

12 AFRICAN GAINS IN THE OECD BEPS PROCESS Action 9 Transfer Pricing on Allocation of Risk 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. UNECA Sub-Regional Workshop on IFFs

13 AFRICAN GAINS IN THE OECD BEPS PROCESS Action 10 Transfer Pricing on Commodities 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. UNECA Sub-Regional Workshop on IFFs

14 AFRICAN GAINS IN THE OECD BEPS PROCESS Action 10 Transfer Pricing on Commodities 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. UNECA Sub-Regional Workshop on IFFs

15 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 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 nd ATAF International Conference on Tax in Africa

16 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 SAIT Transfer Pricing Summit 2015

17 THANK YOU FOR YOUR ATTENTION MERCI POUR VOTRE ATTENTION Thulani Shongwe Multilateral Cooperation : tshongwe@ataftax.org : : Administration-Forum-ATAF/ UNECA Sub-Regional Workshop on IFFs

18 Chairman of the BEPS Sub-Committee Davis Tax Commission

19 Chairman of the BEPS Sub- Committee Professor Annet Oguttu Deloitte Touche Tohmatsu Limited

20 DELOITTE S DIALOGUE BEPS AND TAX TREATIES Prof Annet Wanyana Oguttu University of South Africa

21 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

22 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

23 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

24 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

25 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

26 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

27 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

28 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

29 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 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.

30 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)

31 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

32 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

33 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 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

34 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

35 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.

36 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

37 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

38 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

39 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 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.

40 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

41 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

42 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

43 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

44 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

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46 South African Revenue Service(SARS) Representatives

47 SARS Representatives Sunita Manik Group Executive at the Large Business Centre South Africa Revenue Services Nishana Gosai Transfer Pricing Manager South Africa Revenue Services

48 Panel Discussion and Q&A

49 Your Lead Panellists Thulani Shongwe Specialist: Multi- Lateral Co-operation Africa Tax Administration Forum Ted Silkiluwasha Cross Border Taxation Technical Committee at Africa Tax Administration Forum Professor Annet Oguttu Chairman of the BEPS Sub- Committee Nishana Gosai Transfer Pricing Manager South Africa Revenue Services Sunita Manik Group Executive at the Large Business Centre South Africa Revenue Services

50 Closing Remarks Billy Joubert

51 Deloitte Africa Transfer Pricing Contacts Deloitte Africa Transfer Pricing Leader Deloitte Africa Transfer Pricing Western Cape Lead Billy Joubert Tel/Direct: +27 (0) Fax: +27 (0) Karen Miller Direct: +27 (21) Main: +27 (21) Fax: +27 (21) Deloitte Africa Taxation Services Associate Director Deloitte Africa Transfer Pricing KZN Lead Carla van der Merwe Tel/Direct: +27 (0) Fax: +27 (0) Bradley Pearson Tel/Direct: +27(31)

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