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South Africa joins International Efforts to Prevent Corporate Across-Border Profit Shifting

Thursday, 29 August 2013   (0 Comments)
Posted by: Author: Deloitte
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Author: Deloitte

South Africa has formally joined the Organisation for Economic Cooperation and Development (OECD) in their efforts to prevent multi-national companies shifting profits between tax jurisdictions in an attempt to evade paying taxes in the primary countries in which they operate, says professional services firm Deloitte.

South Africa will therefore become a partner in the OECD’s international action plan that sets out 15 actions designed to address the concerns surrounding ‘base erosion and profit shifting’ and related issues that are troubling tax authorities across the globe, says Louise Vosloo, Director in International Tax at Deloitte.

"The OECD action plan identifies the actions, implementation deadlines as well as resources and methodologies required to execute the plan. The plan follows an original OECD report that concluded that international tax principles are dated and cannot keep pace with the modern day, constantly changing business environment that has arisen with the rapid growth of digital economies and  ecommerce.

"By taking advantage of these technological tools, major corporations have been shifting profits to low or no tax jurisdictions at the expense of countries in which they operate that have higher tax regimes. Two of the main targets of the OECD plan are to address double non-taxation and practices that artificially segregate the taxable income in low tax jurisdictions.

"The objective is to develop new, consensus based approaches designed to reduce base erosion and profit shifting through international standards that will build a unified approach to international corporate income tax. In addition it is intended that these measures should be in line with modern business models and developments and also encourage transparency.”

Although South Africa’s authorities have aligned themselves with the OECD’s proposals and objectives, they have already moved locally by introducing measures against base erosion and profit shifting practices that are threatening the South African fiscus. Specific actions in four areas were identified. These were hybrid debt; take action against BEPS connected person debt; transfer pricing and acquisition debt.

The primary concern around base erosion in the country was found to be excessive interest deductions. The preliminary proposal by SARS is that  certain debt instruments be re-categorised  entirely as equity, thus the debt principal will be the shares and the "interest” yielded will be the deemed distribution of the dividends.

Secondly, the proposals states that this "interest” will be treated as dividends.

"SARS is engaging the tax administrations of Australia, UK and USA to acquire information on tax evasion so it can share some of the data these jurisdictions have compiled on complex offshore structures that involve trusts and companies holding assets for residents in jurisdictions around the world,” says Vosloo.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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