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Davis commission report on first deliverables BEPS release

Monday, 05 January 2015   (0 Comments)
Posted by: Author: Keith Engel
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Author: Keith Engel (SAIT)


While most of us were away on holiday, the Davis Commission released its first interim report on Base Erosion and Profit Shifting ("BEPS”) on 23 December 2014 (which can be found at  The report contains South African recommendations relating to the 2014 deliverables by the OECD on BEPS.  All-in-all, the 2014 report covers 7 of the 15 deliverables (with the remainder due in 2015 after the OECD completes its work).

Short Overview

The Davis Committee interim report is divided into three parts:  (1) an overall introduction, (2) a detailed summary of the OECD action points as these points relate to South Africa, and (3) a table of recommendations.

The introductory note reiterates the overall global statements on BEPS and seeks to contextualise these concerns within a developing country paradigm with emphasis on South Africa in particular.  In terms of a developing country context, the Davis Committee notes that protection of the corporate tax base in a developing country context is more important than for developed countries.  Relative corporate revenues for developing countries are typically more than 25 per cent of total revenues; whereas OECD and other developed countries only rely on corporate revenues to the extent of 3-10 per cent of the total tax-take.  In justifying this differential, the Davis Committee notes that developing countries cannot fully rely on the VAT as a source of revenue in large part due to the regressive nature of VAT and concerns that a lack of corporate taxation could favour capital over labour.

At a South African level, the Davis Committee reveals some interesting statistics on the non-goods outflow of service/intangible payments from 2008 to 2011, which in aggregate increased from roughly 43.6 billion to 205 billion per annum.  The largest increase stems from the subcategory of legal, accounting and management services.  The Committee notes that much of this outflow is associated with the mining and manufacturing industries (which is said to be "not surprising”.)  The role of State-Owned Enterprises in this outflow is also noted but the Committee is implicitly concerned about the post 2008 progression overall.

Action Recommendation Highlights

The report contains a fairly exhaustive attempt at applying the OECD recommendations to the South African context.  Provided below are the more notable items of interest:

·         Action Plan 1:  Addressing the Challenges of the Digital Economy

The Davis Commission is of the view that there is no urgent need of general legislative action in the case of e-commerce given the plethora of general South African tax rules already in place, but some specific rules may be helpful.  One key recommendation is the enactment of specific source rules for the supply of e-commerce goods and services.  The Davis Committee believes that these source rules should have a consumption focus and contain an element of apportionment (as opposed to the all-or-nothing approach of the current source rules).  At an administrative level, foreign residents should be required to file annual income tax returns if these residents have any quantum of source income without regard to the prerequisite existence of a South African permanent establishment.

The report also spend considerable focus on the issues of the VAT as they relate to e-commerce, in part re-examining the recent changes of 2013 and 2014.  Amongst other recommendations, the Davis Committee suggested that the definition of e-commerce be clarified (with the specific inclusion of online advertising) as well as the distinction between business-to-business transactions versus business-to-consumption.  Other suggestions included the clarification of the continued application of the reverse-charge mechanism, relief from penalties for inadvertent mis-identification of the consumption versus business status of payees, simplified VAT registration for foreign suppliers of e-commerce and the desire for neutrality between foreign versus domestic stakeholders.  Of particular note is the Committee’s suggestion that consideration be given to utilising the banks as an improved (and immediate) withholding mechanism for VAT transactions.

·         Action Plan 2:  Neutralising the Effects of Hybrid Mismatch Arrangements

The Davis Committee believes that the issue of hybrid instruments should best be addressed conceptually rather than via specific rules such as the hybrid debt provisions of sections 8F and 8FA.  Under this approach, deductions would presumably be denied if the cross-border payment fails to qualify as income under the payee country’s system of taxation.  The anti-avoidance ceiling of section 23M was additionally questioned "as complex and its workings unclear” despite its anti-avoidance intent.  Pre-existing foreign tax credit schemes (such as those associated with the Brazilian tax treaty) were said to be on the decline.  However, the Committee suggested that foreign credits should not be legislatively available where global tax was effectively neutralised in terms of the underlying net income (through deductions or other offsets).

·         Action Plan 5:  Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

The Davis Committee identified the South African Headquarter regime as the main preferential regime that could be subject to the new substantial activity requirement of the OECD.  The Committee suggested that the regime be retained for the sake of enhancing South Africa’s gateway status and that the regime be enhanced so as to promote headquarter services (as opposed to the current regime which merely favours holding company status).  Special economic zones are additionally slated as a preferential incentive that need to be similarly examined for substantial activity.

·         Action Plan 6:  Preventing Treaty Abuse

The Davis Committee favours the introduction of a "main business purpose” requirement for the application of tax treaties as well as a possible limitations of benefits article.  A domestic general anti-avoidance override for tax treaties is said to exist implicitly but should be made legally explicit.

The Davis Committee strongly favours the renegotiation of older treaties with outdated provisions (such as the lack of source taxation for immovable property companies in the case of the Netherlands tax treaty and the pro-source bias of the interest provision within the Zambian tax treaty).    The revised Mauritius tax treaty is strongly supported, including the revised tie-breaker clause in the case of dual residence companies.  Pre-existing tax sparing clauses within certain older treaties should be revised in line with newly announced OECD pronouncements.

As a side note, the Davis Committee calls into question the section 6quin tax credit.  The Committee states that the credit effectively relinquishes taxing authority to its fellow Africa neighbours even though this relinquishment is unwarranted under international tax principles.

·         Action Plan 8:  Assuring that Transfer Pricing Outcomes are in Line with Value Creation/Intangibles

The Davis Committee focuses on two aspects of this Action Plan.  Firstly, the Davis Committee takes cognizance of schemes where intangibles are developed locally, but only finalised once abroad so that payments are made to the new (low-taxed) foreign location.  However, these schemes are of little concern given the anti-avoidance measures (such as section 31 transfer pricing, the anti-intangible migration provisions of section 23I and Exchange Control provisions prohibiting the outbound transfer of certain intangibles) with the possible exception of some remaining schemes of local deductions followed by foreign income.  The second category of concern are payments to a foreign location with little value addition (e.g. people presence), but the Committee is unsure how these schemes can appropriately be rectified.

·         Action Plan 13:  Re-Examining Transfer Pricing Documentation

The Davis Committee mainly suggests that any revisions in this area be updated in line with the OECD recommendations.  The SARS interpretation guidelines (e.g. Practice note 7) should be updated in line with recent OECD principles.  The Davis Committee fully supports the notion that multinationals should be prepared to have a master global file, a local file and country-by-country reporting but suggest a R1 billion group turnover threshold and other requirements of materiality to reduce administration that outweighs the business economics.

·         Action Plan 15:  Developing a Multi-Lateral Instrument

As expected, the Davis Committee fully supports the OECD plan for multi-lateral agreements to facilitate the globalisation of the BEPS proposals.  The outcome of these OECD efforts is still pending.

SAIT Submission

The Technical Department of SAIT will be preparing a detailed submission on the Davis Commission’s first interim report on Base Erosion and Profit Shifting. The Committee faced a difficult task being forced to wade through a voluminous amount of material in a short period and public participation is therefore of critical importance. 

Interested parties are requested to forward their comments to by no later than 24 March 2015.



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