Print Page
News & Press: TaxTalk

Davis Commission Report on First Deliverables BEPS Release

Monday, 13 April 2015   (0 Comments)
Posted by: Author: Keith Engel
Share |


Author: Keith Engel (SAIT Technical)

Davis Commission Report on First Deliverables BEPS Release:  A Good Effort Despite the Constraining Mandate

Keith Engel argues that tax professionals should value the Davis Commission’s thoughtful and open approach, although a Committee with a more South African centric mandate may have proven more valuable in the long run.


On 23 December 2014, the Davis Commission released its first interim report on Base Erosion and Profit Shifting ("BEPS”).  The report contains recommendations for the South African tax system 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 this year).  Public comments on the Davis Commission recommendations are due by 31 March 2015. 

Short Overview

The Davis Committee interim report falls 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 summary table of the same recommendations.

A. Introductory note

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 African in particular.  In terms of a developing country context, the Davis Committee indicates 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 revenue; whereas, the OECD and other developed countries rely only on corporate revenues to the extent of 3-10 per cent of the total tax-take.  In justifying this differential, the Davis Committee states that developing countries cannot fully rely on  VAT as a source of revenue in large part due to the regressive nature of VAT and raises 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 indicates 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.

B. Action Recommendation Highlights

The Davis Committee 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 for 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 spent considerable focus on VAT issues 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 transactions.  Other suggestions included the clarification of the continued application of the reverse-charge mechanism, relief from penalties for inadvertent errors in identifying 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 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 tax credit of section 6quin.  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 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 potentially remaining schemes involving local deductions followed by foreign income.  The second category of concern deals with  payments to a foreign location with little value addition (for example, 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 (including, 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. 

Preliminary thoughts 

The Davis Committee is to be commended for performing the herculean task of fully reviewing the OECD BEPS reports despite the short-time frame and lack of extensive staff support.  The scale of the project is massive, and one can see that the Committee made an exhaustive attempt to cover all aspects of the OECD work.  The Committee is also to be commended for seeking local economic data.

Although the Committee worked hard to contextualise the BEPS debate so that the debate had a South African flavour, the real problem for the Committee was the mandate itself.  The Action points of the OECD clearly have a strong European flavour.  For instance, the Committee rightfully points out that management and technical fees pose a greater threat to the South African tax base than the OECD focus on intellectual property fees.  As a result, the Committee was wrongfully forced into an OECD straight-jacket to find base erosion through an OECD lens.  This is not to say that South Africa does not have base erosion – just that South African base erosion is probably occurring from a different source.  Indeed, the Committee’s information on management and related service fees highlights this fact, but the OECD action points unfortunately do not specifically address these concerns beyond improved general documentation associated with transfer pricing.

The Committee’s focus on tax treaties was rightfully identified as a probable concern.  However, the actual avoidance at stake within South Africa needs to be clarified.  For instance, treaty shopping in terms of dividend payments via countries such as Mauritius are not really an issue because the Mauritian treaty dividend rates match the rates found in most treaties (and dividends do not cause base erosion in the OECD sense because dividend payments by a South African company are not deductible).  The bigger concern is interest, service and royalty payments when applied in the case of tax treaties involving low-tax jurisdictions.  If revenue is to be protected, a more comprehensive policy strategy needs to be considered focusing specifically on low-tax jurisdictions that adversely impact the South African tax base, and specific information relating to these outflows would have been helpful.  Unfortunately again, the format of the OECD action points do not facilitate this approach – instead seeking a generic response for all tax treaties.  That said, the Committee’s overall emphasis on adding clarification on the application of the domestic GAAR and support of subjective anti-avoidance rules within treaties themselves probably can be supported as a reasonable generic response.

Within the introductory note, the Committee strongly raises the point that anti-avoidance must be measured against South Africa’s need for competitiveness.  Most practitioners will undoubtedly take comfort that the Committee recognises the need for this balance and, indeed, the overall tone of the report takes a very measured response.  Nonetheless, this author expects some commentators to criticise the report for its failure to discuss the issue of tax and competitiveness (other than a brief discussion of the headquarter company issue).  To be fair to the Committee, the issue of competitiveness is outside the core mandate of the OECD report, meaning that the issue of tax and competitiveness has to be an item of discussion reserved for another day.  This author for one believes that the line between anti-avoidance and competitiveness can be preserved as long as anti-avoidance measures do not inadvertently impact non-tax motivated commercial transactions (easier said than done).

In terms of transfer pricing, the Committee again took a balanced approach.  While South Africa will clearly follow international trends in this regard, many businesses will undoubtedly support an approach that provides documentation relief in terms of materiality.  The international "paper/systems burden” of compliance in the tax and regulatory arena is quickly becoming a heavy expense for many companies, and company resources dedicated to these efforts are quickly falling short of international demand.  The question is how to simplify information requests while enhancing government access to useful information.  This clearly requires an enhanced dialogue between government and taxpayers.

All-in-all, practitioners should welcome the Committee’s thoughtful and open approach in the debate even if certain points may be of concern.  One would hope that practitioners will respond constructively with additional information and that Government will properly take into account the measured nature of the Committee’s approach when formalising proposals (without one-sided cherry-picking).  From a larger perspective though, one does wonder whether the BEPS report was the best use of Committee resources in a time-period when Government is seeking to raise significant revenues via closing loopholes.  Although the closure of some loopholes raised by the Committee using the OECD lens may raise small pockets of revenue, a Committee mandate starting with a more South African "centric” factual/legal paradigm would probably have been more fruitful.

This article first appeared on the March/April 2015 edition on Tax Talk.

Please click here to complete the quiz.




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.

  • Tax Practitioner Registration Requirements & FAQ's
  • Rate Our Service

    Membership Management Software Powered by YourMembership  ::  Legal