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IBFD 1st AFRICA TAX SYMPOSIUM

“A CRITCAL ANALYSIS OF WHAT AFRICA’S RESPONSE

SHOULD BE TO THE OECD BEPS ACTION PLAN”

Prof Annet W Oguttu

University of South Africa

INTRODUCTION

BEPS: Tax avoidance by multinational enterprises that makes use of 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

2013 OECD 15 Point Action Plan - to ensure profits are taxed where economic activities generating

the profits are performed & where value is created.

BEPS arises because:

International corporate tax framework not kept pace with changing business environment

Old business models - lower degree of economic integration across borders

Modern business models - Global taxpayers; MNE value drivers - IP; information & communication technologies

Result - encourages tax avoidance by MNE - to minimise global tax exposure

Exploitation of legal arbitrage opportunities & boundaries of acceptable tax planning;

Exploiting gaps in interaction of different tax systems - artificial reduction of taxable income

Shifting profits to low-tax jurisdictions where little or no economic activity is performed

Businesses integrate across borders - tax rules remain uncoordinated - technically legal structures devised to

take advantage of asymmetries in domestic & international tax rules

What is at stake is the corporate income tax (CIT)

CIT among OECD countries not high - average about 10% of total tax revenues

CIT important source of revenue in Africa - average 29% - revenue from individuals & consumption taxes limited

African countries have more at stake in an effective international tax system - their development depends on it

BEPS IN AFRICA

Concerns about BEPS are not new in Africa

For decades:

Money has been shifted from developing to developed countries & tax haven jurisdictions

There are some MNE whose business transactions in Africa are generally straight, but there is

circumstantial evidence that some are involved in aggressive tax avoidance: E.g.

Action Aid report exposing tax dodged by SABMiller in Africa

Global Financial Integrity – estimates amounts shifted out of Africa and provides a proxy for BEPS

behaviour by equating BEPS to illicit finical flows

o “the tide of tax and illicit capital flight from African economies is estimated between $50billion and

$80 billion per annum and in some cases revenue lost exceeds the level of aid received by

developing countries”

OECD failed to acknowledge that its member nations have benefited from and had dealings with

tax havens & lent them credibility

There was no political will to deal with the tax haven problem

Rise of political begun:

In the wake of the global financial crisis

Propelled by media reports engineered by non-governmental claiming that MNEs holding money

in tax haven & not paying their fair share of taxes

Response: In 2013, the OECD at behest of G20 issued a 15 point BEPS Action Plan

WHAT SHOULD AFRICA’S RESPONSE BE TO THE OECD BEPS ACTION PLAN?

Although OECD BEPS Action Plan may have been well-intentioned, its been criticised:

Not drawn up jointly with developing countries - does not address their immediate BEPS concerns

Agenda driven by the concerns of developed countries

OECD only engaged with developing countries after BEPS agenda was drafted & closed

The regional consultations have only served as orientations to a pre-existing plan

Most Action Plans will likely benefit developing countries in the long term – with economic &

administrative advance

2 year time scale, does not consider administrative, economic & systemic challenges faced by African

countries

It does not explore certain practical measures more suitable for African countries in addressing BEPS

How should Africa respond be to the OECD BEPS Action Plan?

No African country is a member of the OECD - not bound to follow the OECD recommendations

OECD’s primary focus - member countries but its additional goals of contributing to the expansion of

world trade & development of the world economy, affect non-members as well

BEPS is a global challenge - requires global solutions

All countries have a shared interest in strengthening the integrity of the international tax system


Address the critical issues that exacerbate BEPS in Africa

Most African countries’ tax laws not sufficiently developed to counter BEPS

Historically, most African countries didn’t encouraged investment aboard - enforced strict exchange controls

Economic growth policy: domestically owned firms to produce goods & services for domestic consumption

Tax systems prioritised domestic taxation residents - development of international tax laws lagged behind

Globalisation – African countries can no longer isolate their tax systems

Large resource bases exploited by foreign investors

Foreign investors: Africa is the new frontier of the global economy

OECD: Africa is the new emerging markets investment frontier

MNE management structures: from country-specific operating models to global models

Need for international tax laws to address BEPS

DTA negotiation dynamics - DTA an important aspect of international tax laws Few DTAs signed - some political gestures - no significant capital flows

Historically - views that DTA not needed - result in giving up taxing rights/bondage to restrictive DTA provisions

Change - acknowledgments that DTAs facilitate capital inflows - increasing DTA net work

Challenge - in absence of countering measures – abuse of DTAs - BEPS

Cause: Signing treaty provisions not in country’s favour - developed countries better skilled in negotiating tax

treaties

Lack of administrative capacity to negotiate tax treaties in Africa

Weak DTA negotiation teams - reflecting strong position of the other state

DTA can’t impose tax if income is not subject to tax under domestic legislation

However tax laws of most African not sufficiently developed to prevent BEPS


Address the critical issues that exacerbate BEPS in Africa continued:

Limited tax administrative capacity

Hampers ability to implement & gain full benefits of international tax reforms

Note: Levels of economic development & administrative capacity in Africa vary

To curtail BEPS - re-vamp administrative capacity – measures required:

Competent tax officials who can understand & administer complex international tax laws

Continuous training on international developments

Ability to hire & retain specialised tax officials - accountants, lawyers & economists

Expert retention policy – payment of salaries comparable to those in private sector

Technical expertise to carry out tax audits

Electronic & technological advancement of tax systems - AEOI

Integrity of tax official enhances collections - large discretion powers encourage corruption

Note: A number of countries are introducing reform programs:

o Ethiopia - enhancing capacity of revenue authority, central to public sector reform

o Cameroon – 2004 administrative reforms; 2007 Fiscal Reform Commission

o Tanzania - reforms to strengthen tax administration, & address corruption


African countries should not be passive to the OECD BEPS Action Plan

They should take advantage of:

Current international political will to address long standing BEPS concerns

MNEs have pulled back on aggressive tax avoidance - reputational risks

International initiatives to capacitate developing countries tax systems

UN: Participates in OECD work – provides insight into developing country concerns – UN Questionnaire

on priority BEPS concerns (in Africa, reposes from Zambia & SA)

OECD: committed to reinforce support to developing country revenue authorities - Tax Inspectors without

Borders initiative

G20: helping developing countries build administrative capacity & effective tax systems to reap full

benefits of international tax reforms

• Development of tax laws & administrative capacity varies in Africa – case by case assessments

• “G20 Development Working Group” on BEPS: involved with tax & economic organisations - ATAF (advisory and

in- kind support)

• G20 initiatives e.g. in Tanzania, Kenya, Uganda, Rwanda, Ethiopia

• capacity development - shaping the fundamental building blocks of tax policy and administration

• Voluntary availing of tax policy and administration experts - based on resource needs

Important initiatives needed in Africa:

Regular & proactive engagement on BEPS under regional organisations to ensure their views are taken into

account in the design and implementation of reforms

Change of attitude from views of being instruction takers not decision makers

Raise awareness of the significance of BEPS issues at political levels - with Ministries of Finance and other

relevant Ministries


Examples of proactive initiatives to address BEPS in Africa – should be associated with or emulated

Regional initiatives: ATAF - promotes & facilitates mutual cooperation among African tax

administrators

2014 conference on the Global Tax Agenda for Heads of African Tax Administrations and Ministries of Finance

Participants from 29 African countries and OECD officials

Conference Outcomes Document:

o need to improve administrative capacity, broaden the tax base, and increase tax revenue as a proportion of GDP

o development of rules for global taxation should address the concerns of all countries

o African countries should be involved in the BEPS process - shape the issues in the 15 Action Points in this

project to address Africa’s concerns

o Formation of “Cross Border Taxation Technical Committee” - to provide guidance on an African BEPS approach

and give input into the OECD BEPS process

April 2015 conference on Cross Border Taxation in Africa

Focused on an African position on BEPS Action points

Collaboration with OECD & G20 in advocating African countries’ BEPS interests

African countries should draw on the expertise & representative nature of ATAF

Initiatives at national level: Measures in Tanzania, Kenya, Uganda, Rwanda, Ethiopia – collaborating in G20 capacity building projects

South Africa - Davis tax committee appointed by Minister of Finance in 2013

In December 2014, the DTC released its first Interim Report for public comment

South Africa is a member of the G20 and a member of the OECD BEPS Committee.

Although SA’s above memberships is not representative of African countries, as a major African power it ought to

champions the cause of Africa in the OECD BEPS committee, and convey Africa’s views at G20

RESPONDING TO OECD BEPS ACTION PLAN FROM AN AFRICAN

PERSPECTIVE

BEPS Action Plans: Pertinent issues from an African perspective can be divided

into three categories: BEPS Action Plans that are of priority in Africa

BEPS Actions Plans that are not of high priority in Africa

BEPS concerns relevant to African but not covered in the OECD Initiative

Even though BEPS is a global concern: Nature of BEPS concerns not uniform for all countries

BEPS concerns developed countries face, not necessarily the same for developing countries

BEPS schemes that undermine European/American tax base often don’t work in African paradigm

The G20 Development Working Group states:

Due to economic & administrative challenges of developing countries, their highest priority Action Plans are:

Actions 4, 6, 7, 10, 12 & 13 - discussed below

BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA

Action Plan 4: Limit Base Erosion via Interest Deductions and Other Financial

Payments

Excessive deductions of interest by MNEs a major BEPS concern in Africa

Thin capitalisation schemes - Co. equity capital small in comparison to debt capital

Interest on loan capital is a deductible expense: in computing taxable

Dividends distributed from equity capital not deductible - distributions of profits - taxed

MNE ensure subsidiaries financed with increased levels of debt as compared to equity

OECD: Use “arm’s length principle” to curb thin capitalisation

If loan exceeds arm’s length lending situation, lender taken to have an interest in profitability of

the enterprise and the loan

Interest rate in excess of the arm’s length amount, is taken to have been designed to procure a share in

the profits

African countries should put in place provisions to prevent base erosion via interest deductions

Thin capitalisation provisions

The challenges of applying the arm’s principle to TP also apply to thin capitalisation

BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA CONT.

Action Plan 6: Prevent Treaty Abuse Entails “treaty shopping” - use of DTT by the residents of non-treaty country to obtain treaty benefits

not supposed to be available to them

Done by interposing conduit company in one of contracting states to shift profits out of those states

Action Plan 6 deals with 2 cases:

Circumvention of domestic tax law to gain treaty benefits - apply domestic anti-abuse rules

Circumvention of limitations in DTA - apply treaty anti-abuse rules - OECD three-pronged approach:

Title & preamble of DTAs - DTA not intended to create opportunities for non-taxation or reduced taxation through

treaty shopping

Inclusion of a specific limitation-of-benefits provisions (LOB rule)

Principle purpose test (PPT rules) - treaty abuse not be covered by LOB rule

Treaty shopping has not received much attention in many African countries

Uganda: Sec 88(5) of Income Tax Act (Cap. 340, as amended)

In treaty negotiations –use of conduits for tax avoidance not taken full account of

African tax officials deal with MNE treaty shopping - companies registered in Mauritius under Global Business

Licenses 1; companies in Netherlands or Switzerland as means of disposing of assets in offshore jurisdictions

African countries should strengthen their treaty negotiating capacity

Research on potential treaty partner

Complex USA type LOB provision not feasible for African countries


Action Plan 7: Prevent the Artificial Avoidance of PE Status

PE concept - crucial element of DTAs – article 5

Fixed place of business through which enterprise's’ business is wholly or partly carried out

Special rules for building & constructions cites

Deemed PE - dependent agents

Exclusions: preparatory & auxiliary activities

Basic nexus to determine if country can tax business profits of foreign enterprise

Foreign enterprises should create significant & substantial economic presence

Article 7(1) - only profits attributable to PE taxed by source state

Challenges of applying PE concept

MNE can artificially fragment operations among multiple group entities to qualify for PE exclusions

Manipulation of PE time limits

Non-residents service activities – consultants/engineers allege services of temporary nature

Exclusions – art 5(4)(f) - any combination of activities - creates nexus that is not preparatory or auxiliary

Challenges posed by digital economy

The PE issue concerning for developing countries

Base erosion if foreign investors avoid PE status

Yet its not in the interest of developed countries to expand PE concept

African countries should sign article 5 based on UN MTC:

Art 5(3)(a): building site, construction, installation projects extends to “assembly projects or supervisory activities in

connection therewith” – time limit 6 month unlike 12 month in OECD MTC

Art 5(3)(b): PE rule for furnishing of services - consultancy services through employees or other personnel engaged by

the enterprise - activities must continue (for the same or a connected project) > 183 days in 12-months

Art 5(5)(b): Dependent agent includes “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”.


Action Plan 10: Assure that transfer pricing outcomes are in line with value

creation/other high-risk transactions BEPS Action 8, 9 & 10 require TP out comes to in line with value creation

Meaning of TP:

Manipulation of prices of transactions between connected entities to reduce profits or increase profits artificially

To prevent TP, OECD recommends ALP

When conditions between two associated enterprises in their commercial/financial relations differ from those

between independent enterprises, any profits which would have accrued, but haven’t because of those

conditions, may be included in the profits of the enterprises and taxed

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

Value creation TP priority concern for African countries: Action 10 - 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.

o These factors are analysed below from an African perspective

BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN

10 CONT.

Clarify the circumstances under which transactions can be re-characterised

African countries'’ concern – preserving tax on foreign dividends distributed by local subsidiary to

parent company

If subsidiary funded by equity capital, dividends not deductible: if by loan capital interest - deductible

Companies often characterise dividends as interest

To address potential for BEPS, African countries should:

Deny/limit interest deductions if the payee has no global taxable income.

Rebalance the profit so the profit arises where the true economic substance lies

Levy withholding tax on dividends at the shareholder level, in treaty context, tax is reduce to 5 or 10 percent% -

African countries to limit the application of treaties

Clarify application of TP methods, in particular profit splits, in global value chains

Although some African countries have transfer pricing legislation

Applying OECD Transfer Pricing Guidelines is challenging for African countries

Difficult to find African comparables - few organised companies in any given sector; no African databases

European comparables used - these need to be adjusted to suit African market business.

With challenges of applying ALP developing countries have placed emphasis on profit split methods

BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN

10 CONT.

Provide protection against base eroding payments: Management fees

MNE keep claiming deductions for various management, technical & service fees

Little or no tax paid in source countries – allegations of making losses year after year

Profits shifted to low tax jurisdiction while taxes are minimized in source state

Response – treaties with articles on services, management & technical fees - deviating from OECD

& UN MTC – not addressed in OECD BEPS project

Generally defined as payments of any kind to any person, other than an employee of the person making the

payments, in consideration for any services of a managerial, technical or consultancy nature, rendered in a

contracting state

Fees may be taxed in resident state but also in source if beneficial owner is a resident of other state

Fee not to exceed a certain percentage

Examples:

Royalty & service fees - Ghana’s treaties with Germany & Netherlands;

Technical fees – Uganda’s treaties with South Africa, Mauritius & UK;

Management fees – Ghana’s treaties with Italy & Belgium; US-India treaty

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” – UN MTC

2012: UN proposed new article on technical services - allows country to tax service provider even if no physical

presence is created

BEPS ACTION PLANS THAT ARE A PRIORITY IN AFRICA: ACTION PLAN 10

CONT.

Provide protection against 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 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

Non-actual management expenses, notional interest & royalties from head office may be charged on the PE

Notional payments for financial services on internal loans & derivatives involving PEs

Differs from approach in UN MTC & 2008 version of OECD MTC

Single entity approach - only actual income & expenses of PE allocated

Developing countries very sceptical about adopting OECD approach MNEs often avoid PE taxes - claiming deductions of fees charged to headquarter office

Disallowance of notional head office expenses should be maintained to preserve source tax bases


Action Plan 12: Require taxpayers to disclose their aggressive tax planning arrangements

Comprehensive & relevant information on tax planning strategies often unavailable to tax administrations.

Audits not sufficient for the early detection of aggressive tax planning techniques

Action Plan 12 calls on countries to:

require taxpayers to disclose their aggressive tax planning arrangements;

improve information flow about tax risks to tax administrations and tax policy makers.

develop mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures

Ensure information sharing for international tax schemes between tax administrations.

develop measures on co-operative compliance programmes between taxpayers & tax administrations

Strengthening EOI will help African countries to identify offshore investments that should be subject to tax

New standard: Automatic EOI could potentially lead to increased tax revenues

Detecting: tax evasion & offshore wealth; strengthening compliance with domestic tax rules

Challenges:

balancing taking part in AEOI with other tax priorities

Capacity to comply with the AEOI

Concerns about reciprocity

Solutions: G20 DWG working with OECD Global Forum to: identify obstacles to AEOI in developing countries and how

to solve them

Collaboration with ATAF to enhance & building awareness of AEOI reforms in Africa

Disseminating tools & resources

Getting feedback on implementation AEOI, e

Ensuring Africa’s views are taken into account in the design and implementation of reforms

G20 pilot projects with African countries: participating as information exchange partners; providing technical advice, financial

support & capacity building in understanding international tax reforms


Action Plan 13: Re-examine Transfer Pricing Documentation OECD: Asymmetry of information between taxpayers & tax administrations undermines administration of TP rules &

enhances BEPS - Tax administrations don’t have “big picture” view of MNE global value chain

When OECD developed TP Guidelines in 1995, tax administrations & taxpayers had less experience in creating and

using transfer pricing documentation

Guidelines emphasised reasonableness & cooperation in the documentation process for taxpayers & tax administrations:

avoid excessive documentation compliance burdens and ensure provision of adequate information to apply ALP reliably.

No list of documents to include in TP documentation package

Countries have adopted TP own documentation rules thus: increase in the volume & complexity of TP issues, compliance

costs for taxpayers; TP documentation inadequate for tax enforcement & risk assessment

In African countries

Absence of documentation requirements; inability to enforce existing ones

Lack of resource & technical capacity to process data & evaluate information

Action Plan 13: Revision of Chapter V of TP Guidelines relating to TP documentation rules.

The OECD recommends that countries should follow a three-tiered documentation structure consisting of:

Master file: contains standardised information relevant for all MNE group members.

Local file: referring specifically to material transactions of the local taxpayer.

A country-by-country report: containing information relating to the global allocation of the MNE’s income and taxes paid,

together with certain indicators of the location of economic activity within the MNE group.

Action 13 also covers compliance matters

With enhanced tax administration capacity, African countries should be able to benefit from this three tired approach

OECD: CbC report to be submitted by MNEs with annual consolidated group revenue in preceding fiscal year of € 750

Concern: high reporting threshold would exclude many companies whose presence in smaller economies is significant

The complex arrangements for filing could restrict dissemination to developing countries.

BEPS ACTION PLANS THAT ARE NOT A HIGH PRIORITY IN AFRICA

Action 1: Address the tax challenges of the digital economy

Taxing the digital is not an immediate concern

Many African countries do not want to stifle the development of badly needed electronic advancement

Most internet companies in Africa remain small and relatively unprofitable

Africa yet to see the rise of local e-commerce businesses from aboard (e.g. Amazon)

Action 2: Neutralise the effects of hybrid mismatch arrangements

Most African countries don’t have the relevant legislation in place

Action 3: Strengthen controlled foreign companies rules

South Africa only SADC country with comprehensive CFC rules - reasons for a country not having CFC rules

Lack of strongly committed to the principle of “capital export neutrality” - resident taxpayers should pay the same tax

on their domestic and their foreign source investment income.

Amount of domestic tax avoided through the use of non-resident entities does not warrant additional administrative

costs and complexity associated with such legislation

Action 5: Counter harmful tax practices , taking into account transparency & substance

African countries with tax regimes that could be harmful: Mauritius, Botswana, SA’s head quarter company regime

African countries interest is persevering competiveness of their economies to attract FDI

Action 8: Assure transfer pricing outcomes are in line with value creation: intangibles

Excessive royalties charges associated with IP don’t a major concern in Africa

Exchange Control provisions in many African countries provide some protection

Action 9: Assure transfer pricing outcomes are in line with value creation: risks and capital

Action 11: Establish methodologies to collect & analyse data on BEPS & the actions to address it

BEPS ACTION PLANS THAT ARE NOT A HIGH PRIORITY IN AFRICA CONT.

Action Plan 14: Make Dispute Resolution Mechanisms More Effective

Article 25 OECD MTC: Mutual Agreement Procedure, which contains an arbitration clause

MAP is not very effective among many African countries

Transfer pricing disputes are the most common subject for which MAPS

Concerns about effectiveness of arbitration

Action Plan 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

Interests of developing may not be addressed in a multinational instrument.

Currently two main MTC: OECD MTC favours capital exporting countries, UN MTC favours capital importing countries

Concerns on how these diverging interests will be captured in a single multinational instrument

Some African countries have signed regional multinational treaties: ATAF, SADC & EAC treaties

Gauge effectiveness of regional treaties before joining worldwide multinational instrument

Develop strong coordination and cooperation; share best practices; develop strong collective position on African interests to

table for multinational instrument

Heed caution by:

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

BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT

ADDRESSED IN THE OECD ACTION PLAN

Strengthen source taxation by enhancing withholding taxes (WHT)

OECD BEPS Project: doesn’t cover taxing rights between residence & source countries

This a fundamental BEPS issue - harmful tax competition & “race to the bottom”

An effective tax system requires the right basis for taxing income: Two main bases:

Territorial (source) – tax income derived from the territorial – most developing countries - easier to administer

Worldwide (residence) – residents taxed on worldwide income – most developed countries - administrative

capacity to caste tax net worldwide

Normally both bases applied in hybrid form - some countries lean towards territoriality, others towards residence

Historically countries’ tax policies generally territorial but had international dimension

Globalisation of trade – shift to worldwide systems to preserve tax bases – offshore investments

To lessen global tax exposure, taxpayers employ global tax avoidance strategies

Countries enact anti-avoidance legislation - taxpayers a step ahead - cycle

Tax policy issue: Should countries’ resources be used to tax worldwide & prevent offshore tax

avoidance; or should resources be used to effectively tax domestic income & encourage

competiveness of domestic enterprises

To remain competitive, reduce administrative costs, ensure simplicity - many developed countries (e.g. Japan &

UK) have migrated to largely territorial systems

27 of 34 OECD countries employ some form of territoriality system - ‘a pragmatic response to the practicalities in

a world where competition is fast moving and truly global.’

African countries should place emphasis on strengthening source basis


ADDRESSED IN THE OECD ACTION PLAN CONT.

Strengthen source taxation by enhancing withholding taxes (WHT)

Practical way to enhance source taxation - not addressed in OECD Action Plan

Impose WHT on interest, dividends & royalties paid to non-residents

Alleviates difficulties in collecting tax from non-residents

Resident appointed as non-resident’s agent – obliged to withhold % of tax from payments to

non-resident

Failure to comply - personal liability imposed on resident agent

MNEs find WHT a major loss of revenue - flat rate on gross income

DTAs can reduce WHT

Treaty negotiations:

Developed countries - gross tax wipes out profits – impacts on importation of capital &

technology

Developing countries have to fight for WHT in DTA negotiations

Pressure to reduce WHT rates to zero/near zero or to give up their right to tax these payments

Developing countries also contribute to the earning of this income – WHT should be used to

strengthened source taxation

BEPS CHALLENGES AFRICAN COUNTRIES FACE THAT ARE NOT ADDRESSED

IN THE OECD ACTION PLAN CONT. A practical way to deal with transfer pricing: Unitary taxation (UT) with formulary appointment (FA)

OECD recommends use of ALP to prevent TP

Conceptual & practical difficulties in applying ALP

Requires matching comparable transactions between non-arm’s length entities & arm’s length entities

MNE transactions often not comparable to those between arm’s length parties

MNEs don’t operate as if their subsidiaries were separate enterprises

Difficulties of applying OECD Transfer Pricing methods

Commentators suggest unitary taxation - treats related parties as part of a single enterprise

FA: MNE taxed on global income - each country’s tax depends on fraction of economic activity therein

Addresses economic reality of MNEs - highly integrated with operations in different regions

Fixed formula for profit attribution - administrable

OECD BEPS rejects radical switch to FA- advocates ALP approach

Objections to FA

Requires countries to agree on a fixed formula

Relies heavily on access to foreign-based information

Profits attributed to each member may differ from income in its books of account

Difficult to apply with respect to intangibles

The case for FA: overcomes the challenges of ALP

Art 7(4) 2008 version OECD MTC permitted customarily use of apportionment formulae

Some OECD TP methods (profit splits) entail apportionment of profits

APAs often use FA

Developing countries lack data bases for comparables: FA - clearer & easier to administer

Access to foreign-based information – addressed in UN Transfer Pricing Manual & BEPS Action plan 13

Varied use of FA: American Federal States; Brazil - varying approaches not good for international trade

OECD should developing guidance on FA - Convergence between ALP & FA needed

With potential strength of FA, its varied use, ALP problems - FA important in international tax



Develop Guidelines on granting tax incentives (TI) TIs considered a tool for encouraging FDI – However:

TI distort resource allocation, lead to sub-optimal investment decisions; harmful to long term growth

TI not primary determinant of investment decisions

Internationally not much guidance on granting TI

Treaty context – some guidance on tax sparing provisions between developing & developed countries

To prevent elimination or reduction of TI offered to foreign investor by his residence country – credit method

Developed countries allow residents to retain TI – tax is spared

However: tax sparing can lead to tax abuse (e.g. transfer pricing, round tripping and treaty shopping)

Inevitably results in the direct loss of revenue for the foregone tax

Developing countries have to make concessions to obtain tax sparing

1998 OECD Report on Tax Sparing - recommendations on tax sparing

Tax incentive should be defined precisely - no open-ended tax sparing

Set maximum tax rate for the tax sparing credit

Inclusion of anti-abuse clauses

Time limitations or sunset clauses

Restrictions to business income not passive income

Guidelines on TI should be developed – building on the above on tax sparing

2015: G20, IMF, OECD, UN & World Bank to work jointly on options for efficient & effective use of TI for

investment

Use of multilayered structures to indirectly dispose of valuable underlying assets of

businesses situated in Africa to tax havens Ugandan: Heritage & Gas Limited v Uganda Revenue Authority – disposal of mineral licensing rights

2004: Joint Operating Agreement between Heritage Oil & and Tullow Uganda Ltd

Licence granted by UG Gov’t to explore, develop & produce petroleum in designated areas where oil was discovered

Heritage sold to Tullow its 50% participation in the oil exploration license - Heritage resident in Mauritius

URA issued assessment of US$ 404, 925,000 on Heritage for CGT on sale of immovable property

URA: Sec 79(g) UG ITA - income from disposal of an interest in immovable property located in UG, sourced in UG

Heritage: No definition of immovable property in ITA - interest in immovable property not taxable in UG

Held: Sec 88 ITA, UG/Mauritius DTA forms part of ITA

Art 6 UG/Mauritius DTA: immovable property includes “property accessory to immovable property”

Proceeds from the disposal of immovable property were taxable in UG

Ugandan: Zain International BV v Com General of URA - disposal of telecommunications shares

2010: Zain International BV disposed of its shares in Zain Africa BV to Bharti Airtel International BV

Zain Africa BV had equity interests in Celtel UG Ltd

URA issued assessment - shares disposed were held indirectly by Zain International BV in Celtel UG Ltd

Zain International BV objected: No shares of Celtel UG Ltd were disposed of; transaction was between Zain International

BV and Bharti Airtel International BV - a Netherlands entity so income sourced in Netherlands not UG

URA: Art 13 Netherlands/UG treaty - gain arising from the disposal of an interest in immovable property located in UG

taxable in UG

High Court: UG had no jurisdiction to tax Zain International BV – URA appealed

Court of Appeal: UG has jurisdiction to tax

The taxpayer intends to apply for MAP in Netherlands .

Zain case similar to Indian Vodafone case – could occur in other African countries with similar legislation

Need for countering legislation





Transfer pricing in the extractive sector

Not a transfer pricing focus area in the BEPS Action Plan

African countries incur tax loss from:

commodities exported at under value to tax havens

goods imported at inflated prices from companies in tax havens – tax loss - excessive tax

deductible depreciation charges

Interposing entity between MNE mining company in Africa & market in low tax jurisdiction

African country receiving discounted price on end market price or contract price

Often interposed entity has little or no substance in low tax jurisdiction

Difficulties in obtaining information on substance of foreign entity

Lack of comparable data on extractive sector

Domestic statutory provisions required in African countries to address this concern

AEOI could help

ibfd 1st africa tax symposium 5 annet... · ibfd 1st africa tax symposium “a critcal analysis of...

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