THE Davis Tax Committee has recommended raft of changes to tax laws in a bid to limit the erosion of South Africa’s tax base through profit shifting.
Profit shifting from high to low tax jurisdictions is used by multinational companies such as Google, Amazon, Starbucks and countless others to lessen their tax liabilities and is a cause for concern globally as it undermines the tax base. It has also become a battle-cry of the Economic Freedom Fighters who accuse the South African Revenue Service of not doing enough to stem the outflow of sorely needed funds from the country.
The committee on Tuesday released its first interim report on Base Erosion and Profit Shifting (BEPS), which was submitted to Finance Minister Nhanhla Nene in June, and has asked for public comment on its findings by March 2015. Mr Nene authorised the release of the report, which is aligned with the action plan developed by the Organisation for Economic Cooperation and Development and discussed at several meetings of the G20.
The lengthy report deals with how to tax the digital economy, hybrid mismatches, harmful tax practices, transfer pricing, treaty abuse and multinational conventions. It proposes amendments be made to tax laws to deal with gaps in SA’s tax regime, based largely on the OECD’s 15-point action plan.
It notes that BEPS undermines competition as multinational enterprises have competitive advantages over enterprises that operate at domestic level (especially small and medium-sized enterprises); could lead to an inefficient allocation of resources by distorting investment decisions towards activities that have lower pre-tax rates of return, but higher after-tax rates of return; undermines the integrity of the tax system and discourages tax morality; and results in a loss of tax revenue which leads to critical under-funding of public investment that could help promote economic growth.
The report also notes that domestic tax regimes have not kept pace with today’s environment of global taxpayers, characterised by the increasing importance of intellectual property as a value-driver and by constant developments in the digital economy.
"Although there are cases of illegal abuses (which are the exception rather than the rule), multinational enterprises engaged in BEPS comply with the legal requirements of the countries involved, in that they use legal methods to circumvent the application of a country’s tax law," the report says.
"As businesses increasingly integrate across borders, the tax rules often remain uncoordinated; so businesses come up with structures which are technically legal but which take advantage of asymmetries in domestic and international tax rules. Governments recognise this and also recognise that a change in this legal framework can only be achieved through international co-operation."
Picture: THINKSTOCK
THE Davis Tax Committee has recommended raft of changes to tax laws in a bid to limit the erosion of South Africa’s tax base through profit shifting.
Profit shifting from high to low tax jurisdictions is used by multinational companies such as Google, Amazon, Starbucks and countless others to lessen their tax liabilities and is a cause for concern globally as it undermines the tax base. It has also become a battle-cry of the Economic Freedom Fighters who accuse the South African Revenue Service of not doing enough to stem the outflow of sorely needed funds from the country.
The committee on Tuesday released its first interim report on Base Erosion and Profit Shifting (BEPS), which was submitted to Finance Minister Nhanhla Nene in June, and has asked for public comment on its findings by March 2015. Mr Nene authorised the release of the report, which is aligned with the action plan developed by the Organisation for Economic Cooperation and Development and discussed at several meetings of the G20.
The lengthy report deals with how to tax the digital economy, hybrid mismatches, harmful tax practices, transfer pricing, treaty abuse and multinational conventions. It proposes amendments be made to tax laws to deal with gaps in SA’s tax regime, based largely on the OECD’s 15-point action plan.
It notes that BEPS undermines competition as multinational enterprises have competitive advantages over enterprises that operate at domestic level (especially small and medium-sized enterprises); could lead to an inefficient allocation of resources by distorting investment decisions towards activities that have lower pre-tax rates of return, but higher after-tax rates of return; undermines the integrity of the tax system and discourages tax morality; and results in a loss of tax revenue which leads to critical under-funding of public investment that could help promote economic growth.
The report also notes that domestic tax regimes have not kept pace with today’s environment of global taxpayers, characterised by the increasing importance of intellectual property as a value-driver and by constant developments in the digital economy.
"Although there are cases of illegal abuses (which are the exception rather than the rule), multinational enterprises engaged in BEPS comply with the legal requirements of the countries involved, in that they use legal methods to circumvent the application of a country’s tax law," the report says.
"As businesses increasingly integrate across borders, the tax rules often remain uncoordinated; so businesses come up with structures which are technically legal but which take advantage of asymmetries in domestic and international tax rules. Governments recognise this and also recognise that a change in this legal framework can only be achieved through international co-operation."
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