02/12/22

SOUTH AFRICA: New tax avoidance laws gazetted.

As published on businesstech.co.za, Friday 2 December, 2022.

South Africa’s National Treasury has gazetted the Base Erosion Profit Shifting Multilateral Convention to Implement (BEPS MLI) to bring the country in line with international standards of cross-border transaction tracking and taxing.

The new BEPS is a multi-national treaty that aims to update existing bilateral tax treaties in an attempt to reduce the likelihood of tax avoidance opportunities and base erosion by multinational enterprises, said the fiscal authority.

The BEPS MLI will come into force in South Africa on 1 January 2023.

The overall goal of the BEPS MLI is to swiftly update the existing network of bilateral tax treaties to reduce opportunities for tax avoidance and base erosion by multinational enterprises, National Treasury said. The BEPS MLI will be applied alongside existing tax treaties.

According to the Organisation for Economic Co-operation and Development (OECD), developing countries suffer the most from multinational enterprises shifting profits across borders and exploiting mismatches in tax legislation between countries.

Developing countries, such as South Africa, rely heavily on corporate taxes as a source of revenue. When multinational companies exploit gaps in different countries’ tax systems, all parties involved suffer consequences, said the OECD.

A certain level of bank secrecy and lack of transparency has in the past caused multinational companies and high net-worth individuals to shift money around to tax havens across borders, often legally but with the intent of avoiding higher tax brackets.

The organisation noted that BEPS practices cost countries between $100 and $240 billion in lost revenue annually. South Africa is a late signatory of the BEP MLI treaty, as it was bought to the international financial table in 2016.

The National Treasury, under finance minister Enoch Godognwana, said that the BEPS MLI would be applied alongside existing tax treaties. South Africa has 76 bilateral treaties currently in force.

“These 76 tax treaties will, after all these countries have ratified the BEPS MIL, meet the tax-related BEPS measures without the need to renegotiate these existing bilateral tax treaties,” said the Treasury.

Only five tax treaties with other countries will not be covered by the BEPS MLI, namely Germany, Zambia, Malawi, Grenada and Sierra Leone – this is primarily due to renegotiating process currently being underway or overall incompatibility.

The adoption of these treaties has been in the pipeline for a while, with Cliffe Dekker Hofmeyr reporting early this year that the 2022 Budget Speech announced the plans to implement a ‘two pillar’ approach to align itself with OECD standards.

Pillar One of the plan aimed to ensure a fairer distribution of profits and taxing rights among countries with respect to large multinational enterprises opening in certain countries.

Pillar Two, according to Cliffe Dekker HOfymer, sought to encompass a global minimum tax rate of 15% on specific entities and limit the source of taxation on certain related-party payments.