The last two centuries have seen courts handing down judgments wherein the House of Lords and/or the judiciary have been required to interpret the concept of tax avoidance taking into account the specific facts of each case, as well as the interpretation of what constitutes lawful tax structuring, and what does not.
A popular dictum regarding the structuring of a taxpayer’s affairs is that which Lord Tomlin made in 1936 in the well-known case of IRC v Duke of Westminster  A.C 1; 19 TC 490 at 520, wherein he stated that:
Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.
The qualification “if he can” is a significant factor which depends on the circumstances of each case. In some instances, a taxpayer may attempt to remain outside a certain charging provision of legislation, and in others he may wish to bring himself within the ambit of a statutory provision with the aim of obtaining a tax benefit. It may also occur that although the intention of the taxpayer may be to remain outside a charging provision, he may bring himself within a charging provision of statutory legislation, which subsequently results in a tax liability.
Base erosion and profit shifting: the Action Plans
With the implementation of the Organisation for Economic Cooperation and Development (OECD’s) Base Erosion and Profit Shifting (BEPS) Action Plans, which include, among others, Country-by-Country (CbC) Reporting for multinational enterprises (MNEs), taxpayers will no longer be able, or at least not easily be able in any event, to strategically escape taxation by shifting their profits to low or no tax locations. Taxpayers are now faced with the realisation that gone are the days where they were able to arrange their affairs in a way to attract as little tax as possible, but are now faced with the harsh reality that the South African Revenue Service (SARS), as well as forums such as the OECD and the Davis Tax Committee have awakened to issues regarding tax avoidance, and are actively taking steps to address these very issues.
Following our former Minister of Finance, Pravin Gordhan’s 2016 Budget Speech, Gordhan stated that National Treasury will continue to act aggressively against transfer pricing abuse, the misuse of tax treaties and illegal money flows. Reference was further made to the BEPS Action Plans in order to address revenue losses, and a further reference was made to international agreements in respect of information sharing to enable tax authorities to act more effectively against illicit flows and abusive practices by MNEs and wealthy individuals.
In the 2017 Budget Speech, Gordhan once again reiterated the ongoing problems with specific reference to MNEs making use of inconsistencies in global tax rules to their advantage and in order to avoid tax liabilities. In this regard, Gordhan stated that South Africa intends to sign a multilateral instrument to assist with the updating of treaties and reduce the scope for aggressive tax avoidance activities, which to date, has been signed along with various countries. Gordhan further stated that the automatic exchange of information between tax authorities will come into operation in September 2017, whereas multinationals will be required to file certain information regarding their cross-border activities by the end of 2017. BEPS Action 13 specifically deals with guidance on the implementation of transfer pricing documentation and CbC Reporting by MNEs.
South Africa’s legal framework in respect of CbC Reporting
In terms of the CbC Reporting, the draft CbC regulations were published in April 2016, and finalised in December 2016 and apply to the years of assessment beginning 1 January 2016. Before the draft regulations were promulgated, South Africa signed a multilateral competent authority agreement (MCAA), which sets out the rules and procedures which may be necessary for those jurisdictions implementing BEPS Action 13 to automatically exchange CbC Reports. In June 2017, SARS further released a draft briefing note as well as the External Business Requirements Specification document (BRS) which provided further clarity in respect of the submission and content regarding the CbC Report and Financial Data Reporting requirements.
The BRS further makes provision for the filing obligation contained in the draft notice to apply retrospectively for years commencing on or after 1 January 2016, and makes reference to a “three tiered standardised approach to transfer pricing documentation”, which consist of the following:
- a Master File, which is generally completed by a parent or headquarter entity, but is available to all MNEs. A Master File should provide an overview of the MNE group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity;
- a Local File, which is compiled by all MNE entities, referring specifically to material transactions, as defined in the BRS. The Local File provides more detailed information relating to specific intercompany transactions in each country in which they operate; and
- a CbC Report which is compiled by the reporting entity of the MNE group containing certain information regarding global allocation on the MNE group’s income, taxes paid, as well as certain indicators of the location of economic activity among tax jurisdictions in which the MNE operates.
The information provided in these submissions will be used to assist tax administrators to identify whether companies have engaged in transfer pricing activities, or any other type of activities which result in profits being shifted to low or no tax locations.
Who is required to submit and by when?
In the event that the taxpayer meets the threshold with a MNE Group consolidated revenue of more than R10 billion or €750 million in the event that the parent entity is a tax resident in a EU member’s jurisdiction, and has a December reporting fiscal year-end, the taxpayer will be required to file a CbC Report with SARS on 31 December 2017. For taxpayers who do not have a December reporting fiscal year-end, the CbC Reports and returns must be filed within 12 months from the last day of the reporting fiscal year-end.
On 31 August 2017, in terms of the Tax Administration Act No 28 of 2011 (TAA), SARS published a draft list of jurisdictions which are intended to assist members of MNE Groups who are resident in South Africa in complying with their obligations under the CbC regulations. In terms of Article 2(2) of the CbC regulations, a member of a MNE Group who is resident in South Africa but is not the “Ultimate Parent Entity”, as defined in the regulations, may be required to file a CbC Report with SARS. If members of MNE Groups are tax residents in South Africa and the “Ultimate Parent Entity” of the MNE Group is the tax resident of a country which has an international agreement (as defined in the regulations) with South Africa, the South African member of the MNE Group may be required to file a CbC Report with SARS. The filing of a CbC Report is not necessary where there is a Qualifying Competent Authority Agreement between South Africa and the country where the “Ultimate Parent Entity” is a tax resident or if an alternative arrangement has been made by the MNE Group. It has been anticipated that the draft list will be updated again in October 2017 as more jurisdictions enter into Qualifying Competent Authority Agreements.
Countries such as the United Kingdom, Italy and South Korea, among others, have drafted financial penalty provisions for non-compliance with the reporting requirements, however at this time South Africa has not followed suit. Should taxpayers not file the relevant CbC Report or returns, they would be in contravention of the TAA and a penalty could be imposed, in addition to the transfer pricing adjustments made.
Information sharing between countries
Due to the fact that SARS signed the MCAA in January 2016, information which has been submitted in the CbC Report will be automatically exchanged between the other signatories to the MCAA. In addition, and in terms of s3(3) of the TAA, in the event that the Government of South Africa has entered into an international tax agreement with another country, and where SARS is obliged to exchange information or wishes to spontaneously exchange information to a competent authority of the other country concerned, SARS is permitted to do so.
The availability in respect of the sharing of information differs in respect of Master and Local Files. In respect of Master Files, the sharing of information will only be permitted on request, however in respect of Local Files, exceptional circumstances are required in order to share information contained therein.
Time is of the essence
Taxpayers who meet the threshold and who have their reporting fiscal year-end in December are required to file the relevant returns with SARS on 31 December 2017, a mere four months away. The BRS contains details in respect of the content and completion of the CbC Report, Master File and Local File and, as will be noted from the BRS, the information required to be submitted is extensive, and taxpayers who meet the filing threshold are urged to prepare timeously.