On 24 February 2016, the Minister of Finance announced in the Budget Speech that South Africa was working with other countries to combat base erosion and profit shifting (“BEPS”). Accordingly, large multinationals with head offices in South Africa will be required to submit Country-by-Country (“CbC”) reports to the South African Revenue Service (“SARS”) as recommended by the Organisation for Economic Co-operation and Development (“OECD”) in its BEPS “Action Plan 13: Re-examine Transfer Pricing Documentation”.
The CbC report will include the global allocation of income and taxes paid, indicators of the location of economic activity within the group, as well as information about which entities in the group do business in a particular jurisdiction and the business activities each entity engages in.
The CbC reports will be exchanged between SARS and tax authorities in 31 different jurisdictions following the signing of a Multilateral Competent Authority Agreement for the automatic exchange of CbC reports by the South African Government on 27 January 2016.
The legislation to give effect to the announcement and the explanatory memorandum to describe how SARS will apply the law and implement CbC in South Africa has not been made available as yet, but is expected to be included in the Taxation Laws Amendment Bill to be published later this year. When drafting legislation, South Africa has in the past, made reference to the legislation of a number of countries, most notably Australia and the United Kingdom.
Accordingly, it is possible that in drafting the CbC legislation, SARS and National Treasury will make reference to the Australian legislation to implement CbC reporting which was enacted in December 2015. The Australian Tax Authority (“ATO”) also developed a Law Companion Guideline (LCG 2015/3) that describes how it will implement the CbC reporting requirements in Australia. Interestingly, in terms of the ATO guidelines:
- CbC reporting applies to years starting on or after 1 January 2016
- the threshold for a reporting entity in Australia is an “annual global income” of A$1-billion, as this threshold is considered to represent a near equivalent amount in Australian currency to the OECD recommended threshold €750-million. In South Africa, the Davis Committee recommended a threshold of R1-billion
- the “annual global income” of a global parent entity for a period is the group's total annual income as shown in its latest global financial statements for the period whether that income is disclosed as a single line or in multiple lines in those financial statements. For example, income from a joint venture should be included in the group's annual global income by whichever method is used to report that income
- the ATO will not require information that goes beyond what the OECD guidance recommends. In South Africa, the Davis Committee recommended that that the CbC report should contain additional transactional data regarding related party interest payments, royalty payments and related party service fees
- the ATO will have the discretion to exempt an entity from CbC reporting by written notice, or by legislation exempt a specified class of entities from CbC reporting
- where accounts are recorded in a foreign currency, the currency conversion rules should be applied in compliance with the Australian legislation and not as per the recommendation of the OECD to translate amounts at the average exchange rate for the year
Given the announcement in the Budget Speech and likely publication of the CbC legislation in Taxation Laws Amendment Bill to be released later this year, large multinationals with head offices in South Africa are encouraged to start developing policies and procedures in preparation for implementation of the CbC reporting.