BUDGET 2021: About BEPS and transfer pricing

Minister of Finance, Tito Mboweni, delivered the 2021 Budget Speech in Parliament on 24 February 2021 and the immediate feedback echoed by various representatives from the opposition parties was that the budget contains too little action. However, as it was expected that South Africa would face the biggest budget deficit recorded in history, the talk of a tax revolt and broad resentment against the cutting of the public wage bill combined with the significant financial impact of the pandemic, the Minister was clearly in a position where treading very carefully is the only sensible thing. Thus, it could be argued that little action is the appropriate thing to do. Besides, minor relief for individual taxpayers in terms of a move of the tax brackets has seemingly provided for some positive flavor. Additionally, the announcement of a reduction of the corporate tax rate to 27% next year should take pressure off and hopefully aid in attracting business going forward.

However, an area in respect of which the Minister did indicate some action is BEPS and transfer pricing. In 2016, the Organisation of Economic Cooperation and Development (OECD) finalised the first BEPS initiative, which targeted the abuse of existing international tax rules by creating rules that would not be detrimental to international trade. The BEPS initiative resulted in 15 action points. The G20 Group of Finance Ministers, which had tasked the OECD with this project, adopted the 15 BEPS Actions Plan. South Africa, one of the G20 Group members, has implemented or is in the process of implementing these actions.

One of the BEPS Actions, Action 4, deals with rules to limit excessive interest deductions. While South Africa has had interest limitation rules, for example, in terms of section 23m of the Income Tax Act, No. 58 of 1962, as amended, the South African rules deviated from the recommendations in Action 4. At the time of last year’s Budget presentation, however, National Treasury published a discussion document, announcing the review of the tax treatment of excessive debt finance, interest deductions and other financial payments. The document discusses a move towards interest limitation rules aligned to BEPS Action 4 as well as a simplification of the existing rules, including an alignment with the existing transfer pricing rules. Following broad public consultation processes, now the Minister announced that with the lowering of the corporate income tax rate, the new set of interest limitation rules will be introduced. Thus, the new simplified and enhanced interest limitation rules will, together with the transfer pricing rules, aim at curbing BEPS in South Africa. If both rules are implemented as envisaged, this will have a significant impact on existing intra group finance arrangements as well as future structures.

A further BEPS and transfer pricing related announcement by the Minister relate to the taxation of the digital economy, for example, digital services providing companies, which sell services to users in South Africa. While BEPS Action 1 of the 15 BEPS Actions Plan already addresses digital services, it focuses on the indirect tax treatment of such services. South Africa was one of the first countries, and the first in Africa, to introduce VAT legislation addressing the provision of digital services. However, Action 1 does not cover corporate income tax. The first BEPS initiative was soon followed by a second one, “BEPS 2.0”. The purpose of this is to develop rules that ensure that digital services providers are taxed, at the appropriate level, in the right jurisdictions. The proposed rules encompass two proposed target areas, also referred to as “Pillars”:

• tax allocation rules in a changed economy; and
• (four) new rules granting jurisdictions additional taxing rights where other jurisdictions have not exercised their primary taxing rights or income is subject to low rates of tax.

While this second BEPS initiative was expected to be finalised by the end of 2020, the pandemic has certainly contributed to the delay experienced. However, significant disagreements between different role players and the inability to find some reasonable consensus has pushed out the finalisation of the initiative. Although South Africa is one of only two African countries participating in the group and would be expected to aim for a consensus, the Minister, in his Budget Speech, made it clear that should a consensus not be reached soon, South Africa would implement unilateral rules. A unilateral approach may not be in the best interest of flourishing international trade relationships.�

The two BEPS and transfer pricing related actions addressed in the Minister’s Budget Speech tie in with SARS’ consistent talk about SARS’ focus on countering transfer pricing and the recent increase in transfer pricing reviews and audits in South Africa. SARS’ focus on transfer pricing should be noted and taxpayers should expect further significant activity in this regard.

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Mr Kulani Chauke
Project Manager: Corporate Communications
SAICA Brand Division
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***@saica.co.za