Tax coherence : the alignment of South African legislation with the OECD BEPS action plan

Abstract: In recent years, there have been reports in the global media on how Multinational enterprises structure their tax affairs to pay minimum or avoid paying taxes altogether. Such reports included among others the Starbucks case in 2012 where it reported no profit and paid no income taxes for three financial years in the United Kingdom despite making a turnover of about 1.2 billion pounds. Also, McDonalds has to pay as little as 80 million pounds on a turnover of 3.6 million while Ebay, was noted for not paying taxes in a particular financial year in the United Kingdom. This act of reducing the tax base and shifting profit from higher tax jurisdiction like the UK to lower tax jurisdiction is referred to as Base Erosion and Profiting shifting (BEPS). The OECD and the G20 to address BEPS, introduced a 15 - point Action plan in three pillars. The three pillars are Tax Coherence, Substance and Transparency and Certainty. This study concentrated on the coherence pillar of the Action point plans. Tax coherence is basically bridging the gaps and mismatches in the tax legislations in jurisdictions involved in transactions so as to prevent BEPS. The OECD has identified areas such as hybrid instruments, control foreign company rules, excessive interest deduction and harmful tax practice as the main causes of incoherence or inconsistency in tax treatments when transacting business across jurisdictions. In South Africa, to ensure adherence to international and avoid BEPS, the government tasked the Davis tax Committee to examine the Action plans of the OECD and advise the government on ways of implementing the action plans in South Africa. The purpose of this study was to investigate if the current South African tax legislation and the proposed recommendations by the OECD on BEPS Action Plans on Tax Coherence can assist in addressing BEPS in a South African context to a satisfactory extent. The study is conducted in the form of extended literature review which critically examines Tax Coherence under the BEPS Action Plans and investigates how the South African legislation has been designed to combat BEPS. The Action point plans discussed in the research were Action plan 2 – Hybrid Mismatch Arrangement, Action Plan 3 – Controlled Foreign Companies rules, Action Plan 4 – Interest deduction and Action plan 5 – Harmful tax Practices. The general consensus from the study was that, the current South African tax legislation is...M.Com