IMPORTANT TAX DEVELOPMENTS OF THE POST-BEPS WORLD
Tax law is subject to frequent change. This combined with the numerous jurisdictions in Africa, has created a need for regular information in addition to specialist tax advice. Not only do our tax lawyers have knowledge based on years of experience, we also have access to resources to help us monitor tax legislation across the continent. In an effort to keep our clients informed of pertinent tax developments with an Africa-wide impact, we will be emailing Africa Tax Updates as and when they occur. For further information or assistance, please send an email to firstname.lastname@example.org.
Bilateral tax agreements, concluded by nearly every jurisdiction in the world, have served to prevent harmful double taxation and assist with cross-border trade and the movement of capital, technology and persons.
Bilateral tax agreements may, however, give rise to ‘treaty shopping’. Treaty shopping arises where a person indirectly accesses the benefits of a tax agreement between two jurisdictions without being a resident of one of those jurisdictions. It is considered undesirable for many reasons but mostly due to the income that escapes taxation.
There have been many attempts to tackle treaty shopping in the past, such as the introduction, among others, of the concept of ‘beneficial owner’ into the dividends, interest and royalties articles of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention, in 1977. However, it should not be relied on as the main provision to curb treaty shopping.
Action 6 of the OECD’s campaign against ‘base erosion and profit shifting’ (BEPS) relates to the abuse of bilateral tax agreements through the development of model treaty provisions. The 2015 Final Report on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) (Final Report) acknowledges that the adoption of anti-abuse rules in tax treaties is not sufficient on its own to address tax avoidance strategies that seek to circumvent provisions of domestic tax laws and that these must be addressed through domestic anti-abuse rules.
The Final Report acknowledges that both domestic anti-abuse rules and judicial doctrines play an important role and may address situations where transactions or arrangements are entered into for the purpose of abusing both domestic laws and tax conventions.
The Final Report acknowledges that domestic anti-abuse laws can take the form of:
- specific legislative anti-abuse rules, such as thin capitalisation rules, transfer pricing rules, exit taxes and dividend stripping provisions;
- general anti-abuse laws to address arrangements which are not adequately dealt with by judicial doctrines or specific anti-avoidance rules; and
- judicial doctrines or principles of interpretation which have been developed by domestic courts when dealing with tax avoidance arrangements. Examples of these include the doctrines of substance over form, sham, economic substance and business purpose.