South Africa: Base Erosion And Profit Shifting - Treaty Shopping

Last Updated: 26 November 2014
Article by Peter Dachs

Most Read Contributor in South Africa, November 2017

The concept of base erosion and profit shifting ("BEPS") has been much discussed at various international forums including the G20 Finance Ministers and Central Bank Governors meeting in July 2013 in Moscow as well as the G20 Heads of State meeting in September 2013.

From a South African perspective, the Davis Tax Committee has been set up, inter alia, in order to address the issue of BEPS in a South African context.

An issue considered by the OECD as part of its BEPS reports is that of "treaty shopping".

According to the OECD, "treaty shopping" is an abuse or an improper use of a tax treaty, being contrary to the objectives of the treaty. "Treaty shopping" occurs where taxpayers who are not residents of contracting states seek to obtain the benefits of a tax treaty by placing a company or another type of legal entity in one of the countries to serve as a conduit for income earned in the other country, (Indonesian Director General of Taxes quoted in Indofood International Finance Ltd v JP Morgan Chase Bank N.A., London Branch [2006] EWCA Giv 158 (Court of Appeal) at para 18).

The UN Commentary on article 1 of the UN Model Convention states: "A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions." (ITC "Improper Use of Tax Treaties, Tax Avoidance and Tax Evasion" May 2013, p6)

Silke on International Tax argues that subject to the potential application of specific anti-avoidance provisions, there seems to be no warrant for claiming that the mere presence of a tax avoidance purpose (even if it is a sole purpose) turns a given factual matrix into unacceptable 'treaty shopping'. A typical would-be 'treaty shopper' then only has a single real hurdle to clear, namely to qualify in principle for benefits in terms of a particular treaty. Once this threshold has been negotiated, all that usually remains is for the relevant provisions of the treaty to be invoked, (Silke on International Tax at § 46.42).

In a South African context, treaty shopping could apply in the context of, for example, a parent company with a South African subsidiary where the parent company has advanced interest-bearing loan funding to its subsidiary. However, due to the introduction of the new interest withholding tax, the parent company now looks to route its loan funding to its South African subsidiary through a company in an intermediate jurisdiction which has a more favourable double tax agreement ("DTA") with South Africa. Such DTA would then not allow South Africa to impose its interest withholding tax on interest paid by the South African subsidiary to the company in the intermediate jurisdiction.

There are certain tax sparing clauses in various DTA's, for example, the DTA with Brazil in respect of government bonds.

Article 11(1) of the DTA between South Africa and Brazil provides that interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, Articles 11(4)(a) and (b) provide that notwithstanding the provisions of paragraphs 1 and 2:

"(a) interest arising in a Contracting State and derived and beneficially owned by the Government of the other Contracting State, a political subdivision thereof, the Central Bank or any agency (including a financial institution) wholly owned by that Government or a political subdivision thereof shall be exempt from tax in the first-mentioned State;

(b) subject to the provisions of subparagraph (a), interest from securities, bonds or debentures issued by the government of a Contracting State, a political subdivision thereof or any agency (including a financial institution) wholly owned by that government or a political subdivision thereof, shall be taxable only in that State".

Article 11(4)(b) read with Article 11(4)(a) of the DTA therefore applies, inter alia, to provide exclusive taxing rights to Brazil in respect of interest derived from bonds issued by the Brazilian government and derived and beneficially owned by South African residents other than the South African government, South African Reserve Bank or other governmental agencies set out in Article 11(4)(a) of the DTA.

In addition the DTA between South Africa and Zambia provides taxing rights to Zambia in respect of interest paid on certain debt instruments advanced by South African residents. South Africa may not tax such interest.

Principle issues with treaty shopping?

The question arises whether and to what extent South Africa should care about treaty shopping. As set out in the example above, if a parent company chooses to invest into South Africa through an intermediate jurisdiction with a more beneficial DTA, is such parent company not simply structuring its investment in a tax efficient manner, as permitted in terms of South African case law?

In the view of the writer this should be considered by the South African tax authorities at the time of entering into DTA's with other jurisdictions. For example South Africa entered into a DTA with Mauritius in the knowledge that, for example, interest payable by a South African entity to a Mauritian entity would be taxed at an effective rate of approximately 3% in Mauritius.

South Africa has also entered into DTA's with various European jurisdictions which jurisdictions have provisions effectively mitigating the quantum of tax paid in those jurisdictions. For example, an investor may set up a foreign company and invest in equity in that foreign company in the form of, for example, redeemable preference shares. The foreign company may then advance a loan to the South African entity. As a matter of the foreign jurisdiction's tax law, a deduction will be granted for the dividends payable in respect of the redeemable preference shares leaving the foreign company taxable only on its spread/margin.

In this regard there is significant competition for tax revenues on a world-wide basis. Jurisdictions are incentivised to enter into as many DTAs as possible and then also to offer tax incentives, inter alia, to attract multi-nationals into their jurisdictions.

South Africa is one of such jurisdictions. For example South Africa has recently introduced a "headquarter company" regime in terms of which foreign investors may invest through South Africa into, inter alia, Africa. As part of marketing this initiative South Africa has made mention of its many DTAs with African jurisdictions. In particular South Africa competes directly with Mauritius in respect of attracting foreign investment into Africa.

It is therefore not in South Africa's interest and would also provoke justified criticism if South Africa attacked foreign investors for investing in South Africa via an intermediate jurisdiction with a favourable DTA when South Africa is doing precisely the same in terms of its headquarter company regime. In particular, in terms of this regime South Africa is encouraging foreign investors who wish to invest in, inter alia, various African jurisdictions to invest in these jurisdictions via South Africa and thereby take advantage of South Africa's DTAs with such African states. This will have the effect of reducing the amount of tax paid by such foreign investors in the African jurisdictions and will increase the amount of tax revenue generated by the South African fisc.

This issue goes to the heart of the BEPS debate. Where profits are "shifted" from one jurisdiction to another, it is typically only the jurisdiction from which they are shifted that raises a concern. Most member states of the OECD and other jurisdictions which are taking part in the BEPS process have tax incentives which encourage profit shifting into their own jurisdictions. However they are then aggrieved when the same techniques are used to "shift profit" away from such jurisdictions and thereby erode their tax base.

Put simply, with the global economic downturn, all jurisdictions are looking to increase their tax revenues.

Turning back to South Africa, it seems that South African tax law already provides several defences against treaty shopping. Three important defences in this regard are the concepts of "beneficial ownership" and "effective management" as well as the use of South Africa's domestic anti tax-avoidance rules.

Take the above example of the parent company looking to route its loan funding to its South African subsidiary through a company in an intermediate jurisdiction with a favourable DTA with South Africa. If the company set up in the intermediate jurisdiction does not qualify as the "beneficial owner" of the interest received from the South African subsidiary then the terms of the relevant DTA will simply not be applicable. South Africa can therefore attest whether such company qualifies as the beneficial owner of the interest.

A further issue is whether the company in the intermediate jurisdiction is "effectively managed" in that jurisdiction. If it is simply a "post box company" with no substance then it is very likely that it will not be "effectively managed" in that intermediate jurisdiction and South Africa can then simply ignore the provisions of the relevant DTA and impose its interest withholding tax on the payments made to that company.

South Africa also has anti tax-avoidance provisions. In terms of these rules if the "sole or main purpose" of a taxpayer was to obtain a "tax benefit" and certain abnormal features exist in respect of such arrangement, the anti tax-avoidance rules can be applied to disregard the transaction entered into by the parties.

A "tax benefit" will apply if a party side-steps an anticipated tax liability.

In the context of the definition of a "tax benefit" in terms of section 1 of the Income Tax Act No. 58 of 1962 ('the Act'), based on case law (Hicklin v SIR 41 SATC 179and Smith v Commissioner for Inland Revenue 26 SATC 1) the liability for the payment of any tax, levy or duty that a taxpayer must seek to avoid, postpone or reduce is not an accrued or existing liability, but an anticipated liability. It was held that to avoid liability in this sense is "to get out of the way of, escape or prevent an anticipated liability".

If there is a "tax benefit", the second requirement for the application of the anti tax-avoidance provisions is that the "sole or main purpose" is to obtain such tax benefit. Therefore, provided the taxpayer does not comply with this requirement, the arrangement will not constitute an impermissible tax avoidance arrangement, i.e., the provisions of section 80A of the Act will not apply.

It is provided in section 80G that:

  • an avoidance arrangement is presumed to have been entered into or carried out for the sole or main purpose of obtaining a tax benefit unless and until that party proves that, reasonably considered in light of the relevant facts and circumstances, obtaining a tax benefit was not the sole or main purpose of the avoidance arrangement; and
  • the purpose of a step in or part of an avoidance arrangement may be different from a purpose attributable to the avoidance arrangement as a whole.

In terms of the example set out above, if the South African subsidiary repays its existing loan funding to the parent company and the parent company routes such loan funding through an intermediate jurisdiction this has the effect of the parent company side-stepping an anticipated tax liability in respect of interest withholding tax. A tax benefit will therefore arise for the parent company. In order to avoid the application of South Africa's anti tax-avoidance provisions, such parent company then bears the onus of proving that its "sole or main purpose" was not to achieve such tax benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions