South Africa: Summary Of The Davis Tax Committee’s BEPS Sub-Committee General Report Released December 2014

Last Updated: 23 February 2015
Article by Peter Dachs

Most Read Contributor in South Africa, September 2018


This note provides a summary of the Davis Tax Committee's (DTC) general report detailing the South African perspective of Base Erosion and Profit Shifting (BEPS).1 The Sub-committee's interim report released during December 2014 is titled "Addressing Base Erosion and Profit Shifting in South Africa" and provides the DTC's stance on BEPS as of the 30th of September 2014.2

The Davis Tax Committee and the Base Erosion and Profit Shifting Subcommittee

The South African Minister of Finance appointed the DTC to review South Africa's taxation system in light of economic growth, employment, development and fiscal sustainability. The DTC subsequently established a sub-committee to address concerns regarding "base erosion and profit shifting" (BEPS). The DTC BEPS Sub-committee focuses on BEPS's effects on the nation's tax base as identified by the Organisation for Economic Co-operation and Development (OECD) and G20.3 The report is up to date with the OECD's deliverables providing all 7 of the 15 deliverables in accordance with the OECD's schedule.

Throughout the report, the DTC consistently refers to South Africa's National Development Plan (NDP) and notes that while South Africa has a vested interest in combatting BEPS, South Africa should not adopt OECD measures without considering the country's need to encourage foreign direct investment (FDI) in light of the NDP. The DTC also notes the general need to preserve South Africa's international competitiveness by providing a tax environment conducive to economic growth.4

The DTC provides that protection against BEPS must occur at a policy level by "strengthening the source basis of taxation to effectively deal with inbound investments."5 It must ensure effective withholding taxes, account for the impact of treaties, consider the impact of exchange controls, and consider the Finance Ministry's intended phase-out of exchange controls. At an administrative level, the use of proper forms and withholding processes must be considered as well as the impact of treaties on the exchange of information.6

To what extent is BEPS a problem in South Africa?

Although it is difficult to quantify the occurrence of BEPS in South Africa, the DTC writes that since the country rejoined the global economy in 1994, there is increased global interest in South Africa. Naturally, South Africans are more actively participating in offshore investments and minimizing global tax exposure.7

The National Development Plan (NDP) is South Africa's fiscal and economic strategy and supports a competitive tax policy that fosters economic growth, an increase in tax revenues, and an increase in the tax base. Given the many times the NDP is referenced throughout the report, the NDP framework will clearly guide the DTC's practical response to BEPS.

The Sub-committee looked to the South African Revenue Service (SARS) statistics indicating that corporate revenues were fairly stable until 2008 and took a predictable down turn after the 2008 financial crisis. However, despite increased economic activity in certain sectors, the corporate tax contribution to the GDP declined between 2008 and 2013.8 The DTC writes that is does not believe that the declining trend in the ratio of corporate income tax to GDP is necessarily from the existence or non-existence of BEPS practices.

Second, the Sub-committee reviewed the National Treasury's 2013 Budget, which concluded in line with the SARS' statistics above. The National Treasury's report showed that corporate tax revenue in South Africa declined from 7.2% of GDP in 2008/9 to 5.5% in 2009/10 and to 4.9% in 2010/11. In 2011/12, the ratio slightly recovered to 5.1% but then decreased again to 4.9% in 2012/2013.9

Third, the Sub-committee referenced the South Africa Reserve Bank (SARB), which records payments directed offshore. The DTC references SARB data that measures non-goods payments from 2008 to 2011 inclusive. Non-goods payments include copyright, royalty and patent fees; legal, accounting and management consulting fees; advertising and market research; research and development; architectural, engineering and technical services; and agricultural, mining and other processing services. Approximately 50% of all payments flowing out of South Africa relate to legal, accounting and management consulting services.10

Interestingly, just after the 2008 financial crisis, overall outflows increased by nearly 25%.11 Although the South African economy did not feel the full effect of the financial crisis, the DTC finds it peculiar that legal, accounting and management consulting services increased by nearly R6.5bn (an increase of 32.6%). Engineering and technical services increased by R3.7bn (an increase of 39.5%).12

Besides citing the above studies, the DTC does not provide a quantifiable or definitive indication of the prevalence of BEPS in South Africa.

State-owned multinational corporations

Lastly, the Sub-committee looked to state-owned or controlled enterprises, which the DTC identified as significant "players in cross border trade as well as posing potential transfer pricing risk."13 The DTC showed great interest in state enterprises because state-owned enterprises appear to consume a notable portion of South African non-goods services.

In 2011, the United Nations Conference on Trade and Development (UNCTAD) reported that there are at least 650 state-owned multinationals globally, constituting an important emerging source of foreign direct investment (FDI). Further, the DTC notes that there are more than 8,500 state enterprise foreign affiliates globally, bringing foreign affiliates in contact with several host economies.

The DTC also notes that although state-owned multinationals comprise of less than 1% of all multinationals, their FDI totals about 11% of total FDI globally.14 Consequently, the DTC BEPS Sub-committee considers state-owned multinationals a significant force in non-goods transactional flows. It surmises that state-owned enterprises consume non-goods in a unique way relative to general consumption trends. The DTC cites that state-owned multinationals spend nearly 50% of total payments on legal, accounting and management consulting services. The second largest type of state-operated enterprise purchases is copyright, royalty, and patent fees and architectural, engineering, and technical services. Lastly, the DTC notes that State-owned enterprises are the largest consumers of engineering and technical services at 44% of the total data set.15

The DTC Sub-committee also assessed the top non-goods payments in taxpayer sectors; unsurprisingly, the prevalence of payments come from the manufacturing and mining sectors. The DTC views the magnitude of non-goods transactions as a serious threat to the fiscus. Itis an indication that illicit tax base migration through avoidance schemes and practices could be taking place.16 "[C]onstant reviews in respect of assurance interventions and tracking should become the norm."17 The DTC also notes that, "in respect to consuming services from abroad, a permanent establishment (PE) risk exists for the offshore service providers."18

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1. See also the Annexure titled, "The Summary of Recommendation for South Africa: OECD September 2014 Deliverables."

2. "Addressing Base Erosion and Profit Shifting in South Africa: Davis Tax Committee Interim Report"

3. This summary does not address the OECD's 15 point action plan in detail. For more information on the BEPS Action Plan, see OECD "Action Plan on Base Erosion and Profit Shifting" ( (accessed 13-01-2015)

4. Davis Tax Subcommittee Report on BEPS (page 25).

5. Addressing Base Erosion and Profit Shifting in South Africa: Davis Tax Committee Interim Report. Page 38.

6. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 28 (23-12-2014)

7. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 19 (23-12-2014)

8. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Table 1 Page 20. (23-12-2014)

9. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 20 (23-12-2014) citing the National Treasury Budget (2014).

10. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Table 2 Page 21. (23-12-2014)

11. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Table 1 Page 21 28. (23-12-2014)

12. The DTC is cognizant of the positive economic effects of the 2010 World Cup but writes that it is unlikely that the quantum of these monetary flows are explained by a single event. See The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 21. (23-12-2014)

13. Transfer pricing documentation, reporting and intangibles are acknowledged in the Report's Annexure. See Actions 8 and 13. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 22. (23-12-2014)

14. Roughly 11% during the year 2010. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 22. (23-12-2014)

15. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 23. (23-12-2014)

16. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 24. (23-12-2014)

17. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 24. (23-12-2014)

18. The Davis Tax Committee "Interim Report: Addressing Base Erosion and Profit Shifting in South Africa." Page 24. (23-12-2014)

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.

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