BEPS - What is it? & What is the cost on Africa?
Abacus Seychelles Limited
05 June, 2017
Nice acronym but what exactly is it all about? Base erosion profit shifting.
About half a decade ago developed countries complained that their tax bases were getting eroded.
Globalisation made the world seamless and capital migrant. Large multinationals and high net worth individuals were moving their profits from high tax jurisdictions to lower tax jurisdictions.
This in effect resulted in the tax base of developed and large developing countries getting eroded.
So they put the OECD Global Tax Transparency Forum (forum) on the task to find a solution for the latest malaise "Base erosion profit shifting."
The first thing that the forum did is to give it a catchy name "BEPS".
The next thing they did was work a solution to ensure that profits were not shifted to avoid tax. Now this proved a challenge.
Tax is a county's sovereign right. Countries need to have good robust tax regimes to incentivize investments. Domestic and foreign direct investments fuel growth which creates employment.
So what the forum did is come up with a set of "15 Minimum Standards" that countries must adhere too.
The object of these standards is to prevent double non- taxation, treaty abuse and harmful practices which promote profit shifting.
The tax rate is the sovereign right of a country. So is its decision to choose source based taxation i.e. only tax income earned from sources in the country. However, BEPS insists on certain provisions in the double tax avoidance treaties, removal of preferential schemes.
Countries first need to agree to adopt the minimum standards. The risk of not agreeing is being deemed non- complaint.
In other words "You are a sovereign nation but you also need to be a good global citizen." Not complying will result in one being shunned by the world community.
At a recent International Fiscal Association – Mauritius on May 18 and May 19, the BEPS creators / founders sat around the table with tax practitioners, tax administrators, policy makers, leading lawyers and academia from across the globe including Africa.
Much heated discussion, passionate debate many different perspectives.
Professor. Johann Hattingh of the UCT Tax Institute from South Africa made a very good point – Africa's problem is not erosion of its tax base but broadening it".
This is even more true of small island countries where bases need to be broadened. A whole Government has to be run just like a big country but supported by a tiny base.
For example: A tiny nation of 100,000 citizens has to earn enough revenue to support its Government, infrastructure, etc. To do viably this it has to expand its population and get more tax payers.
BEPS has many supporters; India and China being one of the largest out of fear that their tax base is eroding and making it lose much required income.
Different countries, different problems – does one solution fit all? How does one balance all of these? Prof Jennifer Roeleveld, of IFA South Africa put it very well when she recently read an initiative on alleviation of poverty in Switzerland. Am sure Swiss poverty would be welcome in Africa! Tax incentives and special economic zones in Africa brought growth in strategic areas and jobs.
Will BEPS really achieve the objective of ensuring the tax bases of developed and large developing countries are not eroded?
Will it help the new "frontier" and small island countries expand their bases?
Will it serve the purpose of some at the cost of others or will it be a true equalizer? Time will tell.
Many practical difficulties were pointed out. Dr Rama Sithanen, an ex-Minister of Finance in Mauritius posed a very valid question – how would a Minister of Finance make a budget? He would have to check if his budget complied with OECD initiatives like BEPS, IMF requirements, world bank requirements!
Would a Minister of Finance ever get a budget out? Some tiny nations have gone the other extreme they amend their tax code every time an international agency create a new requirement without really understanding what they are doing – the result incoherent and uncertain tax law.
Prof. Dr Jeffrey Owens, the former Director and founder of the forum also named as one of the 21 most influential persons in tax today by the International Tax Review stated that uncertainty in tax law is a stumbling block for foreign and domestic direct investment and a breaker of growth.
As we move into this exciting new era of the revolution of taxation, Dr Owens stressed on three principles of a good tax system.
1. Tax certainty – He said that tax certainty is the key to domestic and foreign investment. Tax uncertainty is an impediment to growth which results in unemployment.
2. Simplify tax administration: for this tax administrators and tax policy makers need greater discussion
3. "Tax payer rights" and "co-operative compliance
The Director of the OECD Global Tax Transparency forum went on to say that nations have been provided everything they have asked for in terms of information. Now the tax payers must not be harassed.
Porus Kaka, Senior Advocate and head of the International Fiscal Association globally informed the forum that one key standard was missing – one on tax payer rights and this need to be worked on with haste.
Many issues surrounding BEPS and the implementation is swift; It has to be done over 2017 and 2018. This includes ratifying double tax avoidance agreements to bring in certain standards, consistency and avoid double non-taxation. The Forum is advocating the signing of a multi-lateral document to do this. However, as Professor Johann Hatting pointed out in future this will give rise to many interpretation issues. The statement does not become party of the agreement but is in addition to it.
He also did raise a valid point on the feedback of African nations to OECD initiatives being ignored. Once again we ask will BEPS serve the purpose of African nations?
The global tax landscape is changing. Government of the new frontiers and small island states are left with many challenges – how do they attract FDI whilst complying with BEPS? A lot of work for small nations. What will be the benefits?
Time will tell whether these measures are successful in curbing the erosion of bases, but for now we all have to comply.
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