Tax Treaties: Double Taxation and Recent Developments
By Willem Oberholzer, Director, KISCH Tax Advisory
Tax planning at a global level often draws scrutiny from certain jurisdictions, as it can be seen as undermining a local tax authority. However, the careful management of a multinational's tax value chain remains legal as long as it adheres to the relevant legal statutes of the countries in which the multinationals have operating entities. Bilateral tax treaties, which have long existed to prevent the negative effects of double taxation - where two or more jurisdictions tax the same income, asset, or transaction - are essential for promoting cross-border trade and investment. There are currently over 3,000 such treaties worldwide, aimed at removing these barriers.
However, these tax treaties have also given rise to the phenomenon of 'treaty shopping'. Treaty shopping occurs when entities not originally intended to benefit from a specific treaty find ways to exploit its provisions, often through complex structures or arrangements. This practice can reduce the overall tax liability of multinationals, but it may also compromise the tax sovereignty of other countries.
Treaty abuse is a key issue addressed by the Organisation for Economic Co-operation and Development (OECD) under its Base Erosion and Profit Shifting (BEPS) initiative. BEPS refers to tax planning strategies used by multinationals to exploit gaps and mismatches in tax rules, allowing them to artificially shift profits to low or no-tax jurisdictions. While such strategies may technically comply with the law, they raise concerns about fairness and equity in the global tax system.
The OECD's BEPS framework, supported by over 145 countries, including South Africa, seeks to mitigate these concerns. It includes 15 actions designed to curb tax avoidance, harmonize international tax rules, and foster a more transparent tax environment. These actions aim to ensure that profits are taxed where economic activity and value creation occur. Additionally, the framework addresses the tax challenges posed by the digital economy and provides businesses with greater certainty through standardized compliance.
Under BEPS Action 6, member countries commit to including specific provisions in their tax treaties to prevent treaty abuse. These provisions offer flexibility to accommodate the unique circumstances of each jurisdiction. The minimum standard for these treaties includes two key components: an explicit statement against non-taxation (typically found in the preamble) and one of three methods for addressing treaty shopping.
To expedite the implementation of BEPS measures, the OECD has introduced a Multilateral Instrument (MLI), which allows for the modification of existing bilateral tax treaties. For those treaties governed by the MLI, tax authorities are now equipped with more robust tools to combat treaty shopping and enforce more consistent global tax practices.
While these measures aim to address the most pressing concerns surrounding international tax planning, they also reflect the ongoing tension between optimising tax structures and adhering to the evolving expectations of fairness in global taxation.
If you have any queries on the above or require any tax advice, please contact:
Willem Oberholzer
Director
KISCH Tax Advisory
+ 27 83 326 0500?
Willemo@kisch-ip.com
