Action 7 of the BEPS action plan and the permanent establishment status of non-resident online retailers in South Africa

Abstract

Action 7 of the BEPS action plan identified a multinational tax planning strategy that typically avoids corporate tax in the consumer country by preventing the creation of a Permanent Establishment (PE) therein. This is especially relevant in South Africa’s online retail industry on the basis that the taxability of non-resident online retailers depends on the existence of a South African PE, as defined. In response to the use of tax planning structures that avoid the creation of a PE, Action 7 proposed certain amendments to the PE definition. This article investigated to what extent, if any, the proposed solutions in Action 7 could impact the definition of a PE and, consequently, the taxability of non-resident online retailers in South Africa. A literature review of publications on Action 7 was undertaken and applied to a South African case study to meet the stated objective. It was established that the applicability and impact of the amendments are case specific and depend, inter alia, on South Africa’s position on the OECD’s multilateral instrument. Should the amendments apply, the South African warehouse of a non-resident online retailer may, depending on the facts, create a PE and resulting tax liability for an enterprise that previously avoided corporate tax in South Africa.

Keywords:

• Permanent establishment
• online retailer
• Base Erosion and Profit Shifting
• BEPS
• Action 7

Notes

1 The data is based on inputs obtained from the OECD’S MLI Matching Database on 5 June 2018 (available at: http://www.oecd.org/tax/treaties/mli-matching-database.htm). In alphabetical order, the DTAs that match to South Africa’s position on article 13 are Austria, Cameroon, Croatia, Egypt, India, Indonesia, Israel, Italy, Japan, Kuwait, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, Norway, Romania, Russia, Slovakia, Spain, Tunisia and Turkey.