The OECD (Organisation for Economic Co-operation and Development), in a recent report entitled Addressing Base Erosion and Profit Shifting, described base erosion as a growing problem which presents a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike. South Africa, influenced by international tax developments, has proposed new measures that seek to address perceived base erosion problems, whilst at the same time trying to position itself as a ‘Gateway to Africa’.
From a tax policy perspective, base erosion becomes a concern for national tax authorities when gaps in the interaction of different tax systems, or the application of bilateral tax treaties, allow for income from cross-border activities to result in either non-taxation or unduly low taxation. The term ‘base erosion’ includes tax evasion, tax avoidance, tax underestimation and population flight.
All of these phenomena have the effect of eroding an administration’s tax base, thereby limiting the revenue that the administration can allocate towards its planned objectives. Of late, governments have become particularly concerned about corporations and multinationals being able to use tax havens and exploit loopholes or gaps in tax systems to avoid taxes or pay taxes at low effective rates – or, in some cases, pay no tax at all. In response to this perceived problem the OECD recently released and G20 finance ministers have endorsed an Action Plan on Base Erosion and Profit Shifting, an internationally coordinated attempt to address tax avoidance in a globalised economy. The Action Plan identifies 15 specific actions for governments to develop (in an ambitious two-year time frame) instruments “to prevent corporations from paying little or no taxes”.