Tax Base Erosion and Profit Shifting in Africa – Part 2: A Critique of Some Priority OECD Actions from an African Perspective

Summary: In Part 2 of this article, the author continues her examination of the implications of the OECD’s Action Plan on Tax Base Erosion and Profit Shifting from an African perspective. Although the OECD Project covers 15 Actions to address BEPS, the low economic development of many African countries, their limited administrative capacity and general lack of development of international tax laws limits the ability of these countries to fully implement all the OECD’s recommendations to curtail BEPS. This paper identifies three of the highest priority actions that have the greatest BEPS impact for African economies. These are: Action 4, which deals with limiting base erosion via interest deductions and other financial payments; Action 6, which deals with preventing treaty abuse; and Action 7, which deals with preventing the artificial avoidance of permanent establishment status. Referring to examples from an array of African countries, the paper discusses the special concerns that these countries face with respect to Actions 4, 6 and 7 and the limitations of the measures that they currently apply to deal with those concerns. Thereafter, the paper provides recommendations as to how African countries can effectively implement the OECD recommendations with respect to Actions 4, 6 and 7. This analysis is based on the premise that as much as African countries are encouraged to associate themselves with the OECD recommendations to curtail BEPS, their approach should be one of coming up with customised solutions to protect their tax bases. Since African countries’ tax systems are not homogenous and since their levels of economic development as well as their levels of administrative capacity to deal with the challenges associated with BEPS vary immensely, each country must evaluate its own situation to identify its particular issues and determine the most appropriate techniques to ensure a sound tax base.