General Anti-Avoidance Rules and Tax Treaties: A South African Perspective
| Author | Rudd, R. |
| DOI | https://doi.org/10.47348/SAMLJ/v33/i3a3 |
| Published date | 16 May 2022 |
| Date | 16 May 2022 |
| Citation | (2021) 33 SA Merc LJ 384 |
| Pages | 384-418 |
GENERAL ANTI-AVOIDANCE RULES AND
TAX TREATIES: A SOUTH AFRICAN
PERSPECTIVE
REINHARD RUDD*
Senior Lecturer, School of Accountancy, University of the Witwatersrand
Abstract
The domestic laws of many countries contain statutory general
anti-avoidance rules, or ‘GAAR’. As tax avoidance schemes have
proliferated, especially in a cross-border context, the relative
importance of a country’s GAAR has increased. A question that arises
is whether a country’s GAAR can be invoked to deny the benefits
granted by a tax treaty. The question is complicated by the fact that, as
international agreements, tax treaties are subject to public
international law, while at the same time forming part of the domestic
laws of the states party to the treaty. While the Organisation for
Economic Co-operation and Development has attempted to provide
clarity in this regard, the answer remains dependent on the manner in
which tax treaties interact with the domestic laws of the specific
jurisdictions in question. In terms of South African law, the provisions
of a tax treaty rank equally with those of domestic law. As a result, any
conflict must be resolved by the application of the principles of
statutory interpretation and superseding of legislation. Despite this
fact, the South African courts tend to favour an approach whereby the
provisions of domestic law and those of a treaty are reconciled, rather
than having one prevail over the other. The author argues that the
GAAR may be applied in a treaty context, provided that the purpose of
a treaty and the GAAR can be reconciled. Ultimately, the author is
of the view that certainty in this regard can only be achieved through
some form of legislative intervention.
Keywords: general anti-avoidance rules; tax treaty; tax avoidance
*B Com Hons (UJ) M Com (Wits).
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IINTRODUCTION
International tax matters have become a priority for governments
around the world as national economies become increasingly integrated
and cross-border trade continues to grow.
1
As governments attempt to
deal with fragile economies and fiscal deficits, cross-border tax avoid-
ance becomes highly problematic as it deprives the fiscus of much-
needed revenue.
2
Faced with heavy tax burdens in their countries of
residence, taxpayers are ever more inclined to exploit the variations in
the tax systems of different countries in order to pay less tax.
3
To a large degree, the current international tax framework has not
kept pace with developments in the modern economy, including the
impact of globalisation and, more recently, the emergence of the digital
economy.
4
The gaps left by these developments have created opportuni-
ties for Base Erosion and Profit Shifting (‘BEPS’), in terms of which
taxpayers artificially shift profits to low or no tax jurisdictions.
5
BEPS is
estimated to collectively cost countries between US$100 billion and
US$240 billion in tax revenue every year, the greatest impact of which is
felt by developing countries.
6
One of the main concerns identified regarding BEPS is treaty abuse,
7
and, in particular, treaty shopping, in terms of which treaty benefits are
granted to taxpayers in inappropriate circumstances.
8
As different tax
1
OECD, ‘Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project’
(2015) 4, available at https://www.oecd.org/ctp/beps-explanatory-statement-2015.pdf,
accessed on 17 June 2021.
2
Elliffe, ‘International tax avoidance – The tension between protecting the tax base and
certainty of law’ (2011) 7 Journal of Business Law 1.
3
Oguttu, International Tax Law: Offshore Tax Avoidance in South Africa (Juta 2015) 8.
4
G20, ‘Tax Annex to the St. Petersburg G20 Leadership Declaration’ (2013) available at
https://www.mofa.go.jp/files/000013928.pdf, accessed on 25 August 2020.
5
Base Erosion and Profit Shifting (BEPS) is defined by the OECD as ‘tax planning
strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to
avoid paying tax’. OECD, ‘What is BEPS?’ available at https://www.oecd.org/tax/beps/about/,
accessed on 25 August 2020. See also G20, ‘Tax Annex to the St. Petersburg G20 Leadership
Declaration’ (2013) available at https://www.mofa.go.jp/files/000013928.pdf, accessed on
25 August 2020.
6
OECD, ‘What is BEPS?’ available at https://www.oecd.org/tax/beps/about/, accessed on
25 August 2020.
7
On the term ‘treaty abuse’ see Rosenbloom, ‘Tax treaty abuse: Policies and issues’ (1983)
15 Law and Policy in International Business 766 who states that ‘[t]reaty ‘‘abuse’’, for example,
is a heavily loaded term. Not only is it derogatory; it implies that the proper use of tax treaties
can be identified. Yet differences over precisely that point lie at the heart of the current
discussion. Because the term suggests that what is being discussed is a point of common
understanding and agreement, when plainly it is not, the usefulness of the term is
questionable.’
8
Treaty shopping refers to ‘strategies through which a person who is not a resident of a
State attempts to obtain benefits that a tax treaty concluded by that State grants to residents of
that State, for example by establishing a letterbox company in that State’. OECD, Preventing
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GENERAL ANTI-AVOIDANCE RULES AND TAX TREATIES 385
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treaties
9
offer various levels of tax relief, taxpayers can be incentivised to
gain access to treaties that provide the greatest tax benefit.
10
The principal purpose of a country’s tax treaty network is to attract
foreign investment by eliminating double taxation and by providing
certainty regarding the tax treatment of various types of income.
11
When
taxpayers utilise these treaties for tax avoidance purposes, it can result in
loss of revenue for a state party to the treaty.
12
Furthermore, the purpose
of a treaty is undermined when benefits are accessed by persons in third
party countries for whose benefit they were not intended.
13
In order to combat tax avoidance and to prevent the erosion of their
tax base, many countries have developed anti-avoidance measures, often
specifically aimed at cross-border transactions. These measures may
take the form of common-law doctrines, specific anti-avoidance provi-
sions, or general anti-avoidance rules, often referred to as ‘GAAR’.
14
As a
result of the proliferation of increasingly complex tax structures aimed
at circumventing specific anti-avoidance measures, the relative impor-
tance of a country’s GAAR has increased.
15
In this regard, the GAAR
aims to act as a counter-measure in respect of tax avoidance arrange-
ments not covered by more specific anti-avoidance provisions.
16
Aquestion that arises is whether a country’s GAAR can be applied to
deny treaty benefits in instances of treaty abuse. Since tax treaties are
international agreements, they give rise to an international law obliga-
tion and are subject to public international law.
17
At the same time,
tax treaties form part of the domestic laws of the states party to the
the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report,
OECD/G20 Base Erosion and Profit Shifting Project (2015) 9.
9
In this article, the terms ‘tax treaty’, ‘treaty’, ‘convention’ and ‘double tax agreement’ are
used interchangeably.
10
Oguttu, (Juta 2015) 550.
11
Elliffe, (2011) 7 Journal of Business Law 1. See also OECD, ‘Model Tax Convention on
Income and Capital’ (2017) I-1, available at https://www.oecd.org/tax/model-tax-
convention-on-income-and-on-capital-full-version-9a5b369e-en.htm, accessed on 17 June
2021.
12
Oguttu, ‘Curbing ‘‘treaty shopping’’: The ‘‘beneficial ownership’’ provision analysed
from a South African perspective’ (2007) 40(2) Comparative and International Law Journal of
Southern Africa 238.
13
Oguttu, (Juta 2015) 551.
14
Oguttu, (Juta 2015) 104.
15
SARS, ‘Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act, 1962
(Act No. 58 of 1962)’ available at https://www.sars.gov.za/Legal/Preparation-of-Legislation/
Pages/Discussion-Papers.aspx, accessed on 7 October 2020.
16
Olivier & Honiball, International Tax: A South African Perspective 5 ed (Siber Ink 2011)
527.
17
Lang, Introduction to the Law of Double Taxation Conventions 2 ed (Linde Verlag 2013)
32.
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