Section 9D(1) defines a FBE as a fixed place of business which is conducted through one or more physical structures (e.g. office), which is suitably staffed and equipped and has suitable facilities— all to such a degree that it allows the CFC to conduct the primary operations of its business.

The supreme court of appeal (“SCA”) recently considered the definition of FBE in Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd [2023] 2 All SA 44 (SCA). The somewhat controversial judgement caused significant uncertainty and concern amongst South African multinational enterprises which operate via subsidiaries in foreign countries.

The case dealt with the question of whether the operations of an Irish subsidiary (“the CFC”) of the respondent constitutes a FBE as defined. In applying this definition, the SCA was required to identify the primary business operations of the CFC. The CFC held a licence issued by the Central Bank of Ireland authorising it to conduct collective investment management (including investment management, administration and marketing). The CFC opted to outsource the management of collective investment schemes to service providers outside of Ireland and therefore had no staff in Ireland to perform the outsourced functions. The respondent argued that the primary business operations of the CFC were that of fund manager (as distinct from investment manager) and maintaining its business licence in Ireland.

The SCA noted that the CFC’s Memorandum of Association and its business licence entitled it to conduct the wider business of fund management and investment management and the fact that it decided to outsource its investment management functions implied that it did not conduct its primary business via the office in Ireland. The SCA rejected the notion that the primary business is determined with reference to how the CFC chooses to operate. The SCA acknowledged that there are many functions which a company may choose to legitimately outsource, but it cannot outsource its primary business. The court found that the FBE exemption did not apply to the income of the CFC.

While the Tax Court and the SCA reached different factual conclusions, the judgments both shine a sharp light on the requirement for a FBE not only to involve having substance abroad but also that the relevant CFC’s primary operations need to be exercised through that infrastructure, especially where the CFC outsources to a third party that is not based in the same jurisdiction.

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 WTS Renmere, South Africa

However, the instruction specifying the suitable transfer pricing method in Senegal is under process (Cf. Senegal – Transfer pricing country sheet, February 2022). Meanwhile, doctrinal opinion No. 4907/MEFP/CAB/CT/JK of July 17th, 2019 by the General Directorate of Taxes and Domains (DGID) and published in October 2022, suggests that Senegalese tax authorities prefer a method based on local comparable for determining transfer prices.

This opinion emerged post a general accounting audit for the 2013 fiscal year concerning crude groundnut oil sales prices charged with a related entity.

The taxpayer opposed the tax authorities’ accusations of non-adherence to the arm’s length principle, as the price was based on “quoted” prices in Cost-Assurance-Freight (CIF) Rotterdam values using the “MUNDI” index, instead of the “Free On Board (FOB)” value used by auditors.

Responding to the appeal, tax authorities noted the OECD’s 2015 recommendation of “quoted” price for commodities like crude groundnut oil, but believed such comparable are only viable in absence of a relevant local comparable, which they considered better reflects company profitability. In the said opinion, tax auditors’ preference for relevant local comparable over the quoted price in detecting indirect profit transfer was deemed correct.

From this, two conclusions arise:

• Transfer pricing is an international and a local issue. Tax authorities remain sovereign in applying OECD principles as long as they have not been incorporated into domestic law.
• Though the arm’s length principle is recognized in Senegalese law, application conditions aren’t yet clear in Senegal’s tax system, posing tax security issues for multinationals here. Open, pragmatic, and educative interactions with Senegalese tax authorities are crucial to evade tax reassessments.

A primary defense against tax reassessment risk is establishing thorough transfer pricing documentation to justify the group’s pricing policy. Beyond documentation, forging advance pricing agreements with tax authorities is essential to mitigate the mentioned tax risk.

In our view, the first line of defense against the risk of tax reassessment of the company’s pricing policy is to put in place relevant transfer pricing documentation that is sufficiently detailed to justify the group’s pricing policy. Over and above this documentation, the use of advance pricing agreements with the tax authorities is now necessary to reduce the level of exposure to the above-mentioned tax risk.

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 FACE Africa Tax & Legal

Based on the above, where diplomats or diplomatic missions and international organisations pay VAT on goods purchased or services rendered, such diplomats and organisations will be entitled to a refund of the VAT paid at the point of purchase. This is premised on the established principle that goods and services purchased by Diplomats are zero-rated.

Qualified Parties and transactions for refund

The transactions that qualify for refund under the Guidelines are as follows – VAT paid on goods and services purchased or imported by Diplomats, Diplomatic Missions and International Organisations. Persons or Organisations eligible to apply for refund of VAT are Diplomats (foreign employees of embassies/missions not below the rank of third secretary), Diplomatic Mission (Embassies and High Commissions), International Organisations conferred with diplomatic immunities and privileges by the Honourable Minister of Foreign Affairs by an Order published in a Federal Gazette pursuant to the Diplomatic Immunities and Privileges Act.

Refund Process

The Ministry of Foreign Affairs conducts all interactions with qualified Diplomats and Diplomatic Missions and collaborates with FIRS during refund process to ensure efficiency and transparency.

International Organisations

The process for refunds under this sub head is different as all applications for refunds on goods purchased by International Organisations (conferred with diplomatic immunities and privileges by the Honourable Minister of Foreign Affairs by an Order published in a Federal Gazette) are to be made to the Executive Chairman, Federal Inland Revenue Service (FIRS) and to ensure seamless refunds, the application must be accompanied with proper documentation.

Conclusion

The Guidelines on VAT refund is a welcome development that has created opportuities for diplomats and qualified international organisations to exercise some of the priviledges granted them as a result of their status. It will be interesting to see the implementation of the Guidelines in the months ahead.

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 WTS Blackwoodstone

The draft of the Growth Opportunities Act (Wachstumschancengesetz) provides for the mandatory use of electronic invoices from January 1, 2025 for certain circumstances. The core elements of the planned changes to invoicing are:

• the definition of the term “e-Invoice” in line with the ViDA bill, i.e. an invoice that must compulsorily comply with the requirements of CEN standard EN 16931 (Directive 2014/55/EU of 16.04.2014); thus, the draft reverts to the data format that is already used for electronic invoices in the B2G area through ZUGFeRD and XInvoice,
• the deletion of the priority of paper invoices in Sec. 14 para. 1 sentence 7 German VAT Act,
• the obligatory issuing of an e-Invoice for B2B transactions taxable in Germany (except for certain tax-exempt transactions) if the supplier and the recipient of the service are deemed to be resident in Germany,
• the possibility to use e-Invoices or “other invoices” in electronic form also in the B2C sector (however, only with the consent of the recipient)

The bill also contains transitional regulations for the introduction of electronic invoicing: Until December 31, 2025 taxpayers shall be allowed to use other forms of invoicing than electronic invoicing, e.g. in paper format. For transactions carried out in the years 2026 and 2027 it shall also remain possible to continue invoicing by using the EDI procedure instead of electronic invoicing until December 31, 2027.

In a letter dated October 2, 2023 addressed to the trade associations, the tax authorities commented on the planned changes to the issuing of invoices pursuant to Section 14 German VAT Act. With regard to the question of which invoice formats can be regarded as structured electronic invoices under this regulation, the Federal Ministry of Finance and the highest tax authorities of the federal states are of the opinion that in particular both invoices according to the XStandard (so-called XInvoice) and those according to the ZUGFeRD format (from version 2.0.1) should in principle meet the planned requirements. In addition, the letter provides further details on the future handling of hybrid invoice formats (e.g. an invoice in ZUGFeRD format, which simultaneously contains a pdf document and a data record in XML format). From the expected introduction of the mandatory electronic invoice on January 1, 2025, the structured part is to be decisive for these invoice formats, in contrast to the current provisions. In the event of differing information in the two elements, the data from the structured part (the XML file) should then take precedence over that from the image file (the PDF document). The tax authorities also explicitly clarify that the basic permissibility of a hybrid format should not change. With regard to the possibility, limited until December 31, 2027 according to the provisions of the planned Growth Opportunities Act, of also being able to use the EDI procedure instead of the mandatory electronic invoice, the tax authorities are aware of the importance of this invoicing format for certain areas of the economy. Therefore, a solution is already being worked on to ensure the continued use of EDI procedures as far as possible under the future legal framework. However, it cannot be completely ruled out that technical adaptations to certain EDI procedures may still become necessary with the introduction of the transaction-based reporting system. By way of clarification, the tax authorities state that according to the government draft of the Growth Opportunities Act, the receipt of an electronic invoice will be mandatory for all domestic entrepreneurs as of January 1, 2025. The transitional regulations provided for in the draft only concern the manner of issuing an invoice in other formats. If the invoice issuer decides to use an electronic invoice, the invoice recipient would therefore also have to accept it.

Digitalisation can make a decisive contribution to simplifying procedural processes, e.g., automatic invoice processing without media discontinuity. However, the planned digitalisation of invoicing for VAT purposes is associated with far-reaching changes to processes. The regular publications by the tax authorities make it clear that they also expect massive conversion requirements and adjustments. Taxpayers are recommended to get an overview as quickly as possible of wthat adjustments are required in their IT-landscape in order to meet the planned changes.

The Securities Act 2005 has been amended to provide for CIS and CEF to be explicitly authorised to invest in “money market instruments or debt instruments including loans, debt obligations or similar instruments”.  This extension explicitly broadens the investment horizon of CIS and CEF to cater for debt funds and is welcome by industry players as it brings Mauritius at par with most sophisticated financial centres from a regulatory perspective.

In addition, in order to render Debt Funds more attractive from a tax perspective, the Income Tax Act 1995 has also been amended.  While the standard tax rate applicable to a CIS or CEF on its chargeable income is 15%, with the amendments brought to the Finance Act 2023, a CIS or CEF earning interest income may claim either:

• An exemption of 95% of the interest income earned, subject to satisfaction of prescribed economic substance requirements; or
• credit for actual tax suffered on the interest income,

whichever was more beneficial.

The application of the 95% exemption leads to an effective tax rate of 0.75% on the interest income earned by a CIS or CEF.

The economic substance conditions, which mirror the requirements under OECD BEPS Action Plan 5, require that the CIS or CEF:

• carries out its core income generating activities in Mauritius;
• employs, directly or indirectly, an adequate number of suitably qualified persons to conduct its core income generating activities; and
• incurs a minimum expenditure proportionate to its level of activities.

The core income generating activities to be carried out in Mauritius with respect to a CIS or CEF is defined in the legislation as follows:

If you wish to discuss these topics, please contact:

WTS Tax Consulting (Mauritius) Ltd

• position themselves with reference to their approach, strategy and compliance in respect of tax sustainability
• benchmark themselves against other organisations and peers
• understand perceptions of how tax ties in with the ESG approach and strategy within the wider organisation, and
• assess relative performance over a period to assist in long-term ESG goals

The index covers the following five areas:

• Governance – Licence to Operate
• Tax Risk and Planning – A Consequence, not an Influence
• International Compliance – Right Tax in the Right Place
• Stakeholder Engagement – Leaving no-one Behind
• Environmental – Acceleration to Net Zero

The index results can be used to develop a defined plan to enhance the organisations tax sustainability and to communicate progress with key stakeholders.

The completion of the TSi and the results summary are free of charge. If participants would like to explore the results further and understand their meaning, there is a premium option to obtain an evaluation report that contextualises the results and provides recommendations which can be developed into a roadmap accompanied by a support programme provided by WTS Global specialists.

 “The TSi is one of the initiatives through which WTS Global leads in innovative thinking, challenges conventional practices, and looks toward the future.”
–  Richard Turner, Senior Managing Director, Leader of Tax and Innovation,
FTI Consulting, WTS Global Member Firm in the UK

Our Global team comprises of specialists who are driving the tax sustainability agenda and maintain close contact with industry and academia.

For more information on the Tax Sustainability Index and our experts please visit our TSi website.

You want to evaluate your company’s Tax Sustainability?

Please click here

About WTS Global

With representation in over 100 countries, WTS Global has already grown to a leadership position as a global tax practice offering the full range of tax services and aspires to become the preeminent non-audit tax practice worldwide. WTS Global deliberately refrains from conducting annual audits in order to avoid any conflicts of interest and to be the long-term trusted advisor for its international clients. Clients of WTS Global include multinational companies, international mid-size companies as well as private clients and family offices.

The member firms of WTS Global are carefully selected through stringent quality reviews. They are strong local players in their home market who are united by the ambition of building a truly global practice that develops the tax leaders of the future and anticipates the new digital tax world.

WTS Global effectively combines senior tax expertise from different cultures and backgrounds and offers world-class skills in advisory, in-house, regulatory and digital, coupled with the ability to think like experienced business people in a constantly changing world.

About FTI Consulting

FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. With more than 7,800 employees located in 31 countries, FTI Consulting professionals work closely with clients to anticipate, illuminate and overcome complex business challenges and make the most of opportunities. The Company generated $3.03 billion in revenues during fiscal year 2022. In certain jurisdictions, FTI Consulting’s services are provided through distinct legal entities that are separately capitalized and independently managed. More information can be found at www.fticonsulting.com.

WTS press contact:
WTS Global

Marie Christin Shenouda

T: +49 (0)89 28646-1929

E: Marie Christin Shenouda

WTS Group AG

Florian Kestler

T: +49 (0) 89 28646-1565

M: +49 (0) 162 2444-8333

E: Florian Kestler

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