‘Gross’ly Overlooked: The Difficulties of Implementing the New Article 12AA of the United Nations Tax Convention in African Countries With Transfer Pricing Rules

In an environment where tax compliance is difficult to impose on non-resident service providers resulting in the loss of tax revenue on services rendered to residents, Article 12AA, a newly adopted addition to the UN Model Tax Convention, is to be welcomed by revenue -starved African jurisdictions. However, the drafters appear to have overlooked potential problems of imposing a gross withholding tax on service fees in developing countries with transfer pricing legislation. This paper outlines the prevalence in African jurisdictions of withholding taxes on service fees, the impact of the Double Tax Agreements (DTA’s) on the collection of withholding taxes and the shortcomings of domestic relief for double taxation in African countries, using South Africa’s measures as an example.The paper then illustrates the distortions that the imposition of withholding tax on service fees on a gross basis, which Article 12AA provides for, could have on the economies of developing countries like South Africa as well as its impact on foreign direct investment into such countries, particularly given the interplay of such a tax with domestic transfer pricing rules. The paper briefly examines some proposals from other academics and scholars to address these distortions caused by a gross withholding tax on service fees. The paper concludes that a withholding tax on service fees should not be imposed as a final tax on a gross basis. Provision should instead be made in domestic law to permit non-resident service providers to register voluntarily for tax, in order that they may file a tax return, claim allowable deductions and accordingly pay their tax on a net basis. The paper ends with a call for more research on strategies to streamline administrative hurdles resulting from registration for foreign service providers before the new Article 12AA is widely implemented in Africa.