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6.6 EXEMPTIONS FROM THE DISCLOSURE REQUIREMENT
Due to the fact that the information requested might sometimes be difficult to obtain and the requirements difficult to enforce, such situations have resulted in certain countries providing some limited exceptions to the requirements.
Exceptions to the disclosure requirements relate generally to two given situations: 53
a) where a resident participant in a controlled foreign company does not have sufficient influence over it to obtain the necessary inforrnation;54 and
47 Itis generally this taxpayer who is required to furnish information to the Commissioner in terms of section 72A. It should also be noted that there is provision in section 72A for any other related taxpayer who possesses any other information as required by the Commissioner to either furnish the above taxpayer who will in turn furnish the Commissioner with such details or directly furnish the Commissioner with such details himself.
48 Section74(1)sv' documents'.
49 Section74(1)sv 'information'.
50 Sections 74(2) and 74(3).
51 MacheliA Critical Legal Analysis o/the Regime/or the Taxation o/Controlled Foreign Entities in Terms o/Section 9D o/the Income Tax Act No. 580/1962(Unpublished PhD dissertation, University of Natal, Pietermaritzburg) (2000) 334.
52 Previously section74expressly provided that translation expenses were to be borne by the taxpayer and a reasonable amount thereof was allowed as a deduction. Section 74 was subsequently substituted by section 14 of Act No. 46 of 1996 and this provision was removed.
53 These are not exceptions in terms of the Income Tax Act No. 58 of 1962 but exceptions which surface in various countries adopting CFC legislation and as a result recognised internationally.
54 Macheli op cit 338.
b) where the disclosure of information would involve a breach of foreign laws.55
6.6.1 Insufficient influence
Macheli comments that, in terms of section 72(A)(3)(b), the disclosure requirements of section 72A shall not apply to a resident (even to a resident with the greatest percentage of the participation rights) where the Commissioner, at his discretion, does not find it necessary.56 The above is not clearly apparent from the Act, as the wording in the Act refers to the information to be submitted in the form and within such time prescribed by the Commissioner. Whether this allows for the Commissioner to actually deem the disclosure requirements non-applicable to a taxpayer remains to be clarified.
The fact that section 72A(1)57 of the Income Tax Act stipulates that only connected persons will ever qualify to control a foreign company, with each person holding a prescribed minimum 10 percent of the participation rights in the company, the disclosure requirements will only apply to such a connected person who holds the greatest percentage of the participation rights in the controlled foreign company. It is interesting to note that section 72A(I)(b) refers to connected persons holding more than 50 percent of the participation rights. However, as discussed earlier in this dissertation, it appears that 'acting in concert' is not a requirement for determining control. The definition of 'controlled foreign company' in section 9D(I) only refers to connected persons when applying the five percent minimum threshold requirement relating to a listed company or scheme or arrangement as contemplated in paragraph (e)(ii) of the definition of 'company' in section I of the Act. It therefore appears that a foreign company in which South African residents hold greater than 50 percent of the participation rights will be deemed a controlled foreign company, but because none of them are connected to each other, or to another shareholder and with whom they collectively hold more than 50 percent of the participation rights, they will not be liable for disclosure in terms of section 72A even though certain of these residents may hold greater than 10 percent of the participation rights in the controlled foreign company.
55 Amo1dThe Taxation o/Controlled Foreign Corporations: An International Comparison(1986) 511.
56 MacheliA Critical Legal Analysis o/the Regime/or the Taxation o/Controlled Foreign Entities in Terms o/Section 9D o/the Income Tax Act No. 580/1962(Unpublished PhD dissertation, University of Natal, Pietermaritzburg) (2000) 339.
57 Introduced by section 46 of the Revenue Laws Amendment Act 59 of2000 with effect from years of assessment commencing on or after I January 2001.
This alleviates the situation ill which a concerned resident does not have sufficient influence to obtain the information. This would be, as discussed above, the case where the resident is only one amongst many unrelated residents to other domestic residents with whom he controls a foreign company. In the above scenario, it may very often become difficult for the shareholder with the greatest percentage to acquire all the relevant information as required by the Commissioner.
Itis not very often that residents will not have sufficient influence and not be able to obtain all the necessary information for a controlled foreign company. Inthis regard Prebble58 comments:
'The typical controlled foreign company is a wholly owned subsidiary of its parent. This is particularly true of foreign companies that are established for the avoidance purposes. In practice, the control and minimum threshold rules are not very often called into operation. The reason is that even with modern communications, controlling a foreign company is difficult enough in any circumstances. Most companies that establish foreign operations prefer to own them outright, or, at least, severely to limit the number of people who participate in control. '
6.6.2 Breach of foreign laws
Countries adopting CFC legislation may adopt secrecy laws in order to protect persons operating in the country. Macheli59 comments that it would 'defeat the very purpose of CFC legislation if a taxpayer was allowed to escape liability under the legislation on the basis that the controlled foreign company's income or financial records cannot be disclosed.,60 South African legislation does not provide for this exemption. The situation presents a dilemma in that the secrecy laws make it difficult to verify the accuracy of any information supplied and tax authorities may have to assess tax on some estimated basis.
In South Africa, section 78 empowers the Commissioner to make an estimate of the tax, either in whole or in part, in a case where the Commissioner is not satisfied with the return or information furnished by any person, or where that person defaults in furnishing any return or information as required by the Act.
58 PrebbleCosts ofCompliance with the New Zealand Controlled Foreign Company Regime(1994) 3-4.
59 MacheliA Critical Legal Analysis ofthe Regime for the Taxation ofControlled Foreign Entities in Terms ofSection 9D ofthe Income Tax Act No. 58of 1962(Unpublished PhD dissertation, University of Natal, Pietermaritzburg) (2000) 340.
60 The above issue was addressed by the United States who introduced the Tax Equity and Fiscal Responsibility Act of 1982 (at present section 982 of the Internal Revenue Code) which specifically precludes any exemption from an Internal Revenue Service demand to produce information on the grounds of breach offoreign secrecy laws.