R'OOO R'OOO R'OOO R'OOO R' 000 R'OOO
6.6 EXEMPTIONS FROM THE DISCLOSURE REQUIREMENTS 133
CHAPTER 6
CFC REPORTING REQUIREMENTS AND THE COLLECTION OF INFORMATION
the successful enforcement of section 9D and places a huge administrative burden on certain residents.2
6.2 THE PROVISIONS OF SECTION 72A
Section 72A(1) provides:
that every resident who at any time during the relevant year of assessment:
a) directly or indirectll holds not less than 10 percent of the participation rights in any controlled foreign company as contemplated in section 9D; and
b) together with any connected person4in relation to such resident in aggregate holds more than 50 percent of the total participation rights in such controlled foreign company, is required to submit a return disclosing detailed information.5
The provisions of the above subsection of the Act (section 72A( 1)) shall not apply to any resident where any person who is a resident and who is a connected person in relation to such first-mentioned resident, holds a greater percentage of the participation rights than such first-mentioned resident.6
For example,?
Mr X, a South African resident, holds 10 percent of the participation rights in a CFC. Together with connected persons, Mr X holds more than 50 percent of the total participation rights in the CFC. Mr Y, a South African resident, and one of these connected persons, holds 11 percent of the participation rights in the CFC. In these circumstances Mr X has no reporting obligation in terms of section 9D. MrY has the obligation if he,inturn, together with connected persons, holds more than 50 percent of the total participation rights inthe CFC, and none of the connected persons is a South African resident holding more than 10 percent of the total participation rights.
The return contemplated in subsection (1) shall show fully:
6
Jooste 'The Imputation of Income of Controlled Foreign Entities' (200 I) 118South African Law Journal 500.
It is worth noting that the word 'indirectly' is used here but not in section 90(2).
Such connected person does not have to be a South African resident (Jooste 'The Imputation of Income of Controlled Foreign Entities' (2001) 118South African Law Journal500).
Section 72A( I). The information must be submitted in such form and within such time as is prescribed by the Commissioner. The current form used in South Africa is referred to as the ITI 0 form.
See the proviso to section 72A( I). It is worth noting that although the previous definition of controlled foreign entity referred to participation and voting rights, this proviso has always only referred to participation rights. Jooste comments that the reason for this is not apparent (Jooste 'The Imputation ofIncome of Controlled Foreign Entities' (200 I) I 18South African Law Journal 500).
Example sourced from Jooste 'The Imputation of Income of Controlled Foreign Entities' (200 I) 118South African Law Journal 500.
a) the name, address and country of residence of such controlled foreign company;8
b) the description of the various classes of participation rights in such controlled foreign company;9
c) the percentage and class of participation rights held by such resident whether directly, indirectly, or together with connected persons;10
d) the percentage and class of participation rights held by any other South African resident (who is a connected person in relation to such resident) who directly or indirectly holds not less than 10 percent of the participation rights in such controlled foreign company;11 e) a description of the receipts and accruals of such controlled foreign company which are:12
i) included in the income of such resident in terms of the section 9D;
ii) not included in the income of such resident in terms of the provisions of section 9D(9); and
t) a description of any amount of tax proved to be payable by such controlled foreign company to the government of any other country in respect of any income contemplated in paragraph (e)(i) above, including particulars relating to the country in which such tax was payable and the underlying profits to which such foreign tax relates.13
The above requirements are similar to those of other international CFC regimes. Australia and New Zealand have similar requirements.14 The United Kingdom does not have specific statutory provisions relating to reporting and record-keeping requirements, but the Controlled Foreign Companies Supplementary Page (Form CT600B) to a Company Tax Return (Form CT600) requires similar information to that required in section 72A(2) above.
Itshould also be noted that every resident who is required to submit a return contemplated in subsection (1) shall:
a) submit the relevant information referred to in subsection (2)(a), (b), (d) and (t) relating to any other resident contemplated in subsection (2)(d) to such other resident; and15
b) have available for submission to the Commissioner, when so requested, an income statement and balance sheet of such controlled foreign company prepared in accordance
8 Section 72A(2)(a).
9 Section 72A(2)(b).
10 Section 72A(2)(c).
II Section 72A(2)(d).
12 Section 72A(2)(e).
13 Section 72A(2)(t).
14 Hustler Tax Haven Use and Control: A Study of Tax Haven Use by Australian Public Companies and the Development ofControlled Foreign Company Legislation in Australia (1994) 320-323.
15 Section 72A(3)(a). Itis also worthy noting as pointed out by Klein and Kruger 'Administrative Amendments' Deloitte& Touche Tax News 5 (2000) 16, that the resident referred to here must:
a) be a connected person; and
b) hold not less than 10 percent of the participation rights of theeFe.
with the laws of the country of which such controlled foreign company is a resident, or in terms of internationally accepted accounting practice.16
Section 72A(3)(a) facilitates the imputation of income in terms of section 9D to such other resident who, in turn, is required to submit such information to the Commissioner.17 He may otherwise have difficulty in obtaining such information on his own.18 Unless a South African resident is effectively in control of the controlled foreign company in which he is a participant and its records in relation to its income are available to him, he would not be able to make an accurate return or furnish the Commissioner with any relevant information.
He may not even know whether the company is a controlled foreign company as defined in the Act. Even where he is entitled to and does receive the annual financial statements of the controlled foreign company, these may not disclose all the information required to furnish the Commissioner in terms of section 72A. Moreover, it can happen that such accounts reach the resident after the close of its year of assessment and possibly after he has been assessed for the year. If this happens, his assessment would have to be re- opened.19
The following comment was made by Meyerowitz and is applicable in the context of the interpretation of section 9D(2) under discussion:2o
'Unless the controlled foreign company can and is prepared to disclose to the resident what income has accrued to it at the relevant times, it would be factually impossible for either the resident or the Revenue Department to determine what is taxable in the hands of the resident. Itcould therefore well be that where the resident's participation is not constant throughout the resident's tax year or where the controlled foreign company does not remain such throughout the resident's tax year, section 9D(2) would be a 'brutum fulmen', something to which no effect can be given.'
16 Section 72A(3)(b).
17 Section 72A(4).
18 This view has been expressed by many authors, including:
- Macheli A Critical Legal Analysis ofthe Regimefor the Taxation of Controlled Foreign Entities in Terms of Section 9D of the Income Tax Act No. 58 of 1962 (Unpublished PhD dissertation, University of Natal, Pietermaritzburg) (2000) 326;
- Sandler Controlled Foreign Company Legislation (1996) (OECD) 85;
- Jooste 'The Imputation of Income of Controlled Foreign Companies' (200 I) 118 South African Law Journal 501; and
- The Taxpayer'Editorial: Sections 9C and 9D revisited' (1998) 86.
19 The Taxpa!er'Editorial: Sections 9C and 9D revisited' (1998) 86. One might argue that section 72A places the onus on the reSIdent taxpayer to obtain all the necessary information and provide these to the Revenue authorities and that receiving and furnishing the authorities with such information timeously would be one of the disclosureobi~ctives.
20 J
The Taxpayer'Editorial: Sections 9C and 9D Revisited' (1998) 84.
Surtees, in 'Transfer Pricing: The Next SARS Target', speaks about disclosure requirements relating to subsidiaries in tax havens. Surtees explains that the requirements now extend to the employees of subsidiaries in tax havens with the object of establishing whether they genuinely live there or whether they are South African residents who work in the subsidiaries for short periods to give the impression that the subsidiaries are genuine operating companies. This information is submitted via the use of a questionnaire which also requires names, whether the employment is full time or not, how much time the employees spend in South Africa each year, and the degree of autonomy they have. Details are required as to the physical addresses, descriptions of premises and copies of rental agreements. Even such matters as floor plans, staffing and floor space are included in the details required, as well as detailed financial information relating to gross margin and sales for such subsidiaries for the past five years?1
There are no penalties provided in section 72A itself for non-compliance with its provision.
I believe that the legislation is lacking in this regard and foresee specific penalties being defmed in the legislation in the future. A deterrent is, however, provided by section 9D(11) which states that in the event of default in complying with the provisions of section 72A, the 'business establishment' exemption,22 the 'related CFC dividend' exemption23and the 'related CFC interest, rents and royalties' exemption24 are not available to the recalcitrant resident.
The obvious difficulty with respect to CFC legislation, and in particular section 72A, is that information is required about the net income of a company resident in a foreign jurisdiction. Generally, under principles of customary international law, one country may not generally enforce its tax laws, even through peaceful means (such as information- gathering), in the jurisdiction of another country without the latter country's consent.25 In
21 Surtees 'Transfer Pricing: The Next SARS Target'Deneys Reilz News Desk (July 2002) 2.
22 Section 9D (9)(b).
23 Section 9D (9)(t).
24 Section 9D(9)(fA).
25 SeeGovernment of India v Taylor (1955) AC 491 (House of Lords). In the House of Lords decision on Re-State of Norway's Applications (1990) 1 AC 723, the court did grant a Norwegian court's request to interview witnesses in the United Kingdom in respect of a claim for unpaid taxes in Norway following a tax insolvency. The Lords, while recognisin.g t.he .principle in theGovernment of India case, considered that the principle of non-enforceability did not affectthe~unsdlctlOnof the courts to examine witnesses at the request of foreign courts. This decision may suggest a hberahs~tlOn of the general principle, possibly limiting the non-enforceability to a suit for unpaid taxes, or an applIcatIOn for the enforcement of a foreign court order in respect of unpaid taxes but allowing one country at least with approval of the courts m the other country, to use 'peaceful' enforcement mechanisms. It is, however, questionable what impactNorway's Applications will have on the general principle of customary international law.
(SandlerControlled Foreign Company Legislation (1996) (OECD) 115).
South Africa, section 72A places the onus on the taxpayer to report its share of the CFC's undistributed income and pay the tax owing in respect of that income. This is similar to most countries adopting CFC legislation, whereby the legislation sets out the preconditions which, if met, subject domestic taxpayers to liability.z6 Ithas also been said that the above disclosure may well precipitate the transfer pricing disclosure requirements of Practice Note 7.27
6.3 UNILATERAL APPROACHES TO THE GATHERING OF THE REQUIRED