This will improve the company's cash flow by avoiding or deferring South African tax. 23 The source-based taxation system has enabled South African investors to set up controlled foreign companies in low-tax jurisdictions and shift income to such jurisdictions, thus avoiding the South African tax net.
THE ENACTMENT OF SECTION 9D
Section 9D prevents this as again it does not depend on the distribution and the income would be taxed in the hands of the resident after it is earned by the CFC.44. In view of the above and the fact that all income earned from a controlled foreign company is exempt from the provisions of section 9D(2) (exceptions within the meaning of section 9D(9), section 9D remains an integral part of South African tax law).
THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT s3
It is clear from this chapter that there have been numerous changes over the past decade in countries around the world, particularly South Africa, in the taxation of controlled foreign company income. The subject of setting up controlled foreign companies or converting existing investments to controlled foreign companies is still much debated in the boardrooms of many South African companies regarding the pros and cons.
THE METHODOLOGY AND SCOPE OF THIS DISSERTATION
Chapter 3 focuses on the structure of section 9D with particular reference to the wording in the Act relating to the issue of 'control' as it relates to a controlled foreign company. KEY CONSIDERATIONS REGARDING RESIDENCE-BASED TAXATION AND CONTROLLED FOREIGN COMPANIES LEGISLATION V.
INTRODUCTION
THE CONCEPT OF RESIDENCE 2
Natural persons
- Ordinarily resident test
- Physical presence test
A physical presence at all times is not a prerequisite for being a regular resident of the Republic. If an individual is not ordinarily resident in the Republic of South Africa, the physical presence test is used to determine whether he/she is resident in the Republic under the Act.
Persons other than natural persons (legal entities)
The concession applies from the start of the 330-day period, so that the eligible person will be a resident for part of the first year of assessment and a non-resident for the rest of the first year. It is only after the 330 day period is fulfilled that the person will be deemed not to be a resident.
PLACE OF EFFECTIVE MANAGEMENT
General approach to determining 'place of effective management'
In this case, according to the general approach, the place of effective management would be Stockholm. The place of effective management is where the executive directors effectively manage the company, but not necessarily the board as a whole.
FOREIGN EQUITY INSTRUMENTS OF CFCs
Sandler41 (1996) also comments that the term 'place of actual administration' is used in Art. 4, paragraph 3 of the DECD Model Convention. It should also be noted that a company having its seat of effective management in the Republic is considered to be a 'resident' as defined in section 1 of the Act and therefore cannot be considered a controlled foreign company as defined in section 9D. of the article of the law in relation to another resident. i) in the case of foreign equity acquired before October 1, 2001, at the applicable exchange rate on October 1, 2001; or ii) in all other cases at the average rate of exchange for the year of assessment in which such person actually incurred the expenditure.
BASE COMPANY INCOME
The manner in which a country's CFC regime IS applied to 'base company income' depends on the legislation itself. Where a country applies a 'transaction' approach48, the definition of imputed income will generally include specifically defined 'base company income'.
INTERNATIONAL COMPETITIVENESS
The following example, extracted from the National Treasury's detailed explanation of section 9D of the Taxation Act (June 2002), illustrates such a scenario where a South African multinational is disadvantaged by the foreign company tax rules:51. The National Treasury's detailed explanation of section 9D of the Taxation Act (June 2002)52 states that 'the principles of counter-deferral and international competitiveness are diametrically opposed.
TAX HAVENS
Methods of determining whether a foreign country is a tax haven
For example, a company may have a high tax rate but offer incentives such as new business tax holidays, accelerated depreciation, investment tax credits and other similar incentives, all of which reduce the CFC's effective tax rate to significantly below such statutory nominal rate. However, like the effective tax rate method, an annual calculation must be made to determine the tax payable in the home country.
South African legislative provisions regarding tax havens
Apart from Article 9E(8) above, the general anti-evasion provision of Article 103(1) is broad enough to apply to tax haven abuses. As a result, section 103(1) can serve as general legislation against tax havens, as the Commissioner can use the power granted to him in this section to curb the abuse of tax havens by residents.
THE ISSUE OF 'CONTROL' WITH REGARD TO A
THE STRUCTURE OF SECTION 9D
The CFC legislation aims to prevent such tax evasion without hampering the growth of genuine companies in the international markets. It should be noted that the income of a foreign company is attributable to a South African resident under section 9D only if it is a controlled foreign company as defined.6.
THE TERM 'FOREIGN COMPANY'
8 Under this approach, the formal characteristics of a foreign entity under foreign law would be decisive for that entity's character for national tax law (Stitt 'Characterisation of Foreign Business Entities for Tax Purposes: The Chaos Continues' (1986) 8 Houston Journal of international law 204). See also Macheli A Critical Legal Analysis for the Regime of Taxation of Controlled Foreign Companies pursuant to Section 9D of the Income Tax Act no.
THE ISSUE OF 'CONTROL' WITH REGARD TO A CFC
- The need for control
- The issue of 'acting in concert'
- Indirect Control
- The timing of control
- Control by a concentrated group
The possession of exactly 50 percent of the share rights is thus not sufficient to establish control. Assume that South African company A (incorporated and domiciled in the Republic) holds 100 percent of the participation rights of foreign company B, a CFC.
THE 10 PERCENT RULE
South African company A (incorporated in the Republic) holds 48 percent of the shares in a foreign company B. Foreign company B will meet the definition of a CFC since it is controlled by South African residents to the extent that it owns more more than 50 percent of the participation rights (being South African Company A and Z. C).
INTRODUCTION
THE BUSINESS ESTABLISHMENT EXEMPTION .1 Mobile foreign business income
PREVIOUSLY TAXED EXEMPTION
THE DESIGNATED COUNTRY EXEMPTION .1 The concept of 'cross-crediting'
THE RELATED AND INTRA-GROUP EXEMPTIONS .1 The related CFC dividend exemption
COMMON INTERNATIONAL EXEMPTIONS NOT UTILISED
Sandler (1996), when comparing such legislation from the various OECD member states, summarizes the exemptions offered by these member states as follows:2. The availability of such exemptions indicates the willingness of the imposing country to tolerate delays under certain circumstances.5 This chapter analyzes the current exemptions under Article 9D(9) and focuses on the requirements that must be met in order to these exemptions into account.
THE BUSINESS ESTABLISHMENT EXEMPTION
Mobile foreign business income
- Permanence and independence
- Outside the Republic for a 'bonafide' business purpose
CFC (X) does not have a place of business that is adequately equipped to carry out its core business operations. The following example is taken from the Treasury's Detailed Explanation to Section 9D of the Taxation Act (June 2002) and further illustrates the absence of a business establishment:33.
Diversionary business income
- Increased penalty
- The higher business activity standard
This will result in a higher net income of the CFC that will be attributed to the South African Company. CFC-related services exist where the CFC performs services for an affiliated South African resident (s 9D(9)(b)(ii)(cc)).
Mobile foreign passive income
The net income of the controlled foreign company will not be taxed in the hands of resident shareholders if the actual income of the CFC is subject to South African tax ie. the mere fact that the net income is in principle subject to South African tax is not a sufficient qualification for this exemption.
THE DESIGNATED COUNTRY EXEMPTION 78
The concept of 'cross-crediting'
A further aspect of the rationale behind the country-specific exemption relates to the prevention of what is known as 'cross-crediting'.98 The exemption prevents a taxpayer with foreign-source income from high tax and foreign-source income with low manipulation tax. foreign tax credit system balancing one with the other. Such 'cross-crediting' is not possible if highly taxed foreign income is excluded from the system as a result of the application of the twenty-seven percent rule.
THE RELATED AND INTRA-GROUP EXEMPTIONS
The related CFC dividend exemption
Joostel03 states that this exemption effectively provides for the redistribution of overseas business income (that is, other than passive income) without attribution within the meaning of section 9D, by allowing a South African MNE to reinvest such income overseas without falling to the South African Tax Network. Treasury's response: The dividend of R2 million is exempt from tax under section 9D under the linked CFC dividend exemption.
Related CFC interest, rent and royalties exemption
The operation of the related CFC interest, royalty and rent exemption is illustrated by way of the following example:I1I. He paid interest, royalties and rent of a total of R250 000 to CFC (Y) and other expenses were deductible in terms of the Act of RlOO 000.
The disposal of leased CFC intra-group assets exemption
Mr. A, a resident of South Africa, owns one hundred percent of the shares in CFC (X) and CFC (Y). Further, as section 9D(9)(fB) does not mention the existence of a lease between the two CFCs, the use of the asset by the transferee CFC does not appear to be relevant.
CO-CFC DISPOSALS AND DIVIDENDS EXEMPTION 119
The South African company owns all the shares of CFC 1, which owns all the shares of CFC 2. The National Treasury, however, in its detailed explanation to section 9D of the Taxes Act (June 2002) refers to this section 9D exemption as the "Participation Exemption".
COMMON INTERNATIONAL EXEMPTIONS NOT UTILISED BY SOUTH AFRICAN LEGISLATION
The distribution exemption
A certain percentage of the company's income must be distributed to domestic shareholders in the form of dividends within a set period. SandlerControlled Foreign Company Legislation(1996) (OECD) 68 and MacheliA Critical Legal Analysis of the Regime for the Taxation of Controlled Foreign Entities pursuant to Section 9D of the Income Tax Act no.
CALCULATIONS OF AND LIMITATIONS ON THE REBATE
DIVIDENDS DECLARED BY A CONTROLLED FOREIGN
CALCULATION PROBLEMS AS A RESULT OF THE
SUBSEQUENT CAPITAL GAINS ON THE SALE OF
CONVERSION OF FOREIGN TAX INTO REPUBLIC CURRENCY 119 5.12 REVISED ASSESSMENTS
INTRODUCTION
Some countries even provide relief in terms of blocked currency or currency restrictions in a country of a controlled foreign company, which restricts the distribution of income outside that country. 6. MacheliA Critical legal analysis of the scheme for taxation of controlled foreign entities according to § 9D of the Income Tax Act no.
FOREIGN TAXES PAID
Example 1:17 If A owns all the shares in a company doing business in the Isle of Man (a tax haven), A must account for the company's income in terms of 9D. If the company suffered RIO tax in the Isle of Man, the final liability in South Africa would be reduced to R20 (R30 - RIO).
CALCULATIONS OF AND LIMITATIONS ON THE REBATE GRANTED
If more than one foreign tax has been paid, the combined taxes are taken into account.28 Interestingly, the legislation now clarifies the fact that rebates are available for income taxes paid at any level of government, including those imposed. at the provincial or local level. Generally, the foreign taxes paid or payable must not exceed the amount of ordinary South African tax payable on the relevant foreign profits underlying the foreign dividends attributed under section 9D(2).
CARRY-FORWARD OF EXCESS FOREIGN TAXES PAID
NET LOSS OF A CONTROLLED FOREIGN COMPANY
Such a result is consistent with the South African tax system, which does not recognize group taxation. 46 Macheli A Critical Legal Analysis of the Regime for Taxation of Controlled Foreign Entities in Terms of Section 9D of the Income Tax Act No.
DIVIDENDS DECLARED BY A CONTROLLED FOREIGN COMPANY
This allows the resident, who must account for the net income of the controlled foreign company, to also claim a rebate in respect of the underlying profits which are subject to tax to the extent that a third party company has declared the dividend to the controlled. foreign company. However, no rebate is claimable in terms of the strict wording of s6quat as the rebate would only be claimable to the extent that a dividend is declared to a controlled foreign company.
COMPREHENSIVE CALCULATION EXAMPLES
However, a strict interpretation of the wording does not allow a deduction to be claimed in respect of the accrual of dividends for the purposes of s9E. The Swiss company's profit in respect of its financial year ending 31 December 2001 consists of dividends received in previous years.
R'OOO R'OOO R'OOO R'OOO R' 000 R'OOO
CALCULATION PROBLEMS AS A RESULT OF THE INTERPRETATION OF 'PARTICIPATION RIGHTS'
65 Jooste 'The allocation of income of controlled foreign entities' (2001) South African Law Journa/482. iv) The gross income of the company is R500, which is distributed entirely after tax. As the definition of participation rights goes, it seems that the different rights are cumulative in the sense that the same person can have more than one of the rights.
SUBSEQUENT CAPITAL GAINS ON THE SALE OF SHARES OF A CONTROLLED FOREIGN COMPANY
But if we apply the formula required by section 9D(2), the proportion in which the company's profits of R500 should be distributed, taking into account only the shareholders' rights to capital, would be there. In this example, the rights to participate in the profits or dividends, or any other distribution or award, were simply excluded due to the uncertainty of how this would affect the above formula.
DOUBLE TAX AGREEMENTS
CONVERSION OF FOREIGN TAX INTO REPUBLIC CURRENCY
REVISED ASSESSMENTS
Such amended or additional assessment may not be issued more than six years from the date of the original assessment, unless the Commissioner is satisfied that the amount of tax proved to be payable to the foreign government has been erroneously stated because of fraud, misrepresentation or non-disclosure. of material facts.79. On the other hand, the Commissioner can increase the taxpayer's tax liability or reduce a deduction previously allowed only if he is satisfied that the actual taxes payable to the foreign government are less than the amount originally allowed.
INTRODUCTION
THE PROVISIONS OF SECTION 72A
UNILATERAL APPROACHES TO THE GATHERING OF
BILATERAL AND MULTILATERAL APPROACHES 130
EXEMPTIONS FROM THE DISCLOSURE REQUIREMENTS 133
Together with related persons, Mr. X holds more than 50 percent of the total participation rights in CFC. Y, a South African resident, and one of these connected persons, owns 11 percent of the rights to participate in CFC.
UNILATERAL APPROACHES TO THE GATHERING OF THE REQUIRED INFORMATION
Taxpayers must report their holdings in foreign companies and provide the financial accounts of such companies if they own at least ten percent of the shares directly, or 50 percent indirectly. Taxpayers with CFC income must provide the financial statements of the CFC with their tax returns.
BILATERAL AND MULTILATERAL APPROACHES
An information return must be completed and submitted to the IRS by any US person who acquires more than five percent of any class of stock in a foreign corporation.32. The concept of bilateral or even multilateral approaches means entering into agreements on "exchange of information" with specific target areas.
THE KEEPING OF RECORDS
There are currently no double taxation agreements between South Africa and any tax haven jurisdictions in relation to the exchange of information between the Revenue authorities of the. It should be noted that if any of the above documents are in a language other than any of the official languages of South Africa, the Commissioner may require the taxpayer to provide a translation into one of the official languages (as by the Commissioner determined) is certified. by a sworn translator or any other person approved by the Commissioner.5o.
EXEMPTIONS FROM THE DISCLOSURE REQUIREMENT
- Insufficient influence
- Breach of foreign laws
It is interesting to note that section 72A(I)(b) refers to related persons holding more than 50 percent of the participation rights. The definition of 'controlled foreign company' in section 9D(I) only refers to connected persons when the five per cent minimum threshold requirement is applied in relation 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.
PENALTIES
In fact, there is sufficient power to the Commissioner and the Revenue under the Act to punish an offender. The extent of the penalty is not apparent and will probably depend on the seriousness of the offense as seen by the Commissioner or the tax authorities.
CONCLUSION
- GENERAL
- THE NEED FOR CONTROLLED FOREIGN COMPANY LEGISLATION IN SOUTH AFRICA
- THE COMPLEXITY OF SECTION 9D 7.4 THE EFFECTIVENESS OF SECTION 9D
- THE COMPLEXITY OF SECTION 9D
- THE EFFECTIVENESS OF SECTION 9D
16 MacheliA Critical Legal Analysis of the Regime for the Taxation of Controlled Foreign Entities in terms of Section 9D of the Income Tax Act No. MACHELI SP A Critical Legal Analysis of the Regime for the Taxation of Controlled Foreign Entities in terms of Section 9D of the Income Tax Act No.
1 SATC 50 13 8 SATC 157
