In the scramble for the externalisation of investments as a rand hedge, using the annual foreign R1 million discretionary and R10 million investment allowances, schemes to externalize a business or part of it are surfacing.
Place of incorporation
The definition of ‘resident’ in s 1(1) of the Income Tax Act includes a person (other than a natural person) that is incorporated, established or formed in the Republic or which has its place of effective management in the Republic.
A resident pays tax on worldwide income. This aspect can be easily circumvented by incorporating in a foreign jurisdiction.
Under the specific anti-avoidance provision, s 9D, there is included in the income of a resident directly or indirectly holding participation rights in a controlled foreign company, the CFC’s net income.
It applies when more than 50% of the participation rights (right to benefit from shares or voting rights) are directly or indirectly held by one or more residents. Since nonresident discretionary trusts are usually the shareholders of foreign companies, rather than residents, s 9D can be circumvented. But see 185 TSH 2018 on the proposed recategorisation of income in such circumstances.
SARS, in Interpretation Note 6, addresses the concept of ‘effective management’, which brings within the RSA tax net legal entities whose only link with the RSA is that they are effectively managed here.
Paragraph 2 states that…
the term ‘place of effective management’ is not defined in the Act and the ordinary meaning of the words, taking into account international precedent and interpretation, will assist in ascribing a meaning to it. The term ‘effective management’ or ‘effectively managed’ is used by various countries throughout the world, as well as by the Organization for Economic Co-operation and Development (OECD) in its publications and documentation.
Paragraph 3.1 reads like this…
Introduction to the meaning of place of effective management Management focuses on the company’s purpose and business and not on the shareholder-function.
And para 3.2 like this…
The place of effective management is the place where the company is managed on a regular or day-to-day basis by the directors or senior managers of the company, irrespective of where the overriding control is exercised, or where the board of directors meets….
Interaction of effective management with treaties
Generally, business profits are taxed in the state in which such profits are attributable to a permanent establishment. A ‘permanent establishment’ includes an office and a place of management. But bear in mind that this must be a real and not an artificial arrangement.
For example, art 5(6) of the treaty with Mauritius states that an enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
Simply put, it is a matter of substance over form. It follows that a mere contracting with a nonresident firm to provide administrative services will not suffice.
The acid test
The acid test is the concept of effective management. Merely contracting with a nonresident firm to provide administrative and other ‘dressed-up’ services is no panacea. And not to be forgotten are the decided anti-avoidance cases pertaining to substance over form and simulated transactions, including NWK and Roshcon.
Investing, financing, borrowing, expanding, relocating Offshore
and the SA Income Tax Act
Our world-wide taxation of SA residents is hugely complex, and potentially punishing on those relocating. World-wide taxation under the Income Tax Act is triggered by the concept of ‘residence’, in itself a poorly explained and understood concept, which applies to individuals, companies and trusts. Special rules apply to different revenue-streams, such as remuneration, interest and dividends, and the earnings of and distributions from offshore trusts.
Outgoing income-streams are taxed by withholding taxes, which are themselves constrained by tax treaties. ‘Net-of-tax’ arrangements are not always properly understood. ‘Source’ rules apply to residents and nonresidents equally. Non-residents working here are not always properly informed, or taxed. Complex anti-avoidance provisions complicate offshore borrowings and supposedly govern international transfer pricing. The capital gains tax has its own peculiar method of distinguishing between residents and nonresidents.
Many companies operating offshore in fact suffer dual fiscal residence, not always to the knowledge of their shareholders, while the most complex provision, ever, governs genuinely offshore companies with SA ties. And the income tax, capital gains tax and dividends tax all impose an exit tax upon a change of residence, a concept even more misunderstood than residence itself.
It is doubtful whether this complex branch of the tax law enjoys the attention to detail it deserves, especially at its pivotal point—a change of residence. And those making offshore investments are seldom fully advised on the tax consequences.
The seminar (including the publication): R2 600, incl. VAT at 15%.
The publication alone: R2 020 incl. VAT at 15%.
Dates & Venues
DURBAN Tuesday 27 November 2018 Coastlands Hotel (Umhlanga)
CAPE TOWN Thursday 29 November 2018 Garden Court Nelson Mandela Boulevard
PRETORIA Tuesday 4 December 2018 Kleinkaap (Centurion)
JOHANNESBURG Thursday 6 December 2018 Wanderers Golf Club (Illovo)