S.Africa: South Africa to Reintroduce Pre-2011 CFC Rules
July 31 — Changes proposed by South Africa’s National Treasury would subject controlled foreign companies operating in that country to the divisionary rules regarding their inbound and outbound sale of goods that were effective before the rules were amended in 2011.
The move aims to combat profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and... and protect the domestic tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... because applying only the existing transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... rules leaves the domestic tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... “vulnerable” to offshore profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and..., the government said.
The draft Taxation LawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... Amendment Bill 2015 (TLAB) and the draft Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... Laws Amendment Bill 2015 (TALAB) were released July 22 for public consultation to seek feedback on a raft of new tax changes that were proposed in the 2015 annual budget in February.
One of the changes proposed in the TLAB would reverse the 2011 amendments to the divisionary rules regarding CFCs’ inbound and outbound sale of goods.
Prior to 2011, CFC provisions on sales contained three sets of diversionary income rules:
• CFC inbound sales, applying to the sale of goods by the CFC to any connected South African resident, subject to some exemptions;
• CFC outbound sales, applying to the sale of goods by the CFC to a foreign resident or to unconnected South African residents where those goods initially were purchased from connected South African residents, subject to some exemptions; and
• CFC connected services rules, applying to CFCs performing services to a connected South African resident, also subject to some exemptions.
In 2011, the exemptions concerning the diversionary income rules on CFC inbound sales were narrowed, while the rules on CFC outbound sales were abolished because the authorities believed that the transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... rules could be applied as an alternative.
Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... ‘Not Under Control.’
The government claimed “the legislation was unnecessary because SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... had transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... under control,” … “Now, they are bringing the old anti-avoidance legislation back, indicating that transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... is not under control,”…
“While transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... rules can be applied to prevent the shifting of income offshore through the sale of goods and services, the CFC diversionary rules are more expedient in preventing shifting of profits offshore through these transactions,” the government said in the explanatory memorandum accompanying the draft legislation. “The removal of diversionary rules in respect of the CFC outbound sale of goods resulted in the CFC rules being less effective in immediately addressing profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and... by South African resident companies. Transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... auditing processes by their nature often take long[er] to be finalized and therefore relying on transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... solely leaves the South African tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... vulnerable to base erosion practices,” it said.
Consistent with the pre-2011 regime, the proposed changes would apply to CFC inbound sales except when:
• the CFC purchases goods from an unconnected person in the same country of residence as the CFC;
• the CFC is engaged in the creation, extraction, production, assembly, repair or improvement of goods that involves more than minor assembly or adjustment, packaging, repackaging and labelling;
• the CFC sells a significant quantity of goods of the same or similar nature to unconnected persons at comparable prices, after taking into account whether the sales are wholesale or retail, volume discounts and other geographical differences such as location costs of delivery; or
• similar goods are purchased by the CFC mainly within the country in which the CFC is resident from unconnected persons in relation to that CFC.
For outbound CFC sales, the rules would be completely reinstated in line with their application before 2011. As such, the rules would apply to CFCs selling goods to a foreign resident or to unconnected South African residents where those goods initially were purchased from connected South African residents.
However, exemptions will apply if:
• those goods purchased by the CFC from a connected South African resident amount to an insignificant portion of the total goods;
• the CFC is engaged in the creation, extraction, production, assembly, repair or improvement of goods that involves more than minor assembly or adjustment, packaging, repacking, and labelling;
• the products are sold by the CFC to unconnected persons for physical delivery to customers’ premises situated in the country in which the CFC is resident; or
• the same or similar products are sold by the CFC mainly to unconnected persons for physical delivery to customers’ premises in the country in which the CFC is resident.
If approved by parliament, the changes would have effect from Jan. 1, 2016, and would apply for foreign tax years of CFCs ending during assessment years beginning on or after that date.
Other Changes Proposed
Businesses operating in South Africa also would be subject to a raft of new tax changes proposed in the two bills.
The TLAB 2015 proposes revising the definition of immovable property to tax mineral rights in the same manner as foreign persons who sell South African immovable property. The government said the change is necessary because the definition doesn’t currently include the right to mine or prospecting or right to work mineral deposits and other natural resources. It said that because South Africa has more than 73 tax treaties in force, it is important that the domestic definition is as closely aligned with the definition of immovable property in the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... Model Tax TreatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... as possible in order to order avoid any possible anomalies.
Although Engel noted that the proposal is in line with OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... policies, he warned that it will make “mining exploration harder because junior miners make all of their money this way so this could hurt mining investment.”
Referring to the other measures proposed in the bill, Engel also added that there are other crucial developments in the draft bills. For example, a major development is the proposed amendment to the definition of interest for withholding tax purposes, which would be retroactive to March 1, 2015. “This will catch many companies unaware,” Engel said. “The tax may also be levied on amounts before it is even paid,” meaning that the firm owing interest, has to pay SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... before the creditor, he said.
In summary, the TLAB 2015 aims to give effect to the following proposals announced in the 2015 budget review:
• closing a loophole to ensure consistent tax treatment on all retirement funds;
• closing a loophole to avoid estate duty through excessive contributions to retirement funds;
• amending the tax implications of the outright transfer of collateral
• revising the transitional tax issues resulting from the regulation of hedge funds;
• amending measures to counter tax free corporate-migrations; and
• withdrawing special foreign tax credits for service fees sourced in South Africa.
Meanwhile, the TALAB proposes:
• taking into account medical scheme tax credits for pay-as-you-earn
• introducing rules on the collection of information by South African financial institutions and an associated obligation on the financial institutions to register with SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...;
• extending the period of limitations for issuing assessments under narrow circumstances;
• clarifying qualifying persons for voluntary disclosure, relaxing the requirements for voluntary disclosure and broadening the ambit of voluntary disclosure relief; and
• introducing greater transparency and the automatic exchange of information between tax administrations as an important step forward in countering cross border tax evasionTax Evasion refers to illegal activities or practices undertaken by individuals or businesses to avoid paying taxes. It involves intentionally misrepresenting or concealing income, inflating deductions, or underreporting earnings to reduce tax liability unlawfully. Unlike tax avoidance, which uses legal methods to minimize tax obligations, tax evasion is a criminal offence that carries significant penalties, including fines, imprisonment, and asset... and aggressive tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities....
The draft laws are open to public comment until Aug. 24, 2015, with public workshops expected to take place in September. Once further revisions have been made, the government will table the legislation in parliament for approval.
For More Information
The draft bills can be found at http://www.treasury.gov.za/public{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}20comments/TLAB{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}20and{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}20TALAB{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}202015{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}20Draft/ and http://www.sars.gov.za/Legal/Preparation-of-Legislation/Pages/Draft-Documents-for-Public-Comment.aspx.
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