The Challenges that E-commerce Poses to International Tax Laws: ‘Controlled Foreign Company Legislation’ from a South African
Faced with high rates of tax in their countries of residence, taxpayers involved in international trade are increasingly developing global tax avoidance strategies, in order to maximize profits. For most businesses, the possibility of reducing tax costs by basing a business offshore in a low tax jurisdiction is an inherent aspect of international tax planning. Where accompany is based in an offshore jurisdiction, it is not subject to domestic tax until its income is distributed to the shareholders as dividends with the growing use of international intermediaries and the increase in tax-haven jurisdictions and preferential tax regimes, a number of countries have been prompted to enact specific anti-tax avoidance legislation to reduce the risk of losing domestic tax revenue from international investment. This legislation includes ‘controlled foreign company’ (CFC) legislation. Without this legislation, it would be easy for a resident taxpayer to defer domestic taxation on its foreign income by simply interposing a foreign company in a territory with a lower level of taxation to receive such income, instead of remitting it to the home country. CFC legislation ensures that the undistributed income of a controlled foreign company is not deferred, but is taxed in the hands of its domestic shareholders on a current basis. However, the effectiveness of CFC legislation in curbing the deferral of taxes faces challenges from the current developments of technology. This is especially so with e-commerce, which encourages taxpayers to access offshore facilities without the confines of geographical boundaries. CFC legislation was designed to work in the world before e-commerce when the jurisdiction to tax was based on where transactions or activities took place. This legislation may this not be adequate to deal with new technological developments. E-commerce increases the opportunities for CFCs to be incorporated in low-tax or no-tax jurisdictions and it makes it difficult to assign a place of performance, a factor that is relevant with respect to CFC rules. This article analyses the working of South Africa’s CFC legislation and points out the challenges that this legislation faces in the e-commerce era. The responses of other countries to similar challenges in their CFC legislation are also discussed, and recommendations for the reform of the South African legislation are pointed out.
Source: By Annet Wanyana Oguttu (University of South Africa)
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.