South Africa has specific anti-tax avoidance legislation aimed at South African owned foreign companies.
This so-called controlled foreign company tax legislation in essence aim to tax the notional taxable income of a foreign company in the hands of its South African shareholders.
However an exemption is provided from such taxation if the foreign entity is regarded as sufficiently taxed abroad – the threshold is currently set at 75% of the tax that would have been due had the foreign company been a South African tax resident. The rationale for this exemption is that if the foreign company is sufficiently taxed abroad, no or little anti-tax avoidance risk should exist.
In light of the global trend of lowering corporate tax rates, the Minister of Finance proposed that the current 75% “high tax” exemption threshold will be reconsidered. This proposal implicitly recognise that legitimate business may be conducted offshore whilst incurring significantly less foreign tax compared with South Africa. Although a lowering of the 75% threshold would be in line with the global trend, equally important is the manner in which the amount of taxes to be compared are calculated. South Africa’s current “high tax” exemption is not consistent with the global norm (as advocated by the Organisation for Economic Cooperation and development (‘OECD’)) and a simple threshold adjustment alone will have little practical impact in respect of foreign companies operating as part of a tax group.
A threshold adjustment (lowering) may still result in the South African shareholders of a foreign company being subject to tax on the notional taxable income of the foreign companies, even though economically the foreign company is subjected to foreign taxes at an effective rate in excess of the “high tax” threshold.
Cor Kraamwinkel | International Tax Partner | PwC Tax | cor.kraamwinkel@pwc.com |
