Controlled foreign company (CFC) rules are anti-avoidance provisions designed to deter taxpayers from shifting their capital (and resultant income) to low-tax jurisdictions. Adoption of these rules in South Africa coincided with the relaxation of exchange control laws which opened up borders to inward and outward capital flows. South Africa's CFC regime has been amended over the years to become one of the most sophisticated amongst the G20 and aligned with the Organisation for Economic Co-operation and Development's (OECD) Action 3 recommendations (per the OECD's Base Erosion and Profit Shifting Action Project). Abusive profit-shifting tactics committed by multinational enterprises (MNEs) have caused the OECD to recommend that CFC rules be strengthened globally to combat this behaviour. However, in the United States and the United Kingdom, recent reforms appear to have weakened these countries' CFC (or CFC-equivalent) legislation, countering the OECD's recommendations. Such manoeuvres improve the profitability of these nations' MNEs by allowing their tax bills to remain lower than their international competitors'. As such, there is a danger of starting a race to the corporate tax-rate bottom where developing nations will be the losers, considering their greater reliance on corporate tax revenues than their developed counterparts. India and Brazil, both developing nations and BRICS members like South Africa, also aren't prioritising the strengthening of their CFC regulations – their focus is rather on improving transfer pricing (TP) legislation and enforcement to combat the damaging effects MNEs' avoidance practices are having on tax revenue collections in those countries. The existence of South Africa's advanced CFC legislation amongst a global trend of a weakening in, or the non-adoption of, CFC rules may hinder the competitiveness of South African MNEs. The current CFC regime could thus serve the purpose of stifling growth and foreign direct investment, instead of only deterring profitshifting behaviour. TP legislation targeted at MNEs (the biggest profit-shifting culprits) may yield the most effective anti-avoidance results. South Africa's recently enhanced TP reporting requirements are key to solving the offshore profit-shifting puzzle, as these reports will reveal information about an MNE's global operations and resultant profit-shifting activities. In addition, the revision to the TP arm's length principle to align compensation and value creation, will see profit-shifting MNEs bear the tax they were trying to avoid. It appears that the anti-avoidance purpose embodied within CFC regulations overlaps with the anti-avoidance mechanisms that these enhanced TP rules are designed to achieve. Thus, in a South African context, the most efficient way to curb tax avoidance may be to rely on TP, rather than CFC, legislation. As such, it is recommended that South Africa's CFC regulations be repealed.

With constant changes in the nature of businesses, the way businesses are managed and the manner in which corporate groups are structured, a valid risk exists that legislation, including controlled foreign company (CFC) legislation can become outdated. The implication is that a country’s tax base will not be effectively protected. The aim of this mini-dissertation is to analyse section 9D of the South African Income Tax Act (58 of 1962) against the United Kingdom’s CFC regime to identify aspects of the new CFC rules enacted in Great Britain that could enhance South African CFC rules. Since the United Kingdom and South Africa levy income tax on a residence basis, it was concluded that the CFC regimes of these countries would be comparable. The research problem statement was determined to consider whether any aspects of the amended United Kingdom CFC legislation could be incorporated in the South African CFC rules to ensure that they are more accommodating to investors on the one hand and still protect the South African tax base efficiently on the other hand. The problem statement was addressed through the research objectives. Their findings are summarized as follows: 1 To determine what the factors and circumstances were that resulted in the revised CFC legislation in the United Kingdom. It was found that the Commissioner of Inland Revenue was applying the “motive test” very subjectively which resulted in resident-holding companies being taxed on legitimate trading profits of foreign subsidiaries. The “motive test” therefore lacked objectivity which resulted in the residents being taxed on the profits of their subsidiaries. Since section 9D of the South African Income Tax Act (58 of 1962) also applies a subjective test to consider the investor’s motives, it was concluded that the South African legislation is faced with a similar pitfall as the UK CFC legislation enacted in 1984. 2 To critically compare the CFC rules per section 9D of the South African Income Tax Act to the CFC legislation effective 1 January 2013 in the United Kingdom. It was found that the South African rules address a wider range of activities, whereas the UK CFC regime focuses on specific income streams. A number of aspects were identified where the two sets of legislation agree, but areas were also identified where the legislation differs. 3 To identify elements of the new CFC legislation in the United Kingdom that might improve the current South African CFC regime. The differences identified between the South African and United Kingdom CFC regimes were evaluated. It was concluded that there are elements of the South African legislation that should remain unchanged as it addresses specific risks. It was, however, also concluded that there are valid elements implemented in the UK CFC regime that could simplify the South African CFC legislation, enhancing its competitiveness while still retaining the integrity and effectiveness of the legislation. It was concluded that even though the differences between section 9D and the UK CFC regime may enhance section 9D when enacted in South Africa, these enhancements should be considered very carefully as they might create loopholes providing false progress to section 9D. / MCom (South African and International Taxation), North-West University, Potchefstroom Campus, 2014

With constant changes in the nature of businesses, the way businesses are managed and the manner in which corporate groups are structured, a valid risk exists that legislation, including controlled foreign company (CFC) legislation can become outdated. The implication is that a country’s tax base will not be effectively protected. The aim of this mini-dissertation is to analyse section 9D of the South African Income Tax Act (58 of 1962) against the United Kingdom’s CFC regime to identify aspects of the new CFC rules enacted in Great Britain that could enhance South African CFC rules. Since the United Kingdom and South Africa levy income tax on a residence basis, it was concluded that the CFC regimes of these countries would be comparable. The research problem statement was determined to consider whether any aspects of the amended United Kingdom CFC legislation could be incorporated in the South African CFC rules to ensure that they are more accommodating to investors on the one hand and still protect the South African tax base efficiently on the other hand. The problem statement was addressed through the research objectives. Their findings are summarized as follows: 1 To determine what the factors and circumstances were that resulted in the revised CFC legislation in the United Kingdom. It was found that the Commissioner of Inland Revenue was applying the “motive test” very subjectively which resulted in resident-holding companies being taxed on legitimate trading profits of foreign subsidiaries. The “motive test” therefore lacked objectivity which resulted in the residents being taxed on the profits of their subsidiaries. Since section 9D of the South African Income Tax Act (58 of 1962) also applies a subjective test to consider the investor’s motives, it was concluded that the South African legislation is faced with a similar pitfall as the UK CFC legislation enacted in 1984. 2 To critically compare the CFC rules per section 9D of the South African Income Tax Act to the CFC legislation effective 1 January 2013 in the United Kingdom. It was found that the South African rules address a wider range of activities, whereas the UK CFC regime focuses on specific income streams. A number of aspects were identified where the two sets of legislation agree, but areas were also identified where the legislation differs. 3 To identify elements of the new CFC legislation in the United Kingdom that might improve the current South African CFC regime. The differences identified between the South African and United Kingdom CFC regimes were evaluated. It was concluded that there are elements of the South African legislation that should remain unchanged as it addresses specific risks. It was, however, also concluded that there are valid elements implemented in the UK CFC regime that could simplify the South African CFC legislation, enhancing its competitiveness while still retaining the integrity and effectiveness of the legislation. It was concluded that even though the differences between section 9D and the UK CFC regime may enhance section 9D when enacted in South Africa, these enhancements should be considered very carefully as they might create loopholes providing false progress to section 9D. / MCom (South African and International Taxation), North-West University, Potchefstroom Campus, 2014