The purpose of this study is to analyse low tax jurisdictions as a means of attracting direct foreign investment from a South African point of view. The phenomenon of low tax rates, tax havens and foreign investment have been inextricably linked over years but have gained notoriety since efforts by the Organisation for Economic co-operation and Development (OECD), to harmonise taxation and eliminate unfair tax competition between countries and specifically so with regard to countries classified as tax havens. These efforts have been given further momentum by the recent events known as the worldwide “financial crisis” which have at least partially been blamed on practices followed by tax havens. The phenomenon of low tax rates has been identified as one measure to increase foreign direct investment (FDI) and therefore stimulate the growth of local economies. Low tax rates have been very successfully exploited by countries labeled as tax havens resulting in high economic growth for such countries. It is recognised that South Africa is in need of foreign investment and specifically fixed investment to accelerate growth and solve specific problems like the high levels of unemployment. AFRIKAANS : Die doel van hierdie studie is om ‘n ontleding uit ‘n Suid-Afrikaanse oogpunt te doen van die aanvaarding van ‘n lae koers belastingstelsel soortgelyk aan diè soos gebruik in sogenaamde belastingtoevlugsoorde. Die verskynsel van lae belastingkoerse en buitelandse investering is ‘n bewese feit maar het berugtheid verwerf sedert die pogings van die Organisation for Economic Co-operation and Development (OECD), om belastingkoerse te harmoniseer en onbillike belastingwedywering uit te skakel tussen lande en met spesifieke verwysing na lande geklassifiseer as belastingtoevlugsoorde. Hierdie pogings het verdere momentum verwerf na aanleiding van die gebeure wat bekendheid verwerf het as die wêreldwye finansiële krisis wat ten minste gedeeltelik toegeskryf is aan praktyke gevolg deur belastingtoevlugsoorde. Die praktyk van lae belastingkoerse is geïdentifiseer as een metode om buitelandse investering te stimuleer en sodoende plaaslike ekonomiese goei aan te moedig. Verskeie sogenaamde belastingtoevlugsoorde het sukses behaal deur gebruik te maak van lae belastingkoerse ten einde hoë ekonomiese groeikoerse te bewerkstellig. Suid Afrika het ‘n behoefte aan buitelandse investering en spesifiek vaste investering ten einde plaaslike groei van die ekonomie aan te moedig en sodoende probleme soos hoë werkloosheidsvlakke aan te spreek. / Dissertation (MCom)--University of Pretoria, 2010. / Taxation / unrestricted

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.