An international comparative study of South African controlled foreign company legislation

PhD (Tax), North-West University, Potchefstroom Campus, 2014Globalisation of trade and investment has led multinational enterprises to develop strategies to maximise profits by investing in countries with a favourable tax climate, resulting in loss of tax revenue to domestic economies. In South Africa, recent economic liberalisation and associated relaxation of exchange controls have created increasing exposure to global competition, risk of capital flight and potential threat to the tax base. Heeding OECD recommendations intended to counter negative tax implications for domestic economies and curb harmful tax practices, South Africa introduced controlled foreign company provisions initially in 1997, followed by comprehensive legislation in 2001. Appropriateness of South Africa’s CFC regulations as domestic anti-avoidance measures is assessed in this study for their relevance in the international fiscal arena, highlighting key divergences, shortcomings and anomalies in the South African regulations compared with OECD recommendations, and with regulatory measures in the United Kingdom (jurisdictional-entity approach) and the United States (transactional approach), these two examplars offering paradigms of the most important CFC regulatory approaches currently in force. The primary materials investigated in the study are the statutes which constitute the taxation laws, read in conjunction with auxiliary, quasi-statutory advisory and explanatory documentation issued by the respective regulatory authorities, along with test cases that established legal precedent on points of ambiguity in taxation law. A key finding in the literature review is the relative dearth of publications on current South African CFC regulations in an international comparative context. A paradigm shift is noted in United Kingdom tax policy, as it migrates towards a territorially inclined tax system in CFC regulations – more compatible with European Union (EU) requirements and propelled in large measure by EU-pressure – with a similar trend in United States tax policy, intended to rekindle expansion and growth of the United States economy through repatriation of foreign funds earned by CFCs. The study finds that it would be unrealistic to seek an absolute paradigm for reform or evolution of South African CFC regulations in either the United Kingdom or the United States, although the South African and United Kingdom CFC measures show significant affinities in their entity-based mechanisms to grant full exemption. More significant constituents of CFC regulation in one or another of the two countries do, however, prove to be generally congenial to the South African situation and offer useful pointers for ongoing reform of the South African measures. Other areas in the United Kingdom or United States CFC regulations are identified as less relevant to South African requirements, being linked to tax principles that would be excessively complicated in the South African circumstances, needlessly demanding for tax administrators and for South African shareholders, contradictory to South African tax principles, anachronistic, or not suited for the underlying global-entity approach in the South African regulations. The research provides an updated assessment of the current state of the South African CFC regulatory measures, when seen in a broader international context, and indicates areas that could be the subject of fruitful ongoing investigation.Doctora