International tax planning

  • Post category:Tax

The place of residence of a company dictates the country that has taxing rights over its income and the basis upon which that income would be taxed. Similar to many other countries South Africa taxes its residents on a worldwide basis. A company is considered to be resident in South Africa if it was incorporated established or formed in the Republic or has its place of effective management in the Republic but excluding an international headquarter company. Company tax is also applied to non-residents carrying on a trade through a branch in South Africa.

Branch is not defined in tax legislation in the Republic. Generally there must exist a physical asset that is used to carry on trade. Using a computer server to advertise merchandise may not be sufficient. If a trade is carried on through the use of a multiple of servers across several jurisdictions it is doubtful that one server in South Africa could constitute a branch even if the servers were used for purposes of delivering the service.

It is possible or that a non-resident trading in South Africa may be taxable both in South Africa and in the country of residence. It is also possible that a South African trading abroad may be taxable in South Africa and abroad. Under the terms of most of South Africas double tax treaties the source country being the country in which the non-resident trades may only excercise its rights to tax in respect of profits generated through a permanent establishment .

Thus the issue of what constitutes a permanent establishment is normally important. The terms of a relevant double tax treaty will normally determine what is permanent establishment. However the principal requirement is a fixed place of business through which the business is carried on. Fixed places of business are excluded from constituting permanent establishments where for example the activities carried out there are of a purely preparatory or auxiliary character to the non-residents business. Also a permanent establishment of a non-resident is normally deemed to exist if contracts are regularly made through a local agent who is not an independent agent. There are also some doubts as to what constitutes a permanent establishment in the context of e-commerce. The possibility has been the raised that a website could be considered a permanent establishment on the grounds that it acts as an agent concluding contacts. As e-commerce expands the permanent establishment concept may very well become less appropriate. This aspect should be considered by most jurisdictions.

Tax Havens
When meeting with a new client for the purpose of developing and international tax plan the client normally enquires about best jurisdiction in which to place elements of planned tax structure. With the onslaught on tax havens by organisations such as the United Nations Report and the OECD report Toward Global Tax Cooperation the selection of a perfect tax haven has been complicated. The OECD report contains a so-called black list of a 35 countries whose evil policies of no tax combined with a willingness to aid taxed evaders from other countries is considered predatory and OECD nations are eventually considering retaliatory action against entities from within a black lack listed country.

When selecting a suitable jurisdiction for the purpose of an international structure the following are some points that could be taken into account

Political and economic stability of the government concerned
Tax legislation.
Relevant legislation that is favourable to the interests of the client such as import rules and permit requirements.
Double tax treaties.
Other agreements of mutual assistance and cooperation between local authorities and foreign jurisdictions.
Freedom to move currency – existence of exchange control.
History is of a minimal governmental interference.
The banking and business privacy laws.
Location of the country and its communication and transportation facilities.
The availability of local legal and other management assistance.

Finally one must keep in mind that the double treaties between countries normally override the tax legislation.