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INTERNATIONAL TAX PLANNING KEMP MUNNIK Head of Tax: BDO South Africa
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INDEX WHAT IS INTERNATIONAL TAX? General Terms Expanding operations
Anti avoidance Role of international tax planner Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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whAT iS International tax?
Does international tax law exist? International tax International aspects of domestic law Study: different tax systems interact tax treaties Two principle elements Rules of International Organisational State belongs to, eg, WTO Common principles adopted – majority of States Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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GENERAL TERMS JURISDICTION TO TAX CORPORATE RESIDENCE DOUBLE TAXTION
TAX TREATIES Permanent establishment Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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JURISDICTION TO TAX Claims to taxing rights are based on 'connecting factors', typically: RESIDENCE of a taxpayer in a jurisdiction Residents are generally taxed on their worldwide income SOURCE of income within a jurisdiction Trading profits, rents, interest, royalties, dividends etc Some countries have different 'connecting factors' e.g. the US imposes worldwide taxation of individuals based on citizenship, not residence Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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CORPORATE RESIDENCE (DOMESTIC LAW)
Important because it establishes primary taxing rights Residence country taxes on worldwide income Different countries use different criteria to establish residence Most common criteria: Incorporation Management and control Incorporation OR management and control Place of effective management Example: SA Incorporation OR central management and control The former is statutory; the latter has been developed by case law Day-to-day management activities Also corporate seat, registered office etc Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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ESTABLISHING RESIDENCE
Much international tax planning involves corporate residence Being resident in Country A NOT being resident in Country B Incorporation and similar tests are straightforward enough 'Management and control' type tests depend on the FACTS Tax authorities will look at each situation on its own facts Case law decisions are fact-heavy and there are some grey areas Correct implementation is vital Hard evidence, and plenty of it Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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DUAL RESIDENCE It is possible to be resident in more than one country
Taxed on worldwide income in both DTR may not be straightforward Many countries have laws to prevent double use of losses One valuable role of tax treaties is to allocate residence to only one of the treaty partners 'Tie-breaker' clause Most countries will follow this allocation for domestic tax purposes Most tie-breakers turn on 'place of effective management' Similar to the UK’s concept of 'central management and control' OECD guidance But watch recent treaty trend towards 'mutual agreement' Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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CHANGING RESIDENCE It is possible to move a company’s residence
Also known as ‘migration’ or ‘emigration’ May be deliberate or accidental Typically involves moving the place of effective management Requires application of the law to the facts Has tax implications in both countries Departure from Country A Exit taxes? May accelerate tax return submission /payment dates Arrival in Country B Base cost of assets Tax registration requirements Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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DOUBLE TAXTION TYPES Economic double taxation
Income taxed twice in the hands of different taxpayers Juridical double taxation Income taxed twice in the hands of the same taxpayer Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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DOUBLE TAXTION Credit or exemption Unilateral relief Treaty relief
RELIEF FROM DOUBLE TAXATION Credit or exemption Unilateral relief Treaty relief Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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TAX TREATIES International agreements Sovereign states
Typically negotiated by tax authorities Based on model treaty OECD – favours the ‘residence’ state UN – favours the ‘source’ state US – famous for its ‘limitation on benefits’ clause Interpretation Determined by national courts, but according to international principles Should be interpreted in ‘good faith’, look at clear meaning of the treaty, unconstrained by national law Vienna Convention OECD Commentary Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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Permanent establishment
The ‘business profits’ article gives sole taxing rights to the residence state UNLESS the profits are attributable to a Permanent Establishment in the source state Therefore, if you don’t have a PE then the source state cannot tax your business profits made in that country A common and vital question is “do/will we have a PE?” The basic definition is in the treaty Always check the actual treaty, as they do NOT always follow the model There is more information in the model commentary Reliance on the Commentary is subject to the earlier points about treaty interpretation In any event, the Commentary can only be used to the extent that the wording in your treaty follows that of the model Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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WHAT IS A PERMANENT ESTABLISHMENT
OECD Model Treaty recognises two separate types of PE Actual PE Deemed PE Fixed place of business Through which The business of the enterprise Is wholly or partly carried on Dependent agent Authority to conclude contracts (sometimes 'do business’- wider) In the name of the enterprise Habitual exercise of that authority Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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EXPANDING OPERATIONS ISSUES TO CONSIDER
Location Residence Structure Financing Intellectual property Transfer pricing Profit repatriation Withholding taxes on payments of money around the group Gain on eventual sale Other taxes Location – rate of tax, treaty network, EU or not Residence – UK directors need to be able to get there for board meetings etc Structure – branch, sub, JV, p’ship – do you need local partners for regulatory or commercial reasons? Financing – how will you get the money where it needs to be, how will you get it back out again? IP – have you got any? You sure about that? Where should it be held, and how will the companies which use it pay for it? Transfer pricing – has the jurisdiction got rules? Has your home jurisdiction got rules? How will you deal with this? Profit repatriation – dividends, repayment of loans, sell up? WHT – domestic law, treaties CGT – at home and abroad Other taxes – the last time we’ll mention these since I already caveatted the intro section – expat, payroll, VAT registration and so on. Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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ANTI AVOIDANCE THINGS TO WATCH FOR
Controlled foreign company and similar provisions Transfer pricing Thin capitalisation restrictions Hybrid entities GAARs Disclosure rules Treaty overrides Payments to tax havens Trading losses Conduit arrangements And others… always take advice from a local tax specialist Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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ROLE OF INTERNATIONAL TAX ADVISOR
South African perspective Advise residents: SA tax liability of foreign income Advise non residents: tax liability of SA sourced income Domestic law knowledge – NB! Raise questions: foreign countries taxing rights ie, tax rates, withholding taxes, DTAs Eliminate double tax Advise on: Relief measures available Anti avoidance measures Exchange Control requirements Non Tax factors Return on investment, legal admin systems and commercial and banking facilities, accounting laws, etc “Lawful avoidance of tax in any jurisdiction is the realisation of every taxpayers’ dream” (Huitson R) Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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QUOTATION - Arnold & McIntyre (2002)10
“The Tax ‘tail’ should not wag the commercial ‘dog’. Once the decision to invest has been made, however tax is an important factor in determining the way in which the investment should be structured.” - Arnold & McIntyre (2002)10 Facing the Challenges of Doing Business in Africa International Tax Planning 2011
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Roxanna Nyiri Tax Director BDO South Africa
Independent 3rd Parties
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JPS Group Case Study ??? – Owns Intellectual Property
Royalty ??? – Owns Intellectual Property JPS South Africa Manufacturer Investment Product JPS Mauritius JPS Botswana JPS Uganda JPS Zambia ??? - Headquarter Company location Export Raw Materials Distribution Independent 3rd Parties Facing the Challenges of Doing Business in Africa
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International Tax Planning Objectives
To divert, extract and distribute profits out of high tax paying jurisdictions Ensure that connecting factors i.e. residence/presence do not arise in high tax paying jurisdictions Avoid double tax Minimise global tax liability Facing the Challenges of Doing Business in Africa
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Fully Fledged manufacturer
JPS Example High Tax South Africa 28% Contract Manufacturer / Agent Returns Zambia 35% Uganda % Risk Low Tax Mauritius % Fully Fledged manufacturer Centralised Services Returns Tax incentive co 3% Distributor Intangibles Risk Botswana 15% - 22% Facing the Challenges of Doing Business in Africa
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International Tax issues in SA
Substance over form Source/deemed source Section 9D Residence Section 31 DTA effects General anti avoidance Facing the Challenges of Doing Business in Africa
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SUBSTANCE OVER FORM Is there substance to the offshore entities or are they merely post box companies? Are there premises, resources, employees and capital infrastructure in the offshore entities? Facing the Challenges of Doing Business in Africa
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