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INTERNATIONAL TAX PLANNING KEMP MUNNIK Head of Tax: BDO South Africa.

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Presentation on theme: "INTERNATIONAL TAX PLANNING KEMP MUNNIK Head of Tax: BDO South Africa."— Presentation transcript:

1 INTERNATIONAL TAX PLANNING KEMP MUNNIK Head of Tax: BDO South Africa

2 Page 2 Facing the Challenges of Doing Business in Africa INDEX WHAT IS INTERNATIONAL TAX? GENERAL TERMS EXPANDING OPERATIONS ANTI AVOIDANCE ROLE OF INTERNATIONAL TAX PLANNER International Tax Planning 2011

3 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 International Tax Planning 2011 Page 3 Facing the Challenges of Doing Business in Africa

4 GENERAL TERMS JURISDICTION TO TAX CORPORATE RESIDENCE DOUBLE TAXTION TAX TREATIES PERMANENT ESTABLISHMENT International Tax Planning 2011 Page 4 Facing the Challenges of Doing Business in Africa

5 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 International Tax Planning 2011 Page 5 Facing the Challenges of Doing Business in Africa

6 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 International Tax Planning 2011 Page 6 Facing the Challenges of Doing Business in Africa

7 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 International Tax Planning 2011 Page 7 Facing the Challenges of Doing Business in Africa

8 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' International Tax Planning 2011 Page 8 Facing the Challenges of Doing Business in Africa

9 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 International Tax Planning 2011 Page 9 Facing the Challenges of Doing Business in Africa

10 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 International Tax Planning 2011 Page 10 Facing the Challenges of Doing Business in Africa

11 DOUBLE TAXTION RELIEF FROM DOUBLE TAXATION Credit or exemption Unilateral relief Treaty relief International Tax Planning 2011 Page 11 Facing the Challenges of Doing Business in Africa

12 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 International Tax Planning 2011 Page 12 Facing the Challenges of Doing Business in Africa

13 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 International Tax Planning 2011 Page 13 Facing the Challenges of Doing Business in Africa

14 WHAT IS A PERMANENT ESTABLISHMENT OECD Model Treaty recognises two separate types of PE -Actual PE -Deemed PE Actual PE -Fixed place of business -Through which -The business of the enterprise -Is wholly or partly carried on Deemed PE -Dependent agent -Authority to conclude contracts (sometimes 'do business’- wider) -In the name of the enterprise -Habitual exercise of that authority International Tax Planning 2011 Page 14 Facing the Challenges of Doing Business in Africa

15 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 International Tax Planning 2011 Page 15 Facing the Challenges of Doing Business in Africa

16 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 International Tax Planning 2011 Page 16 Facing the Challenges of Doing Business in Africa

17 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) International Tax Planning 2011 Page 17 Facing the Challenges of Doing Business in Africa

18 QUOTATION “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 International Tax Planning 2011 Page 18 Facing the Challenges of Doing Business in Africa

19 Independent 3 rd Parties BDO SOUTH AFRICA Roxanna Nyiri Tax Director BDO South Africa

20 JPS GROUP CASE STUDY Facing the Challenges of Doing Business in Africa Page 20 JPS South Africa Manufacturer Distribution Export Product Raw Materials Royalty Investment JPS Mauritius JPS Botswana JPS Uganda JPS Zambia ??? – Owns Intellectual Property ??? - Headquarter Company location Independent 3 rd Parties

21 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 Page 21

22 JPS EXAMPLE High Tax South Africa 28% Contract Manufacturer / Agent Returns Zambia 35% Uganda 30% Returns Low Tax Risk Mauritius 15% Tax incentive co 3% Fully Fledged manufacturer Centralised Services Botswana 15% - 22% Distributor Intangibles Risk Facing the Challenges of Doing Business in Africa Page 22

23 Substance over form Source/deemed source Section 9D Residence Section 31 DTA effects General anti avoidance INTERNATIONAL TAX ISSUES IN SA Facing the Challenges of Doing Business in Africa Page 23

24 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 Page 24


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