INTERNATIONAL TAX PLANNING
KEMP MUNNIK
Head of Tax:
BDO South Africa
INDEX
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WHAT IS INTERNATIONAL TAX?
GENERAL TERMS
EXPANDING OPERATIONS
ANTI AVOIDANCE
ROLE OF INTERNATIONAL TAX PLANNER
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WHAT IS INTERNATIONAL TAX?
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DOES INTERNATIONAL TAX LAW EXIST?
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INTERNATIONAL TAX
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International aspects of domestic law
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Study: different tax systems interact
• TAX TREATIES
• TWO PRINCIPLE ELEMENTS
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Rules of International Organisational State belongs to, eg, WTO
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Common principles adopted – majority of States
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GENERAL TERMS
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JURISDICTION TO TAX
CORPORATE RESIDENCE
DOUBLE TAXTION
TAX TREATIES
PERMANENT ESTABLISHMENT
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JURISDICTION TO TAX
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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
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CORPORATE RESIDENCE (DOMESTIC LAW)
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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
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ESTABLISHING RESIDENCE
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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
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DUAL RESIDENCE
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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'
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CHANGING RESIDENCE
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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
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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
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DOUBLE TAXTION
RELIEF FROM DOUBLE TAXATION
• Credit or exemption
• Unilateral relief
• Treaty relief
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TAX TREATIES
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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
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PERMANENT ESTABLISHMENT
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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
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WHAT IS A PERMANENT ESTABLISHMENT
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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
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EXPANDING OPERATIONS
ISSUES TO CONSIDER
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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
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ANTI AVOIDANCE
THINGS TO WATCH FOR
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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
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ROLE OF INTERNATIONAL TAX ADVISOR
• South African perspective
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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
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ie, tax rates, withholding taxes, DTAs
• Eliminate double tax
• Advise on:
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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)
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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
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BDO SOUTH AFRICA
Roxanna Nyiri
Tax Director
BDO South Africa
Independent 3rd
Parties
JPS GROUP CASE STUDY
Royalty
JPS South Africa
Manufacturer
Investment
??? – Owns
Intellectual
Property
Product
JPS Mauritius
Export
Raw Materials
JPS Botswana
JPS Uganda
JPS Zambia
??? Headquarter
Company
location
Distribution
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Independent 3rd
Parties
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
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JPS EXAMPLE
High Tax
South Africa 28%
Returns
Zambia
35%
Uganda
30%
Contract Manufacturer / Agent
Risk
Low Tax
Returns
Mauritius
Tax incentive co
Risk
15%
3%
Botswana
15% - 22%
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Fully Fledged
manufacturer
Distributor
Intangibles
Centralised Services
INTERNATIONAL TAX ISSUES IN SA
• Substance over form
• Source/deemed source
• Section 9D
• Residence
• Section 31
• DTA effects
• General anti avoidance
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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?
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