LOW-TAX AND TAX-HAVEN JURISDICTIONS: CATALYSTS FOR OFFSHORE TAX AVOIDANCE

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EXEMPTIONS FROM THE CFC CHARGE

There are five exemptions from the CFC rules as set out in section 748 of the ICTA.

The acceptable distribution policy exemption

In terms of paragraph 2 of Schedule 25 of the ICTA, an exemption is granted where a CFC distributes at least 90% of its net chargeable profits for the accounting period to its United Kingdom shareholders if the dividends are taxable in their hands. The acceptable distribution test will, however, not be met if the dividends are paid out of specific profits. This is to prevent a CFC meeting the distribution test by specifying that dividends are paid out of profits which have been subjected to a high rate of foreign tax, thereby qualifying for double tax relief in the United Kingdom yet leaving untaxed or low taxed profits abroad.
Dividends must generally be paid within 18 months of the end of the accounting period. A dividend paid to a dual resident company (and hence not accessible toUnited Kingdom tax) does not satisfy the distribution test. Furthermore, the exemption does not apply if it is used as part of a tax avoidance scheme.21

The exempt activities test

To satisfy this test, a company must fulfil three conditions:

(i) Throughout the accounting period in question, the CFC is required to have a business establishment in the territory in which it is resident. This condition presupposes that the company genuinely operates where it is resident.22
(ii) Throughout the accounting period in question, its business affairs in that territory should be effectively managed there. This ensures that bona fide foreign trading companies are kept outside the ambit of the CFC legislation.23
(ii) One of the following should apply:
– The CFC’s main business does not consist of investment business, or dealing in goods for delivery to or from the United Kingdom or connected or associated persons; and, in the case of a company mainly engaged in wholesale, distributive or financial business, less than 50% of its gross trading receipts come from connected or associated persons.24
– The CFC should be a “local holding company” that derives at least 90% of its gross income during that period from non-holding companies which are resident in the same territory and engaged in
exempt activities.25
– The CFC should be a “non-local holding company” that derives at least 90% of its gross income during that period from local holding companies or non-holding companies engaged in exempt activities.26

The CFC should be a “superior holding company” that derives at least 90% of its gross income during that period from companies which it controls, each of which is engaged in exempt activities or is itself a superior holding company.27

The public quotation test

In terms of the ICTA, paragraph 13-15 of Schedule 25, an exemption applies if the CFC is listed on a recognised stock exchange in the country in which it is resident. At least 35% of the voting share capital must be held by the public. The motive test Section 748(3) and paragraphs 16-19 of Schedule 25 to the ICTA provide that an exemption will be granted if the reduction of United Kingdom tax by diverting profits from the United Kingdom was not one of the main purposes of the
company’s existence. A company resident in a country on the “excluded countries list” automatically passes this test.28

The low profit exemption test

In terms of section 748(1)(d) of the ICTA, a CFC charge does not arise if the chargeable profits of the CFC are below ₤50 000 in any accounting period (the de minimis rule).29 The purpose of the de minimis rule is to ensure that rules will not apply unless a certain threshold of profits has been exceeded. Such a provision alleviates the administrative burden on tax authorities so that resources
are allocated to investigating CFCs with larger profit bases.30
To enhance the effectiveness of the United Kingdom CFC legislation, section 748A of the ICTA was introduced by section 89 of FA 2002. This section has theeffect of removing the application of the exempt activities and also all the other exceptions, if the CFC is incorporated in or liable to tax in a territory designated by the Treasury.31 The purpose of section 748A is to give United Kingdom tax
authorities a weapon against offshore tax avoidance that is in line with the OECD fight against harmful tax competition. The OECD policy is that if a tax haven is uncooperative, OECD members should make use of fiscal and other countermeasures.32 Section 748A enables the Treasury to tighten the CFC regime in respect to CFCs incorporated in a non-compliant territory. The designation of such a territory is, however, subject by statutory instrument to affirmative resolution procedures.33

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CHAPTER 1  INTRODUCTION 
1.1 Background information
1.2 Defining tax avoidance
1.3 Factors that have encouraged offshore tax avoidance
1.4 Statement of problem
1.5 Hypothesis
1.5.1 The existence of low-tax and “tax-haven” jurisdictions
1.5.2 Structural features of trusts and companies that make them ideal vehicles for offshore tax avoidance
1.6 Scope of the study
1.7 Methodology
1.8 Conclusi
CHAPTER 2  LOW-TAX AND TAX-HAVEN JURISDICTIONS: CATALYSTS FOR OFFSHORE TAX AVOIDANCE
2.1 What is a tax-haven jurisdiction?
2.2 The characteristics of tax-haven jurisdictions
2.3 Historical development of tax-haven jurisdictions
2.4 A survey of some international initiatives taken to stifle the development of tax-haven
2.5 The OECD campaign against harmful tax practices: Does it mark the demise of “tax-haven jurisdictions” and “harmful preferential tax regimes”?
2.6 To what extent does South Africa follow the OECD recommendations?
2.7 Conclusion
CHAPTER 3  INVESTING IN OFFSHORE COMPANIES 
3.1 Defining a company
3.2 Why companies are used for offshore tax avoidance
3.3 Examples of offshore companies
3.4 Jurisdiction to tax income from offshore companies
3.5 Jurisdiction to tax (historical development in South Africa)
3.6 The residence basis of taxation: Taxing the offshore income of South African companies
Challenges posed by e-commerce The position in South Africa
3.9 Jurisdiction to tax investments from offshore companies in the United Kingdom
3.10 Jurisdiction to tax income from investments in offshore companies in the United States of America
3.11 Conclusion
CHAPTER 4 CURBING TAX AVOIDANCE THAT RESULTS FROM INVESTING IN OFFSHORE COMPANIES: SOUTH AFRICA
4.1 Introduction
4.3 The definitions of the terms used in the CFC legislation
4.4 Exemptions to the CFC provisions
4.5 Elections
4.6 Disclosure requirements
4.7 The compatibility of South Africa’s CFC legislation and its tax treaties
4.8 Challenges e-commerce poses to South Africa’s CFC legislation
4.9 How the complexity of South Africa’s CFC legislation affects its effectiveness
4.10 Curbing tax avoidance that results from investing in offshore hybrid entities
4.11 Curbing tax avoidance that results from insting in conduit company structures (treaty shopping)
4.12 Conclusion
CHAPTER 5  CURBING TAX AVOIDANCE THAT RESULTS FROM INVESTING IN OFFSHORE COMPANIES: THE UNITED KINGDOM AND THE UNITED STATES
CHAPTER 6  THE “TRUST” CONCEPT: WHY TRUSTS ARE IDEAL FOR OFFSHORE TAX AVOIDANCE
CHAPTER 7 CURBING OFFSHRE TRUSTS’ TAX AVOIDANCE: SOUTH AFRICA 
CHAPTER 8  CURBING TAX AVOIDANCE BY OFFSHORE TRUSTS: THE UNITED KINGDOM AND THE UNITED STATES
CHAPTER 9  THE ROLE OF EXCHANGE CONTROLS IN LIMITING THE OUT-FLOW OF CAPITAL TO OFFSHORE JURISDICTIONS
CHAPTER 10  COMPARATIVE ANALYSIS 
CHAPTER 11  CONCLUSIONS AND RECOMMENDATIONS

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CURBING OFFSHORE TAX AVOIDANCE: THE CASE OF SOUTH AFRICAN COMPANIES AND TRUSTS

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