An evaluation of the South African CFC rules with a specific focus on multi-layered transactions

Abstract

Prior to 2019, it had become increasingly prevalent for taxpayers to interpose additional (arguably unnecessary) Controlled Foreign Companies (CFCs) into their international supply chains between South African resident taxpayers and independent non-resident suppliers or customers. Often this was done in order to circumvent CFC anti-diversionary rules by diverting profits to group companies that are subject to tax at a lower rate and that are not subjected to the South African specific anti-diversionary rules. The question that arises is thus whether the current South-African CFC legislation read with the 2019 amendments thereto (particularly insofar these relate to direct and indirect transactions between various parties involved in multi-layered transactions) is sufficient as a deterrent against such abusive multi-layered structures and transactions without going so far as to discourage legitimate business and investment into or from South Africa. Making use of interpretive and qualitative research methodologies, this study analyses the South African CFC legislation relating to multi-layered structures and transactions in context of the actual risk posed by such structures to the South African tax base, the South African tax legislative trends which have paved the way for the 2019 amendments, the views of local and international industry experts and the treatment of similar transactions and/or structures in comparable foreign jurisdictions.