Controlled foreign companies – what would we like to see

2018/19 South African National Budget Expectations

South African multinationals spend an inordinate amount of time on complying with the administrative aspects of controlled foreign company (CFC) legislation. This is mainly due to the complex legislation regulating the imputation of income of CFCs to their South African resident shareholders.

In most cases, for companies to be exempted from the application of the CFC legislation, it has to prove that it qualifies either for the high tax exemption or for the foreign business exemption.

The high tax exemption tests the tax paid by the CFC against a hypothetical South African tax charge. If the tax paid in the foreign jurisdiction is 75% or more of the hypothetical South African charge, the net income will not be imputed to the South African resident shareholders.

The definition of a foreign business establishment contains a long and detailed description of what would constitute such an establishment.

Both tests are onerous to prove. The high tax exemption requires a complete and thorough South African tax calculation whilst the foreign business establishment requires a detailed consideration of the facts pertaining to the company’s operations, offices and employees.

For some time now, tax practitioners have expressed their concern that the costs and effort associated with complying with the administrative requirements of the CFC legislation far outweigh the benefit to the fiscus. Comparatively little tax, in the bigger scheme of things, is being collected as a result of our CFC legislation.

Suggestions made by tax practitioners to simplify the legislation have not been positively received by the National Treasury. These suggestions include having a “white list” of countries that will automatically exempt entities from those countries from any imputations. Suggestions that the 75% rate for testing for high tax is too high in a world where corporate tax rates have been reducing, have also met with a lukewarm reception from National Treasury.

In conclusion, it would be a positive step if the 2018 Budget Speech would provide a reference to a simplified CFC regime, where the money collected by the fiscus is commensurate with the costs associated such collection. 

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