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An Analysis of the Methods Used in the South African Domestic Legislation and in Double Taxation Treaties Entered Into by South

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An Analysis of the Methods Used in the South African Domestic Legislation and in Double Taxation Treaties Entered Into by South The copyright of this thesis vests in the author. No quotation from it or information derived from it is to be published without full acknowledgementTown of the source. The thesis is to be used for private study or non- commercial research purposes only. Cape Published by the University ofof Cape Town (UCT) in terms of the non-exclusive license granted to UCT by the author. University An analysis of the methods used in the South African domestic legislation and in double taxation treaties entered into by South Africa for the elimination of international double taxation TRACY GUTUZA Town Thesis presented for the Degree of DOCTOR OF PHILOSOPHY Cape In the Departmentof of Commercial Law UNIVERSITY OF CAPE TOWN May 2013 University Supervisor: Professor Richard Jooste (UCT) Co supervisor: Mr. Wally Horak. i DECLARATION I declare that the thesis for the degree of Doctor of Philosophy at the University of Cape Town, hereby submitted, has not been previously submitted for a degree at this or any other university, that it is my own work in design and execution, and that all the materials contained herein have been duly acknowledged. __________________________________ _____________________ Town Tracy Gutuza May 2013 Cape of University ii ACKNOWLEDGEMENTS I want to acknowledge so many for the help, guidance and especially support during this process: my colleagues and friends at the University of Cape Town for their constant support and encouragement, my supervisors, Professor Richard Jooste and Mr Wally Horak, for their kind comments and guidance, and the National Research Fund for their financial support.Town But, it is especially to my family that I wish to extend the greatest thank-you. This thesis would not have been possible wereCape it not for the continuous support and practical baby-sitting services providedof by my parents, Helen and Jeff Swartbooi. A very special thank-you goes to my most amazing husband, Brian, who gave me time when I needed it and to my children, Christopher and Sarah, who were willing to sacrifice weekend outings so ‗mummy could work on her PhD‘. Thank-you University iii ABSTRACT The restructuring of the South African Income Tax system since democracy was used as a case study to analyse the methods used to eliminate international double taxation through the lens of the tax policy principles of equity and neutrality. The theoretical framework used to analyse these methods, when the South African tax system changed from source to residence, was that of considering the equitable basis on which a tax base is chosen; the compatibility of the method of relief with the chosen policy principles of equity and neutrality; and the comparison of inward and outward flows by both residents and non-residents. Town The above approach was applied in analysing three identifiable periods, namely the period prior to democracy in South Africa, the period between the years 1994 and 2000, and post 2000. The analysisCape found that the policy principles of equity and neutrality were not consistently ofapplied to the choice of methods used to relieve international double taxation. Consistent application was undermined by amendments to the Income Tax Act and by the use of anti tax-avoidance provisions to prevent loss to the South African fiscus as a result of an increase in tax planning which resultedUniversity from the broadening of the South African tax base. The findings also indicate that although the methods of relief in the Income Tax Act and in double taxation agreements entered into by South Africa reflect the credit system as the default method, the application and quantification of the relief differs. This thesis adds to the body of literature exploring the policy principles of equity and neutrality, as applied in the context of methods relieving international double taxation and in the context of a recently opened and developing economy. iv The results of the research provide a theoretical basis for future restructuring of the South African income tax system as well as the tax systems of other developing countries, particularly in Africa. They also provide a theoretical basis for considering the policy approach to the taxation of cross border income flows and for choosing the method of relief for international double taxation. This thesis proposes that equity and neutrality should be the over-arching policy principles when considering the methods applied to eliminate double taxation. Town Cape of University v Table of Contents Declaration ................................................................................................................................. i Acknowledgements ................................................................................................................... ii Abstract .................................................................................................................................... iii Abbreviations, definitions and acronyms ............................................................................... xiv List of tables ............................................................................................................................. xv 1 Chapter One ....................................................................................................................... 1 Introduction ................................................................................................................................Town 1 1.1 Background ....................................................................................................... 1 1.1.1 Approaches to equity and Capeneutrality ................................................... 3 1.1.2 Methods used to relieveof or eliminate international double taxation... 9 1.1.3 The restructuring of the South African tax system ........................... 11 1.2 The research question ...................................................................................... 12 1.3 The structureUniversity of the thesis ................................ ............................................... 15 2 Chapter Two ..................................................................................................................... 17 South Africa‘s jurisdictional link and double-taxation relief regime prior to democracy in 1994: domestic legislation ................................................................................. 17 2.1 Introduction ..................................................................................................... 17 2.2 Prior to democracy: policy principles ............................................................. 22 2.3 Equity .............................................................................................................. 24 vi 2.3.1 Benefit principle ............................................................................... 28 2.3.2 Ability-to-pay equity ........................................................................ 29 2.3.3 Inter-nation equity ............................................................................ 34 2.3.4 Pre-democracy equity in South Africa ............................................. 35 2.4 Neutrality......................................................................................................... 36 2.4.1 Pre-democracy neutrality ................................................................. 45 2.5 Source and residence as jurisdictional links.................................................... 46 Town 2.5.1 Source or territorial? ......................................................................... 49 2.5.2 Distinction between sourceCape and threshold requirement ................... 53 2.6 Comparison of categories ................................of ................................................ 55 2.7 Outward South African resident trade and investment: local South African resident trade and investment ..................................................................................... 56 2.7.1University Residence ................................................................ .......................... 56 2.7.2 Exemption method of relief .............................................................. 57 2.7.3 Legal form: Branch versus subsidiary .............................................. 59 2.7.4 Dividend income .............................................................................. 60 2.7.5 Interest and royalty income .............................................................. 74 2.7.6 Controlled foreign companies .......................................................... 78 vii 2.8 Outward South African resident trade and investment: host country trade and investment .................................................................................................................. 83 2.9 Inward non-resident trade and investment: local South African resident trade and investment ........................................................................................................... 85 2.9.1 General ............................................................................................. 85 2.9.2 Interest income ................................................................................. 88 2.9.3 Dividend income .............................................................................. 89 2.10 Summation ................................................................Town...................................... 90 3 Chapter Three ..................................................................................................................
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