Curbing income tax avoidance that results from cross-border leasing: A comparative overview with specific reference to South Africa
| Jurisdiction | South Africa |
| Author | Annet Wanyana Oguttu |
| Citation | (2014) 26 SA Merc LJ 338 |
| Date | 25 May 2019 |
| Pages | 338-386 |
| Published date | 25 May 2019 |
CURBING INCOME TAX AVOIDANCE THAT
RESULTS FROM CROSS-BORDER LEASING: A
COMPARATIVE OVERVIEW WITH SPECIFIC
REFERENCE TO SOUTH AFRICA
ANNET WANYANA OGUTTU*
Professor, Department of Mercantile Law, University of South Africa
I INTRODUCTION
Businesses often choose leasing instead of purchasing tangible assets or
equipment such as industrial, commercial and scientific equipment.
1
Indeed, over the last two decades the leasing of assets has become an
important form of acquiring business assets or equipment internation-
ally.
2
Some of the commercial reasons for leasing instead of purchasing
assets include the fact that in leasing arrangements, the lessee does not
have to incur the burden of financing the equipment or bear the risks
associated with the financing.
3
There is thus no added liability to the
balance sheet of the business, which makes it easier to increase its
borrowing capacity.
4
Leasing also makes it easier to replace assets
regularly, thereby reducing the risks of obsolescence.
5
It also enables the
lessee to free working capital to finance current operations and other
cash flow requirements.
6
Although leasing may have commercial advantages, the tax benefits of
leasing for both the lessee and lessor (discussed in paragraph III below)
* LLD in Tax Law (Unisa), LLM with Specialisation in Tax Law (Unisa), LLB (Makerere
University, Uganda), H Dip in International Tax Law (UJ). Professor, Department of
Mercantile Law, College of Law, University of South Africa.
1
Organisation for Economic Co-operation and Development (OECD) ‘The Taxation of
Income Derived from Leasing of Industrial, Commercial or Scientific Equipment’ (1983)
para 1.
2
Idem para 2.
3
Idem para 6.
4
Ralph E Davis ‘Tax consequences of leasing transactions’ 1962 University of Illinois LR 56
at 74; David W Black ‘Sale-leaseback transactions: Advantages and disadvantages’ (1989) 3
Probate and Property 23.
5
OECD op cit note 1 para 7.
6
Philip S Agar ‘Sales and lease-backs’ (1964) 18 Bulletin of the Section of Taxation, American
Bar Association 61 at 62; Roy Rohatgi Basic International Taxation (2002) 30.
338
(2014) 26 SA Merc LJ 338
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constitute one of the key reasons for businesses preferring leasing to
obtaining a loan for financing the acquisition of assets.
7
Leasing has traditionally taken place within national borders; how-
ever, over the last few decades it has followed an international (cross-
border or between two countries) trend which poses more complicated
tax challenges for countries’ tax administrators than is the case with
domestic leasing transactions. Businesses involved in cross-border
leasing transactions can get involved in tax avoidance schemes
8
by
maximising their tax-deductible allowances and exploiting the differ-
ences in the tax laws of various countries. This is especially so
if the jurisdiction of the lessor is carefully chosen.
9
The tax benefits can
then be passed on to the lessee in another country, either by way of a
reduction in the cost of primary financing or by way of an effective
discount on the purchase price of the equipment.
10
To counter the
ensuing tax advantages, countries often enact specific anti-tax avoidance
legislation.
11
However, taxpayers often come up with more sophisticated
schemes that usually involve cross-border leasing.
Cross-border leases normally involve expensive capital assets, such as
aircraft, chartering or leasing of ships, railroad rolling stock, barges,
trucks, containers and similar assets that move between countries.
12
Although the numbers of equipment leased on a cross-border basis are
not big, the amounts are significant in certain industries.
13
Globally, the
volumes of leasing transactions have grown steadily over the last few
decades. Available statistics in this regard a decade ago show that in
2003, the estimated aggregate value of leasing transactions in the United
States of America (USA) amounted to $208 billion, representing 31 per
cent of the total value of all productive assets acquired by US businesses.
The Equipment Leasing Association of the USA also noted in 2003 that
7
Amar Mehta International Taxation of Cross-border Leasing Income (LLM dissertation,
University of Amsterdam, 2004) 2; Rohatgi op cit note 6 at 30; Agar op cit note 6 at 62; OECD
op cit note 1 para 7.
8
The term ‘tax avoidance’ refers to the use of perfectly legal methods of arranging one’s
affairs, so as to pay less tax. This is done by utilising loopholes in tax laws and exploiting them
within legal parameters. See David Meyerowitz Meyerowitz on Income Tax (2008) para 29.1;
Annamaria Rapakko Base Company Taxation (1989) 39.
9
Rohatgi op cit note 6 at 30; Mehta op cit note 7 at 2.
10
Timothy Cox ‘Cross-border leasing into Australia rides high’ (1989–1990) 1 Interna-
tional Tax Review 17.
11
OECD op cit note 1 para 12(e).
12
Peter K Nevitt & Frank J Fabozzi Project Financing 7 ed (2000) 81; International Finance
Co-operation, World Bank ‘Leasing in Development’ (2009) ch 3 at 24, available at
http://rru.worldbank.org/Documents/Toolkits/Leasing/Leasing_in_Development_Chapter3.pdf,
accessed on 12 August 2013.
13
International Finance Co-operation, World Bank op cit note 12 ch 3 para 54.
CURBING INCOME TAX AVOIDANCE FROM CROSS-BORDER LEASING 339
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80 per cent of United States companies lease all or some of their
equipment. In Europe, it was estimated in 2003, that the aggregate value
of leasing in 26 countries amounted to about EUR 194 billion (EUR 44
billion in Germany, EUR 32.15 billion in Italy, EUR 32.82 billion in the
United Kingdom (UK) and EUR 26.03 billion in France).
14
The
slowdown in the global economy as a result of the global financial crisis
that begun in 2007 indicates that the leasing figures have increased
today. The impact of the financial crisis on many global businesses
implies that many businesses would prefer to lease assets rather than
commit large amounts of ever-scarcer capital resources to purchase
them. Even on the African continent, domestic leasing has developing in
many countries, although it is not so significant.
15
Unlike most African
countries, South Africa has an emerging economy, with a well-
developed leasing industry that entails cross-border leasing which is
often used to gain tax advantages.
16
This article exposes how cross-border leasing transactions are used to
obtain tax benefits and to avoid taxes. The article begins by explaining
the legal aspects of leasing transactions in general and the different types
of leasing transactions. Thereafter, some schemes that are often
employed to avoid taxes in cross-border leasing transactions are
described. Then the article addresses the challenges of cross-border
leasing in a tax treaty context. Thereafter, a comparative study is
conducted of legislation in the UK, the USA and South Africa for
curbing some of the cross-border leasing schemes. Based on this
comparative study, recommendations are provided with respect to
South Africa, where its provisions are found wanting.
II THE LEGAL ASPECTS OF LEASING TRANSACTIONS
AND THE TYPES OF LEASING TRANSACTIONS
A lease is a contract in terms of which the owner of an asset or equipment,
the lessor, lets the asset or equipment to be used by another person, the
lessee. Thus, the leasing contract is based on the separation of the ownership
of an asset and its usage.
17
The leasing contract normally states what would
happen to the asset or equipment at the end of the term: whether it can be
acquired by the lessee, or returned to the lessor. The terms and conditions of
the lease may vary widely. The tax consequences of a leasing contract often
14
Mehta op cit note 7 at 1.
15
Nevitt & Fabozzi op cit note 12 at 187.
16
Ibid.
17
OECD op cit note 1 para 9.
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