Curbing Tax Avoidance – Investments in Offshore ‘Protected Cell Companies and Cell Trusts’: The American and British Approach – What Is South Africa’s View?
| Jurisdiction | South Africa |
| Author | Annet Wanyana Oguttu |
| Pages | 16-44 |
| Citation | (2011) 23 SA Merc LJ 16 |
| Published date | 25 May 2019 |
| Date | 25 May 2019 |
Curbing Tax Avoidance – Investments in
Offshore ‘Protected Cell Companies and Cell
Trusts’: TheAmerican and British Approach –
What Is South Africa’s View?
ANNET WANYANA OGUTTU*
University of South Africa
1 Introduction
In order to minimise their global tax exposure, taxpayers active in
international trade often get involved in tax-avoidance schemes. The ensuing
fiscal advantages are often achieved when investments are made in low-tax or
tax-haven jurisdictions. Most of the tax-planning schemes used to avoid taxes,
employ some kind of company or trust structure. One such structure that
appears relatively new on the offshore-investment market, and whose
characteristics and diverse use baffle many tax authorities, is the ‘protected
cell company’ (the ‘PCC’). This structure can sometimes be in a trust form –
‘protected cell trusts’, commonly referred to as unit trusts. In 2009, the Tax
Justice NetWork,
1
released a report in which it noted that investments in PCCs
contributed to the global financial crisis that begun in 2007.
This article describes the development and the intricacies of offshore PCC
and trust structures and how they may be used to avoid taxes. The prevalence
of investments in offshore cell structures by South African residents is also
analysed to determine whether this matter should be an issue of concern for
the South African fiscus. In this vein, the measures, if any, that South Africa
has in place to curb the ensuing tax avoidance are discussed. The article also
covers a comparative study of equivalent measures, if any, in the United
States of America (the ‘USA’) and the United Kingdom (the ‘UK’). These two
countries have been selected because they have historically been at the
forefront of devising legislation to curb offshore-tax avoidance. From the
success story of these two jurisdictions, recommendations are made for the
reform of South Africa’s income tax laws if found wanting in this regard.
2 TaxAvoidance and Tax Havens
Before discussing the topic at hand, a brief background explanation of
concepts such as ‘tax avoidance’ and ‘tax havens’is relevant to appreciate the
issues to be discussed later.
* LLB (Makerere, Uganda), LLM (Unisa), LLD (Unisa), H Dip in International Tax Law
(Johannesburg). Professor, Department of Mercantile Law,College of Law, University of South Africa.
1
Tax Justice Network ‘Mapping the Fault Lines – Key Financial Indicator 12: Protected Cell
Companies’, available at http://www.secrecyjurisdictions.com/PDF/CellCompanies.pdf (accessed 12
May 2010).
16
(2011) 23 SA Merc LJ 16
© Juta and Company (Pty) Ltd
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.
2
Tax
avoidance should be distinguished from ‘tax evasion’ which is illegal and
entails non-compliance with tax laws.
3
Although tax avoidance is not illegal,
it is generally frowned on by tax authorities where it straddles into what South
African Revenue Service (‘SARS’) refers to as ‘impermissible tax avoid-
ance’.
4
This term refers to certain ‘tax avoidance’ practices that extend
beyond what is legally acceptable and thus cross the dividing line between tax
evasion and tax avoidance. Essentially, these practices entail the use of
artificial arrangements, with little or no actual economic impact upon the
taxpayer, that are usually designed to manipulate tax laws in order to achieve
results that conflict with or defeat the intention of Parliament.
5
The ensuing
loss of tax revenue has the effect of limiting any government’s ability to
pursue its economic and social objectives.
6
Impermissible tax avoidance is more disastrous to an economy when
taxpayers devise schemes by which they can move their investments out of
their countries of residence into offshore tax havens where they will be
subject to zero or minimal taxation.
7
According to the Organisation for
Economic Cooperation and Development (the ‘OECD’),
8
a tax haven is
described as a jurisdiction that actively develops tax policies aimed primarily
at diverting finances and other geographically mobile capital from high-tax to
low-tax countries.
9
Statistics show that, over the past 30 years, the number of
financial transactions that have taken place in or through offshore
jurisdictions, have increased at a rapid rate which is showing no sign of
abating.
10
It is estimated that 60 per cent of the world’s money is offshore,
where it is likely to receive favourable tax treatment and be subject to fewer
restrictions,
11
and that a large proportion of the world’s private wealth is
owned through complex offshore structures that often involve companies and
2
See D Meyerowitz Meyerowitz on Income Tax (2008) in par 29.1; K Huxham & PHaupt Notes on
South African Income Tax (2011)at 350-1; A Rapakko Base Company Taxation (1989) at 39.
3
Meyerowitz op cit note 2 in par 29.1; Huxham & Haupt op cit note 2 at 350; OECD Issues in
International Taxation. No 1 International Tax Avoidance and Evasion (Four Related Studies) (1987) at
1; V Krishna Tax Avoidance:The General Anti-Avoidance Rule (1990) at 9.
4
Law Administration SARS Discussion Paper on Tax Avoidance and Section 103 of the Income Tax
Act, 1962 (Act No. 58 of 1962) (2005) at 2 and 22.
5
Idem at 4.
6
M Brooks & J Head ‘Tax Avoidance: In Economics, Law and Public Choice’ in: GS Cooper (ed)
Tax Avoidanceand the Rule of Law (1997) at 53-91.
7
HCAW Schulze ‘Legal Aspects of Offshore Transactions’ (1994) 27 Comparative & International
LJ of Southern Africa 26; Rotterdam Institute for Fiscal Studies (VolA) International Tax Avoidance
(1979) at 29.
8
OECD ‘About OECD’, available at http://www.oecd.org/pages/0,3417,en_36734052_36734103_1_
1_1_1_1,00.html (accessed 7 Jul 2010).
9
OECD Harmful TaxCompetition: An Emerging Global Issue (1998) at 13; A Ginsberg International
Tax Havens 2 ed (1997) at 5-6; PRoper & J Ware Offshore Pitfalls (2000) at 5.
10
P Roper Offshore Options (1999) at 1; Roper & Ware op cit note 9 at vii. V Tanzi Globalization,
TaxCompetition and the Future of Tax Systems [International Monetary Fund Working Paper] (1996) at
11.
11
PEW Roper ‘Investing in the Offshore Market Place’June 2000 Insurance and Tax J at 7.
CURBING TAX AVOIDANCE 17
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