Editorial

• DOI: 10.10520/EJC-1110d75642
• Published date: 01 September 2018
• Author: Milton Seligson
• Record Number: btclq_v9_n3_a1
• Pages: v-vii
• Date: 01 September 2018

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© Siber ink

Editorial

MILTON SELIGSON SC

Two of the three articles in this issue of the BTCLQ focus on anti-avoidance

issues: the f‌irst, an article by a regular guest contributor to this journal, Ed

Liptak, discusses so-called Foreign Tax Credit Generators (‘FTC Generators’)

which featured in the Davis Tax Committee’s Report on Base Erosion and

Prof‌it Shifting; the second, one by Michael Rudnicki, a co-editor of the

BTCLQ, is an analysis of the legislative innovations introduced in 2017 by

way of statutory amendment to provisions of the Income Tax Act relating

to the taxation of companies.

The third article in this issue was contributed by co-editor Des Kruger, a

VAT specialist, and deals with some selected transfer duty and value-added

tax implications of the sale of immovable property.

* * *

The article by Ed Liptak, entitled ‘Leveraged FTC Generators — Did The

Davis Committee Give Them Too Much Credit?’, in Part I thereof considers

the hypothetical FTC Generator used as an example in the Report of the

Davis Tax Committee. He shows that the example used in the Report

involves a foreign f‌inancial institution (a US banking group); a hybrid

entity or special-purpose vehicle formed by the banking group (a US part-

nership); and a local taxpayer that acquires an interest in that hybrid entity

(a South African investor). There are two key legal elements that charac-

terise an FTC Generator: the hybrid entity and a repurchase arrangement.

These arrangements are treated, however, as secured loans in the US, but

as separate purchase and sale agreements in South Africa. This results in a

mismatch that enables both the US banking group and the South African

investor to treat themselves as the sole owner of the same underlying US

partnership interest for the purposes of their respective domestic tax laws.

The article demonstrates that with the numbers used in the Davis Report

example it would not be possible for the US banking group to achieve the

US tax benef‌its that are suggested in the Report, and consequently that the

supposed benef‌its to the SA investor would also not be achievable in the

real world. What the article then ingeniously proceeds to show is that, on

the other hand, if a tax gross-up mechanism is used, the desired tax results

can be achieved by both parties, resulting in an abuse of the relevant provi-

sions. What happens is that the actual income received by the SA investor

escapes taxation in its hands through an artif‌ice or trick.

In Part II of the article the author points out how participants in such

schemes are risk averse and often resort to round-trip f‌inancing to eliminate

risk, thereby depriving their transaction of economic substance. He further