International Institutional Attitude towards Holding Company Regimes: Curbing International Tax Avoidance

• Jurisdiction: South Africa
• Author: Thabo Legwaila
• Published date: 20 August 2019
• Date: 20 August 2019
• Pages: 159-200

Articles

INTERNATIONAL INSTITUTIONAL

ATTITUDE TOWARDS HOLDING COMPANY

REGIMES: CURBING INTERNATIONAL TAX

AVOIDANCE

THABO LEGWAILA*

Professor, Department of Mercantile Law, University of Johannesburg

I INTRODUCTION

Depending on their stages in economic development, different countries

view holding companies and jurisdictions that are conducive to holding

companies operations differently. During the developmental stages,

most countries go to great lengths to attract foreign direct investment to

their shores. Countries with adequate infrastructure have the benef‌it of

attracting foreign direct investment through the availability of such

infrastructure.

Fundamental determinants such as market size, access to raw materi-

als and the availability of skilled labour are primary factors in attracting

foreign direct investment. A suitable tax regime plays a secondary role in

attracting foreign direct investment. The absence of fundamental deter-

minants, and therefore adequate infrastructure, often results in coun-

tries relying on the tax system to attract investment.

Countries engaging in activities that are intended to attract develop-

ment are constantly at the risk of crossing the Rubicon from what is seen

to be fair competition to what is internationally deemed to be crude and

unacceptable tax competition. Certain developed countries, in an

attempt to broaden their tax bases, also engage in this unacceptable

competition. Such unacceptable and unfair competition is referred to as

harmful tax competition. This is practised broadly by tax havens and

those countries whose tax regimes are harmfully preferential.

*B Iuris (Venda), LLB, LLM (Wits), PG Dip Tax Law, LLM (UCT), LLD (UP). This article

is an adapted version of part of my doctoral thesis at the University of Pretoria entitled The

Suitability of the South African Corporate Tax Regime for the Use of South African Resident

Intermediary Holding Companies (2010).

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(2016) 28 SA Merc LJ 159

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This article discusses the measures that are used to curb international

tax avoidance. The purpose of the article is to highlight three levels of

curbing international tax avoidance as a general matter which are (i)

unilateral measures by individual countries, (ii) multilateral methods

that are used by the Organisation for Economic Co-operation and

Development (OECD) as best practice to curb international tax avoid-

ance and (iii) bilateral measures that can be incorporated into bilateral

treaties by treaty partner countries. These measures inevitably, and often

inadvertently, affect holding companies adversely. This analysis is

necessitated by the vast interest in various countries to introduce tax

regimes that are suitable for holding companies (in various forms,

including headquarter companies and intermediary holding compa-

nies), which has the potential of making such countries tax havens,

preferential tax regimes or offshore f‌inancial centres.

1

II HARMFUL TAX COMPETITION

According to Rohatgi, ‘[h]armful competition arises due to mismatches

in the existing tax systems of countries that can be exploited by

taxpayers. Such economic behaviour may be considered as unacceptable

tax avoidance by certain countries since they believe that it undermines

the integrity and fairness of their tax systems’.

2

The term ‘harmful tax

competition’ broadly refers to the tax practices that are adopted by

1

On South Africa, see National Treasury Budget Review (2011) 73. See also Lermer, ‘2010

Budget attracts SA based headquarter companies — PwC’ Moneyweb 18 February 2010,

available at http://www.moneyweb.co.za/mw/view/mw/en/page302588?oid=347864&sn=

2009%20Detail, accessed on 1 June 2015; the most prominent of the other countries are

Mauritius (See Lowtax: Global Tax & Business Portal, ‘Mauritius: Domestic Corporate

Taxation’, available at http://www.lowtax.net/lowtax/html/jmudctx.html, accessed on 12

June 2015; Oleynic Mauritius Tax Guide (2006) (unpublished); Legwaila, ‘The tax treatment

of holding companies in Mauritius: Lessons for South Africa’ (2011) 23(1) SAMLJ 1. On the

Netherlands, see also Lambooij & Portengen, ‘Netherlands — Holding Companies’ (2008),

available at http://online2.ibfd.org/collections/hold/html/hold_nl.html, accessed on 1 June

2015, Lambooij & Peelen, ‘The Netherlands Holding Company — Past and Present’ (2006)

Bulletin for International Taxation 4.1; ‘Netherland Holding Company Overview’,available at

http://www.ocra.com/solutions/eu_holding/Netherlands.asp, accessed on 1 June 2015. On

the United Kingdom, see also Collinson et al, Tiley and Collinson: UK Tax Guide 2006–2007

(LexisNexis UK 2006); Watterson, Corporation Tax 2008/2009 (IBFD 2008) 49; Deloitte

‘Comparison of European holding company regimes’, available at https://www.deloitte.com/

assets/Dcom-Global/Local%20Assets/Documents/Tax/dtt_tax_holdcomatrix_europe_

072309.pdf,accessed on 19 March 2015; Kavanagh, ‘New U.K. participation exemption for

capital gains on substantial shareholdings’(2002) 13(8) Journal of International Taxation 24.

On Belgium, see also Vanhaute, Belgium in International Tax Planning (IBFD 2008) 94. See

also Ernst & Young, Worldwide Corporate Tax Guide (2006) 130; Deloitte, ‘Holding

companies in Belgium’, available at http://www.deloitte.com/dtt/cda/doc/content/

Holding%20Companies%20in%20Belgium.pdf, accessed on 1 June 2015.

2

Rohatgi, Basic International Taxation (Kluwer Law International 2005) 85.

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countries to exploit the weaknesses in the international tax rules in other

countries.

3

It needs to be noted that by using the tax system to attract foreign

investors, countries are exercising their right to f‌iscal sovereignty.

4

In

this regard, it is acknowledged that tax competition cannot always be

bad. It does have positive attributes. At the Commonwealth Finance

Ministers’ Meeting held in Malta in September 2000 ‘[m]inisters

recognised that tax competition could in fact be helpful, and not

harmful, because it can further spur governments to create f‌iscal

environments conducive to generating growth and employment’.

5

In the same positive approach to tax competition, Friedman stated the

following:

6

‘Competition among national governments in the public services they

provide and in the taxes they impose is every bit as productive as

competition among individuals or enterprises in the goods and services

they offer for sale and the prices at which they offer them. Both lead to

variety and innovation; to improvement in the quality of the goods and

services and a reduction in their cost. A governmental cartel is no less

damaging than a private cartel.’

A contrary and more popular viewpoint is that tax competition is

dreadful and appalling. The proponents of this view see tax competition

as resulting in a destructive ‘race to the bottom’. This negative view is

ref‌lected by Ault as follows:

7

‘Tax competition causes ‘‘bidding wars’’ in competing for mobile activi-

ties, ultimately resulting in no tax at all on mobile capital; it makes

redistributive non-benef‌its-based income taxation impossible; it may

require states to shift to other revenue sources, taxing less mobile activities

3

See Olivier & Honiball, International Tax — A South African Perspective 5 ed (Siber Ink

2008) 575; Organisation for Economic Co-operation and Development (OECD) report,

‘Harmful Tax Competition: An Emerging Global Issue’ (1998) 1–19. See also Oguttu, Curbing

Offshore Tax Avoidance: The Case of South African Companies and Trusts (LLD dissertation,

University of South Africa, 2007) 10–14.

4

Biswas, International Tax Competition: Globalisation and Fiscal Sovereignty (Common-

wealth Secretariat 2002) 1: ‘Fiscal sovereignty is a right which has been carefully guarded by

sovereign states and protected in international law over hundreds of years; international f‌iscal

disputes have provoked major international political upheavals... .’

5

Commonwealth Finance Ministers’ Meeting, September 2000, available at http://

www.thecommonwealth.org/document/181889/34293/35232/152088/153876/

commonwealth_f‌inance_ministers_meeting_st_julians.htm, accessed on 6 August 2015.

6

In a speech delivered by Emeritus Professor Milton Friedman from the University of

Chicago at the Hoover Institution, Stanford University in May 2001.

7

Ault, ‘Tax Competition: What (if anything) to do about it?’ in Van Raad (ed),

International and Comparative Taxation: Essays in Honour of Klaus Vogel (Kluwer Law

International 2002) 2.

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