Media reports regularly point out that taxpayers are in the minority in South Africa and that their tax contributions aren’t being efficiently spent by the government. Apparently, only 1,8 million people in SA pay tax and thus support the entire population of 50 million, many of whom are dependent upon government handouts.
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Whether or not this is true isn’t the topic of this article. While it seems that tax authorities can legislate at will against the taxpaying minority in SA, a well-informed businessperson can take steps to place themselves in a more favourable position.
For one thing, in order to be more ‘tax efficient’, it makes sense to operate in different jurisdictions and take advantage of the tax rates and incentives offered by other countries.
SA’s tax and exchange control laws make such multi-jurisdictional planning difficult – but it’s not impossible. For example, if you, as a SA tax resident, earn dividend income from an offshore company in which you have a meaningful share, the dividend will be tax-free under SA’s Income Tax Act. But the offshore concern must be an ‘active’ company, or else the controlled foreign company rules will be applicable and you’ll be taxed upon the net income of the offshore company, in proportion to your shareholding.
The fact remains, though – and this bears repeating – offshore dividends received from an active business where an SA tax resident has a meaningful interest are tax-free in their hands. Furthermore, in certain other circumstances, you might be entitled to tax relief under the double tax agreements that might exist between SA and the offshore country where you have professional interests.
Two businesses
Another option is to arrange it so that SA isn’t your place of residence. With opportunities opening up on the continent and elsewhere, why not relocate to a more favourable tax jurisdiction? If a senior family member, for example, were to set up his farming export business in a friendly jurisdiction, while the junior members continue with the farming operations in SA, the possibility of meaningful tax savings certainly exists.
In this instance, the reach of the tax authorities stops at the SA border, provided that proper consideration is given to aspects of the business arrangement, such as arm’s length pricing and reasonable profit-taking in the low tax jurisdiction.
Duplication
Others might prefer the option of setting up a duplicate business in another jurisdiction. When a business is begun, money is often spent in fine-tuning the operation. However, duplicating a successful business is likely to be easier. Even if the best conditions for a duplicate business are in a high tax jurisdiction, establishing the head office and/or marketing arm in a low tax one could provide the necessary relief.
The point is, the tax authorities only have a real hold on people who are fully tax resident. Those who wish to break free of what they perceive as an oppressive system can do so if they so wish.
Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.
