1. Presentation to SCoF- 16 September 2015 Diversionary Rules – By Carel Gericke

2. PRESENTATION OUTLINE BRIEF HISTORY OF S9D
CURRENT RULES ON GOODS AND SERVICES
2015 – PROPOSED CHANGES TO SECTION 9D
CFC COMPARISONS – MAJOR TRADING PARTNERS
IMPACT ON SHARED PROCUREMENT STRUCTURES
IMPACT ON TELECOMS – ROAMING SERVICS
IMPACT ON UNDERSEA CABLES
CONCLUSION

3. BACKGROUND BRIEF HISTORY OF SECTION 9D Introduced in 1997
Exchange control relaxation on 1 July 1997.
Anti-avoidance legislation
Initially aimed at passive income
Scope extended in 2001 to active income.
Taxes resident shareholder on income received by CFC
Generally, no imputation if CFC has FBE.
Exception being diversionary income i.e “tainted income”.

4. CURRENT RULES ON GOODS AND SERVICES
A: CFC rules on the sale of goods
In 2011, the softer rules were introduced
2011 EM cited unintended commercial impact for changes
FBE exclusion ignored sale of goods to connected resident
Unless the following is met:
Foreign tax paid >50% of SA tax OR
Amount attributable to permanent establishment (“PE”)
PE is defined in Section 1 to mean anything under Article 5 of model tax convention of OECD.
PE has higher threshold than FBE.

5. CURRENT RULES ON GOODS AND SERVICES
B: CFC rules on services
FBE exclusion ignored on services to connected resident
Unless the following is met:
Service performed outside SA and
Relates to creation, extraction, production, repair etc of goods utilised outside SA
Relates to sale and marketing of goods
The service rendered in the country of residence of the CFC
No deduction by connected resident
Arises in respect of financial instrument
Others (from mentioned in S9D(9A) (iv – vii)

6. 2015 – PROPOSED CHANGES TO S9D
2015 PROPOSED CHANGES TO SECTION 9D
A: CFC outbound sale of goods
Rules deleted in 2011 are being re-instated
B: CFC inbound sale of goods
C: CFC diversionary rules on services
No changes made
Reasons provided by National Treasury:
CFC Rules more expedient to curb profit shifting
Transfer Pricing auditing process takes long

7. CFC COMPARISONS - MAJOR TRADING PARTNERS
A: SA vs UK and NERTHERLANDS SA
UK and Holland
High tax exemption
Yes – Except tainted income
Yes
Passive income
Business profit exemption
Yes, but diluted by diversionary rules

8. IMPACT ON PROCUREMENT STRUCTURE
A: RATIONALE FOR SHARED PROCUREMENT
Economies of scale – Bulk discounts, commissions etc
Centralised procurement expertise.
Geographical advantage and close proximity to suppliers.
Efficiency - Cost containment, uniformity etc
B: IMPACT ON MTN’S PROCUREMENT STRUCTURE
MTN SA will buy network assets from MTN’s CFC in Dubai.
Prices charged by the CFC are arm’s length.
It cheaper for MTN SA to buy from CFC than from vendors directly i.e lower W&T
CFC inbound rules will apply in this transaction.
Exemptions will not apply because:
CFC buys goods outside the country where the CFC reside.
CFC sells goods only to MTN operations i.e Only connected persons.
Margins for SA sales to be taxed in SA.
With CFC rules, cheaper to buy from non connected parties.
Clearly not the intention of Section 9D.

9. IMPACT ON TELECOMS – ROAMING
A: ROAMING SERVICES
Example: MTN SA’s subscriber visits Dubai on holiday and roams on MTN Dubai’s network for 2 weeks. MTN SA will need to pay MTN Dubai roaming expense of say R1000 and recover that from the subscriber at cost + 10%mark-up. Assume MTN Dubai is a CFC of MTN Group.
Tax implications:
MTN SA
Inclusion in GI R1100
Deduction of (R1000) ---- Roaming expense
Taxable income R100
MTN Group - Parent Co of the CFC
Inclusion in GI R Diversionary rules on services
The deduction for SA based MNC is therefore neutralised.
Offshore owned MNC based in SA gets full deduction.
Clearly, there is no tax avoidance in this example.
Roaming by the subscribers is beyond control of MTN SA.

10. IMPACT ON TELECOMS – UNDERSEA CABLES
A: UNDERSEA CABLES
Example: A CFC of a SA resident based in low tax jurisdiction owns undersea cables. It has full FBE, properly staffed. There are various commercial reasons why low tax jurisdiction was chosen for this purpose. MTN SA buys capacity from the CFC and paid R MTN SA and CFC are connected persons.
Tax implications:
MTN SA
Deduction of (R1000) ---- Roaming expense
MTN Group - Parent Co of the CFC
Inclusion in GI R Diversionary rules on services
The deduction for SA based MNC is therefore neutralised.
Cheaper to buy capacity from non connected person.
SA taxpayers at disadvantage - Globally uncompetitive.

11. CFC rules being more expedient
CONCLUSION
TP process being long
SARS should engage more resources to deal with TP issues.
CFC rules being more expedient
Non compliance to CFC rules can also only be detected through audit.
Conclusion
We urge Members of Parliament not to approve proposed re-introduction of CFC Rules on goods and amend the services rules to the same as that which applies to goods at present based on the following:
Legitimate transactions are being caught by CFC rules.
SA MNC’s are at disadvantage globally.
TP legislation enforced instead of CFC rules.