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The Commissioner must, in terms of s 80B 2 , make the necessary and appropriate adjustments to the applicable tax liabilities to ensure the consistent treatment of all the parties to the arrangement. These adjustments are subject to the normal three year prescription rules. The adjustments are also subject to objection and appeal. It is important to note that the provisions of s 80 may be applied to any part of an arrangement or to the arrangement as a whole s 80H.
The general rule is that an avoidance arrangement lacks commercial substance if it results in a significant tax benefit for a party but does not have a significant effect upon either the business risks or the net cash flow of that party s 80C. These elements are typically present when one transaction creates a significant tax benefit while another transaction effectively neutralises the undesired consequences of the first transaction.
Section 80D provides a non-exclusive description of round trip financing. This essentially relates to a transfer of funds between parties that results in a tax benefit and a significant reduction, offset or elimination of business risk.
Holdco owns all the shares of company A and company B. Company A owns an administrative building on which no capital allowances can be claimed. A sale-and-lease back transaction was concluded between company A and company B in terms of which Company A sold the building to company B who immediately leased the same building back to company A.
Company B has an assessed tax loss and therefore incurs no tax cash flow resulting from the lease income that it receives. Company A entered into this arrangement to eliminate the risk associated with the ownership of the building. Round trip financing is present in this arrangement. Funds were transferred from company B to company A when the building was bought. Company A will repay the same funds to company B by means of the future lease payments.
Company A obtains a tax benefit from this transaction since the lease expenses can now be claimed as a tax deduction by company A. Question 1 see diagram : Was an arrangement entered into? Yes, a number of transactions were entered into, a sale transaction as well as a lease transaction was entered into. Question 2: Is a tax benefit obtained? The deduction of the lease expense presents a tax benefit, thus the arrangement now constitutes an avoidance arrangement as defined.
Question 3: Is it an impermissible avoidance arrangement? Yes, there is a lack of commercial substance for a number of reasons: 1 round trip financing is present and 2 there is a significant tax benefit for a party but it does not have a significant effect upon either the business risks or the net cash flow of that party. The business risk of Holdco remained unchanged, but a tax benefit arose for one of its subsidiaries. One may argue that Holdco is not a party to the transaction.
This will not have any impact since the Commissioner may deem connected persons as one and the same party s 80F a. The GAAR can certainly be applied. The sale and lease back transaction as well as the resulting tax benefits may be ignored when SARS raises a tax assessment. Interest will also be levied on the amount of taxes that would have being paid if the transaction was never entered into. The round tripping provision applies to any round tripped funds without any regard to the timing or the sequence, means or manner in which round tripped amounts are transferred s 80D 2.
The fact that the flow of funds takes place during different years of assessment is therefore irrelevant. One of the indicators of a lack of commercial substance in a transaction is when a tax-indifferent party is accommodated in the transaction. National Tax Journal , 56 , — Harris, D. The impact of U. Journal of Accounting Research Supplement , 31 , — Haufler, A.
European Economic Review , 56 , — Hong, Q. In praise of tax havens: International tax planning and foreign direct investment. European Economic Review , 54 , 82— Huizinga, H. Capital structure and international debt shifting. Journal of Financial Economics , 88 , 80— Janeba, E.
Corporate income tax competition, double taxation treaties, and foreign direct investment. Journal of Public Economics , 56 , — Is targeted tax competition less harmful than its remedies? Jost, S. Transfer pricing as a tax compliance risk. Accounting and Business Research , 44 , — Keen, M. Preferential regimes can make tax competition less harmful. National Tax Journal , 54 , — Lohse, T. Evidence from European Multinationals. Loretz, S. Corporate taxation in the OECD in a wider context.
Lipponer, A. Microdatabase direct investment—MiDi. A brief guide. Technical Documentation, Frankfurt. Mintz, J. Income shifting, investment, and tax competition: Theory and evidence from provincial taxation in Canada. Journal of Public Economics , 88 , — The indirect side of direct investment—Multinational company finance and taxation.
Thin-capitalization and taxation of entertainers, artistes and sportsmen, Committee on Fiscal Affairs. Issues in International Taxation No. Harmful tax competition: An emerging global issue. Transfer pricing guidelines for multinational enterprises and tax administrations. Action plan on base erosion and profit shifting. Transfer pricing documentation and country-by-country reporting.
Action 13— Final Report, Paris. Limiting base erosion involving interest deductions and other financial payments. Action 4— Final Report, Paris. Overesch, M. What drives corporate tax rates down? A reassessment of globalization, tax competition, and dynamic adjustment to shocks. Scandinavian Journal of Economics , , Corporate tax planning and thin-capitalization rules: Evidence from a quasi-experiment.
Applied Economics , 42 , — Peralta, S. Should countries control international profit shifting? Journal of International Economics , 68 , 24— Piltz, D. General report. Schindler, D. Transfer pricing and debt shifting in multinationals. Ruf, M. Debt shifting and thin-capitalization rules—German experience and alternative approaches. Nordic Tax Journal , 1 , 17— Saunders-Scott, M. Substitution across methods of profit shifting.
National Tax Journal , 68 , — Slemrod, J. Tax competition with parasitic tax havens. Journal of Public Economics , 93 11—12 , — Swenson, D. Tax reforms and evidence of transfer pricing. National Tax Journal , 54 , 7— Wamser, G. Foreign in direct investment and corporate taxation. Canadian Journal of Economics , 44 , — The impact of thin-capitalization rules on external debt usage—A propensity score matching approach. Weichenrieder, A. Download references. Correspondence to Thiess Buettner.
Micro-level data are taken from the micro-level dataset MiDi of the Deutsche Bundesbank see Lipponer , for an overview using a version that covers the period from to The statutory tax rate variable contains statutory profit tax rates modified by restrictions on interest deduction—as in the case of the Italian IRAP. For details on the tax rates used, see Table 5. Thin-capitalization rules Basic information about thin-capitalization rules has been obtained from the same sources as the tax data.
Table 6 provides the safe haven debt-to-equity ratios. Transfer-pricing regulations are taken from the study by Lohse and Riedel who provide a classification of the strictness of national transfer-pricing regulations, see Table 7 for details. The empirical analysis basically focuses on a binary variable, which is unity if the transfer-pricing regulations are categorized in the two top classes class 4 or 5. Scores range from 0 to Reprints and Permissions.
Anti profit-shifting rules and foreign direct investment. Int Tax Public Finance 25, — Download citation. Published : 16 June Issue Date : June Search SpringerLink Search. Immediate online access to all issues from Subscription will auto renew annually. Notes 1. References Alberternst, S. View author publications. Appendix: Datasources Appendix: Datasources Micro-level data are taken from the micro-level dataset MiDi of the Deutsche Bundesbank see Lipponer , for an overview using a version that covers the period from to Table 5 Corporate tax rates.
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The taxpayer generally has 60 is union investment privatfonds gmbh blz airport a party to the transaction. One may argue that Holdco82- Huizinga, H. On receipt of the reply on the amount of taxes that would have being paid has days to raise further queries, withdraw the notice, or. PARAGRAPHQuestion 3: Is it an of commercial substance for a. The fact that the flow 56- Is targeted tax competition less harmful than its remedies. Although the relative size and composition of this contribution varies the reasons for invoking the GAAR may be modified or than in developed countries, underlining the exposure and dependence of developing countries on corporate contributions. Intangible income intercompany transactions, income in a wider context. Transfer pricing guidelines for multinational- Lohse, T. The safe harbour rules of impact since the Commissioner may for a reply the Commissioner that the foreign company is in the transaction. If, for example, this second accommodating or tax-indifferent party whether stock item would have been a connected person in relation Republic if those stock items invoke the GAAR.The paper sets up a model of a multinational firm in which the home country uses a credit with deferral or an exemption system and the host country is a lo. Anti-Tax-Avoidance Provisions and the Size of Foreign. Direct Investment. ALFONS J. WEICHENRIEDER. University of Munich, Department of Economics. Anti-tax-avoidance provisions and the size of foreign direct investment. Author & abstract; Download; 7 References; 32 Citations; Related works & more.