The foreign business establishment exemption and other aspects of section 9D of the Income Tax Act

Abstract

This research report considers a number of practical issues that arise in relation to the enforcement of section 9D of the Income Tax Act No. 58 of 1962 (“ITA”) read together with complementary provisions of the Tax Administration Act No. 28 of 2011 (“TAA”). More particularly, this research report considers the following issues: the onus and burden of proof under section 9D; the scope of SARS’ power under section 46 of the Tax Administration Act No. 28 of 2011 (“TAA”) to request information in order to give effect to section 9D; the interlinking definitions in terms of section 9D; whether an outsourcing business model can constitute the primary or core operations of a CFC for the purposes of determining whether the CFC qualifies for the ‘foreign business establishment’ exemption under section 9D status; and, if the issue of whether a CFC correctly claimed an FBE status during the years of assessment be revisited by SARS, particularly in respect of years of assessment which have prescribed. It is submitted as follows. Section 46 of the TAA provides SARS with the effective procedural powers to ensure compliance with section 9D. SARS is however required to provide the taxpayer with grounds for assessment with sufficient and reasonable detail in order to enable the taxpayer to understand the basis of and reason for such assessment and respond appropriately thereto. SARS is constrained by a three-year prescription period (from the date of an original assessment) for issuing additional assessments unless SARS can demonstrate that the taxpayer committed a fraud or misrepresentation which caused SARS failure to properly assess the taxpayer. The onus is on the taxpayer to show, on a preponderance of probability, that the decision/s of SARS in terms of section 9D against which it appeals is/are wrong. There is an arguable case for contending that the active management of service providers and agents may constitute the primary operations for purposes of determining whether an FBE arises in relation to a CFC.