Taxing the Coronation Group: Comparing South Africa, UK, USA and Ireland's CFC Rules for Targeted Income and Foreign Business Establishment Exemptions

Abstract

The taxation of controlled foreign companies (CFCs) is a critical international issue affecting multinational corporations, governments, and their revenue authorities. CFCs are pivotal in the context of base erosion and profit shifting (BEPS) and efforts to combat tax evasion. Misinterpretation of CFC rules can have profound financial implications for corporations, as illustrated by the Commissioner for the South African Revenue Service (CSARS) v Coronation Investment Management SA (Pty) Ltd (CIMSA). In this case, the CSARS imposed an additional tax of R761 million, representing 45% of CIMSA’s profit before tax (R1 689 million) for the accounting period ending 30 September 2023. The dispute centred on the interpretation of section 9D of the Income Tax Act No. 58 of 1962 (Republic of South Africa, 1962), particularly the foreign business exemption. This research report compares the legislative and judicial approaches to CFCs, focusing on targeted income and the foreign business establishment (FBE) exemption in the Republic of South Africa (RSA). It contrasts these approaches with those of the United Kingdom (UK), United States of America (USA), and Ireland to determine if South Africa's CFC rules align with international best practices or fall short owing to interpretative complexities. The findings aim to assist the National Treasury and multinational corporations to better understand and refine section 9D of the Act. Given that the UK and Ireland use residence-based tax systems similar to South Africa, and the USA employs a citizen-based system taxing its citizens on worldwide income, this report uniquely emphasizes the USA's distinct CFC rules established in 1962. These rules serve as a benchmark in the comparative analysis. As these countries are key trading partners for South Africa, they provide relevant points of comparison. The analysis found that while section 9D requirements are largely consistent with international norms, certain shortfalls were noted. Taxing CFCs on worldwide income was deemed unfair to multinational companies. The UK's source-based approach was found to be fairer, as it only targets CFC income derived from UK resources. South Africa's FBE exemption is complex, whereas the UK's FBE requirements are recommended for their measurability, specificity, and fairness. Additionally, South Africa's 5% exclusion threshold for CFC definition and 10% income inclusion threshold were found to be low compared to international standards.