Double taxation bias in the taxation of companies and partnerships - a comparative study

Abstract

The decision to undertake domestic (onshore) or international (offshore) trade activity should be one primarily influenced by the perceived commercial viability and sustainability of the trade activity in a local or foreign jurisdiction. As with all investment decisions, the decision to trade onshore or offshore should not be a “tax decision”, i.e. a decision motivated primarily by the resultant tax outcome of such trade in the jurisdiction under consideration. ‘Tax is usually not a major factor in the initial decision of an enterprise to make a direct investment abroad. Other factors such as return on investment, political stability, labo[u]r costs and access to foreign markets, are much more important as far as the original investment is concerned. The tax “tail” should not wag the commercial “dog”.1 Similarly, the decision to trade onshore or offshore should never result from a “taxable person or taxable entity decision”, i.e. a decision to trade onshore or offshore based on the manipulation of the existing mismatch in tax treatment between different ‘persons’ as recognised (whether defined or not) in the relevant tax legislation. Persons typically recognised for the purpose of tax legislation include, inter alia, natural individuals, companies2 and trusts. ‘A partnership, in South African law, is not a legal person distinct from the partners of whom it is composed, nor is a partnership a taxable persona for the purposes of the Income Tax Act 58 of 1962 (the ‘Act’).’3 The purpose of this research will be to reveal the creation of a bias in the matter of double taxation of companies, in comparison to, the avoidance of double taxation within partnerships, even where it is observed that the characteristics of a modern partnership are increasingly akin to those of a company. This is a phenomenon found to occur in many jurisdictions across the world. Essentially, the premise of this research is to assert that a company is subject to economic double taxation in South Africa and certain jurisdictions, whereas a partnership, although closely resembling a company (i.e. a ‘quasi-partnership’), is not.