South African Controlled Foreign Companies' Rules and the Digital Economy

Abstract

South Africa's controlled foreign company ("CFC") rules were enacted more than two decades ago before most of today's business  models existed. These are anti-avoidance rules that ensure the South African taxation of profits diverted offshore by South African  residents. In terms of the CFC rules, the profits of a non-resident company may also be subject to tax in South Africa at the hands of its  South African resident shareholder if such non-resident company is considered to be a CFC. Advances in technology developments and  the use of information communication and technology ("ICT") have given rise to what is referred to as the digital economy. The term  refers to economic activities hinged on the use of ICT and the internet. Digitalisation has made it possible for a business to carry on economic activity without the need for a multitude of offices, staff, equipment, and other resources. As a result, new business models like  Uber and Shien have emerged. This paper argues that the current South African CFC rules have not kept pace with these new business  models and do not effectively regulate the new business models and the digital economy. This paper recommends that the CFC rules be  updated to address the digital economy and new business models by amending the rules, incorporating the provisions of Electronic  Communications and Transactions Act 25 of 2002 into the rules, using countryby-country reporting, and even considering implementing a  regime alternative to CFC rules.