A re-evaluation of South Africa's headquarter company regime
The South African headquarter company regime has been criticised for being a conduit company and for allowing South Africa to be used for 'treaty shopping' arrangements. Recent developments in the international tax sphere, arising from the implementation of the outcomes of the BEPS Project, could have an impact on the continued existence and feasibility of the headquarter company regime. The impact that these recent developments could have on the headquarter company regime has not been addressed by previous studies. In this regard, this study makes a valuable contribution to the existing body of knowledge. This study sought to determine, in light of the existing criticism of the headquarter company regime and recent international developments, whether the headquarter company regime still has a role to play in South African tax law and, if so, which aspects of the regime require revision. The development of the headquarter company regime and the policy reasons for the creation of the regime were considered, as well as the existing criticism of the regime. The regime has certain inherent inadequacies which hamper its achievement of its policy objectives. This study makes recommendations for National Treasury to consider whether including the relief that was found to be lacking would facilitate the achievement of the regime's policy objectives. After gaining an understanding of the headquarter company regime's policy objectives and its shortcomings, selected recent developments in the international tax sphere, that may have an impact on the regime, were considered. This included Actions 5 and 6 of the BEPS Project, which relate to the OECD's work on harmful tax practices and the prevention of treaty abuse, respectively. The multilateral instrument, which was developed in order to implement tax treaty-related (DTA-related) BEPS measures, and the development of the 'beneficial ownership' concept, were also considered. This study found that the requirement of 'substance' is playing an increasingly important role internationally, both in regard to the evaluation of preferential regimes to determine whether or not they are harmful, as well as in determining entitlement to treaty (DTA) benefits. This study concludes that the headquarter company regime still has a role to play in South African tax law and that, in order for the regime to be able to achieve its policy objectives, as well as for the regime not to be considered a harmful preferential regime, access to the regime should be restricted to companies that meet prescribed levels of 'substance'.