Tax Avoidance

[anakin]

Hey,

I will probably be getting a big job contract offer from Canada and a friend of mine suggested that I should establish an offshore company with a bank account, in Belize for example, to avoid paying tax marginally. I googled and found this.

http://www.tax-planning.org/Belize_IBC.html

I emailed customer support twice with questions and they replied promptly assuring that it is completely legal and I could produce a Certificate of TAX Exemption to SARS. They have 24 hours support facility and Novik is a law firm based in the UK.

There are many advantages:

• Nominee services through lawyers
• Highest level of privacy protection
• Limited liability without any paid up capital requirement
• Legal tax examption
• No taxation on any kind of income
• No accounting requirements
• No reporting requirements
• No fees for accountants
• No auditing
• No requirements on profession or financial standing
• Business can be comducted internationaly

Their answers to my questions:

1. Does that mean I don't have to pay any income taxes should I want to withdraw the fund to pay my day-to-day expenses, mortgage bond, etc. in South Africa? Can the Certificate of Tax Exemption be submitted should SARS (South African Revenue Services - TAX) want to verify.

NO TAX at all. Sure, you can submit the Certificate of TAX Exemption, no problem

2.
Will the nominated beneficiary in my will get my money if I die.

Sure, as usual

3.
No banking account? It didn't mention anything about the banking account.

You can see bank account http://www.accounting-on-line.com/offshore_banking.html


It looks promising but the only thing that I'm scared of is that SARS will claim this as tax evasion instead of legal tax avoidance.

Say, if I get R 300,000 from Canada ane I will have to pay effective tax rate of about 35%. I will just pay costs of about 10% in total.

What do you guys think?

[Dave A]

As far as I know, tax avoidance is illegal. Tax optimisation is OK though.

[anakin]

Thanks, Dave A! Not sure how they could do that. Please read a quote from Novik website below.

One of the biggest burdens an individual or a company has to face is tax. Yet, whether we want it or not, we have to face it and deal with it. If you feel that you want some tax relief or you want to reduce tax or pay low taxes for yourself or for your company, then, consider tax planning and tax avoidance. Novik Law International can make lower taxes possible for you and your company. Whether you need tax planning or tax avoidance processes done for you, Novik can accomplish them at a much faster rate without any trouble at all. To acquire low taxes or reduced taxes through Novik are all done legally and as allowed by law. While not many people know it, there can be tax exemptions and tax relief provisions which may be applicable to you and your company. You can reduce tax and experience tax relief without violating any law and by doing everything legally and easily.

What should I do to optimise? The client pays half this financial year and another half in the next financial year?

The possible job is a design job - a pure service job - it will probably take about 6 months and there is no need to buy any stock or resources.

[Graeme]

Tax evasion is illegal, but tax avoidance? If I switch from a taxable investment to a tax-free one, that is tax avoidance, but that is not a crime. I am simply making a move to optimise my returns. Is that not what anakin is doing?

[Morticia]

Just be careful of SA tax residency rules - as SA resident you are taxed in SA on worldwide income and gains, irrespective where earned (subject to a few exemptions).

Taxability of off-shore company profits is determined by "place of effective management". Thus if Anakin, being SA resident, provide effective management for this company, the company will in all probability also be deemed to be SA resident and all profits will be taxable in SA.

This is quite tricky domestic legislation and I would be very wary of relying on information provided by an effectively sales driven foreign website.

[Dave A]

Tax evasion is illegal, but tax avoidance?

Thanks for the correction.

Taxability of off-shore company profits is determined by "place of effective management".

Interesting. Would that principle extend to trusts where management is conducted via a lawyer/legal representative situated in the foreign country?

[Morticia]

Place of effective management in the case of a trust is usually the place where the trustees fullfil their fiduciary duties as trustees.

[Sieg]

Tax avoidance

There is often a fine line between tax avoidance (legal steps taken to minimize the incidence of taxation) or tax evasion (what Al Capone ended up doing time in jail for). It also often depends on the view of the Fiscus (the tax collector, such as SARS) or the taxpayer. Off shore schemes are good but frowned upon by SARS. The source of the income is vital: if the source is in SA or deemed to be in SA, then that source of income falls within the South African tax net.

The point I want to make is that this area of commercial activity, law and taxation, is a minefield with the mines usually laid by SARS. Tread very lightly. (and put your hands over your ears in case of a big bang)

Sieg

[duncan drennan]

The source of the income is vital: if the source is in SA or deemed to be in SA, then that source of income falls within the South African tax net.

So does that mean that if the service being delivered is taking place in SA that it automatically falls under the SA tax net? e.g. I work for an offshore client, but do all the work in my SA offices. I am sure the answer (and case law) is not clear cut, but any indication?

[Morticia]

Oh, the law is VERY clear cut in this regard, and lots of case law available. If the source of the service is South Africa, that is where the tax is payable (usually source rules only applied to non-residents in SA).

If you are resident in SA (or deemed to be resident in SA) your worldwide income and gains are taxable in SA, even if source is off-shore (e.g. interest that you earn on that little Swiss bank acoount and rental income on that property on the French Riviera).

[duncan drennan]

Sorry, I didn't explain my question well. I meant more in the case of these offshore trusts, where business is channelled through them. Sieg mentioned the "source of income" and I was wondering how that applied to where the income generating activities take place.

[taxlibrary]

Anakin, please don't even consider it.

First, South Africa has a residence basis of taxation. So, with the exception of the foreign income allowance for individuals (see Interpretation Note 6: http://www.sars.gov.za/home.asp?pid=5993 ) you will be taxable in South Africa on your worldwide income. You have to declare all your income from all sources, earned anywhere in your South African income tax return.

Second, the employer in Canada is likely to deduct tax from your salary there. You can set that amount of tax paid off against your South African tax liability if your salary is also taxable in South Africa. (In other words, there will be no double taxation.)

Third, if you set up a foreign company of which you are the main shareholder, the income of that company is taxable in your hands in South Africa, unless the company has an office with employees outside of South Africa (Section 9D of the Income Tax Act.)

The income of an offshore trust is also likely to be taxed in your hands in South Africa, as it is not easy to set up such a trust and safeguarding the assets in it without you (or other South Africans) being the main beneficiaries or trustees.

In conclusion, accept that you will pay normal income tax on your salary or contracting income. It is likely to cost you a lot of money to set up fancy structures and it is close to impossible for an individual or small business to reduce their overall tax bill by setting up offshore structures.

http://www.taxlibrary.co.za