VICTORIA LIKIUSREVENUE issues concerning offshore or indirect transfers are usually complex, and can be quite case-specific. However, the taxing of capital gains indirectly transferred can be used as a back-up method to combat tax avoidance.
To avoid tax, companies incorporated in high-tax jurisdictions usually establish holding or investment companies in low-tax jurisdictions. This may include companies belonging to corporate groups, or private companies incorporated in a tax haven jurisdiction. These companies are usually used for holding and managing portfolio investments. They aim to avoid or minimise taxes on investment income. For example, dividends received from such portfolio investments by the tax haven based company will be exempt from tax or subject to tax at a low rate in the tax haven jurisdiction. Mauritius is one of the well-known tax haven countries.
In the absence of countermeasures, offshore investment companies can be used to avoid capital gains tax liability on the disposal of capital gains such as shares. This is usually done by converting what would be ordinary income into capital gains. There is a tax advantage to this structure, being that when the fund is situated in a tax haven, there is usually no tax, or only minimum taxation on capital gains.
Namibia uses a source-based tax system. This means that income is taxed by Namibia only if it is generated in Namibia. Tax avoidance is an exercise in which the taxpayer legally tries to defeat the basic intention of the law by taking advantage of the shortcomings in legislation. On the other hand, tax evasion is a practice of reducing tax liability through illegal means, for instance by suppressing income or inflating expenses. In other words, tax avoidance is not illegal, but tax evasion is illegal.
Taxing capital gains on indirect transfers is fraught with challenges. Firstly, such transactions are hard to detect because they occur offshore and, secondly, even if detected, it is hard to penalise a seller or a buyer who is a company incorporated in another country for defaulting on a tax payment due to the source country. There are, however, legal mechanisms at the disposition of the source country such as Namibia to avert these kinds of practices. This includes enacting laws compelling self-reporting by the transferor, and self-reporting by the transferee. Self-reporting by the transferee is more effective than self-reporting by the transferor, given the transferee’s continuing interest in source country assets, and the fact that the transferee is usually not the party paying tax. These mechanisms have been successfully used in countries such as China, Australia, Japan, India and Canada.
The question is then when to impose this notification/self-reporting requirement. To optimise the ability of the tax authorities to collect taxes, a seller who is an offshore company should be required to inform the tax authorities before the transaction occurs, whereas in the case of a buyer who is also an offshore company, it must be required to report its acquisition after consummation for as long as assets disposed of can be attributed to the source country. Tax authorities can impose a penalty or enforce this right by putting a lien on the locally linked assets in case of non-notification. This penalty method has been successfully implemented in Chile. There should also be a clear legal stipulation that if an indirect transfer is not reported, then such transfer will be regarded as an illegal transfer. Alternatively, the requirement could provide that if the transmission is not reported and the relevant tax is not paid, the rights to the assets can be revoked, as is done in Guinea. Namibia’s double taxation agreements with different countries, especially the one with Mauritius, must also be reviewed because most of them are older than 15 years. These are the areas of tax law which require immediate attention by the tax authorities.
These methods will provide tax authorities with a better chance not only to monitor transactions which are subject to potential tax, but also to ensure that our tax avoidance laws are intact, and that taxes are effectively collected.
* Victoria Likius is an LLB holder of the University of Namibia, as well as an LLM holder of Stellenbosch University. Tax law is one of the areas of law which interests her, and you can email her at mweyya@gmail.com
