CFC translation rules: is the taxpayer currently getting the short end of the stick?

Abstract

Controlled foreign company ("CFC") legislation, governed by section 9D of the Income Tax Act 58 of 1962, serves as anti-avoidance legislation in South Africa's residence-based tax system. Section 9D provides for the calculation of a deemed amount which must be included in the South African resident's income. This deemed amount is calculated with reference to the net income for the CFC's foreign tax year. Section 9D(6) provides for this deemed amount, which is denominated in the foreign financial reporting currency, to be translated into South African rand by applying the average exchange rate for that year of assessment. The legislation refers to the South African resident's year of assessment and not the CFC's foreign tax year. It is submitted that the average exchange rate for the CFC's foreign tax year should be used for translation. The author therefore disputes the period to be used in calculating the average exchange rate.