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Definition

A harmful tax practice occurs when a country offers a lower than normal tax rate and other tax incentives which attract investments at the expense of other countries. The OECD created a forum on harmful tax practice in 1998. That forum has been identifying what it considers to be harmful tax practices and preferential tax regimes. It has also established a transparency framework and establishing a review of subsatntial activity requirements to level the tax playing field between countries. South Africa suffers from harmful tax practices because companies shift their taxable income to other jurisdictions (tax havens) where they incur less tax. Our Income Tax Act defines "connected parties" with whom it requires an "arms length" business relationship which does not include over-invoicing.

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