OBRA EFFECTS ON SOUTH AFRICAN INVESTMENT EVALUATED BY CRS.

88-112 E

CRS REPORT FOR CONGRESS

The Omnibus Budget Reconciliation Act of 1987 (OBRA) made two important changes in the taxation of U.S. investment in South Africa. Ordinarily, U.S. investors are permitted to credit foreign taxes they pay against U.S. taxes on foreign earnings; OBRA denies U.S. foreign tax credits for taxes paid to South Africa. Also, U.S. firms can generally postpone indefinitely U.S. taxes on income earned by foreign subsidiary corporations; OBRA restricts this "deferral principle" for South African investment. OBRA's two provisions have the potential of increasing the tax burden on investment in South Africa significantly. In consequence, the level of U.S. investment in South Africa will likely fall, assuming other factors remain constant.

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While the Reagan Administration and Congress are both opposed to South Africa's apartheid system, economic sanctions against South Africa have been the focus of a sharp policy dispute. In October 1986, Congress imposed a number of economic sanctions with the Comprehensive Anti-Apartheid Act (CAAA; Public Law 99-440). The sanctions -- which included a prohibition on certain types of U.S. investment and a partial trade embargo -- were designed to persuade South Africa to move in the direction of abolishing its apartheid system of racial segregation. The Administration, however, argued that the Act's sanctions threatened the economic well-being of South Africa's black workers, and the CAAA became law only after Congress overrode a Presidential veto.

The CAAA also required the President to report on the progress of South Africa in dismantling apartheid; if progress was not reported, the Act required the President to impose additional sanctions. In October 1987, President Reagan reported that South Africa had not made progress against apartheid, but recommended against additional sanctions.

Nonetheless, in December 1987, Congress included two additional economic sanctions in the Omnibus Budget Reconciliation Act of 1987 (OBRA; Public Law 100-203). Both sanctions change the tax treatment of U.S. investment in South Africa. First, the Act prohibits U.S. taxpayers from claiming foreign tax credits for taxes paid to South Africa. The prohibition is a departure from the standard U.S. treatment of income earned overseas, since the U.S. foreign tax credit rules ordinarily permit American individuals and firms to credit foreign taxes they pay against their U.S. taxes on a dollar- for-dollar basis. Second, OBRA limits the applicability of the "deferral" principle for investment in South Africa. Ordinarily, deferral provides a tax benefit for firms with overseas operations by permitting them to postpone indefinitely the payment of U.S. taxes on foreign income.

How important are these latest economic sanctions against South Africa? The analysis here indicates that the combination of OBRA's denial of the foreign tax credit and deferral has the potential of significantly increasing the effective tax rate on investment in South Africa. Accordingly, ownership of South African assets by U.S. persons will probably decline, as U.S. investors find the after tax return on South African assets reduced by OBRA.

But there are a number of factors that could mitigate the impact of OBRA's tax sanctions. OBRA's repeal of deferral, for example, only applies to firms that conduct South African operations through majority-owned South African corporations; some U.S. investment in South Africa is thus immune to OBRA's deferral provisions. In addition, U.S. firms may seek to avoid OBRA's sanctions by shifting income from South Africa to another foreign country without reducing investment in South Africa. Or, the Government of South Africa may decide to reduce its own taxes on U.S. investors to compensate for OBRA's increase in U.S. tax rates.

The first of these mitigating factors is a consequence of the particular way OBRA's repeal of deferral is framed. If Congress deems it advisable or necessary, OBRA's deferral could be made more stringent. It would be more difficult, however, to devise provisions that would halt the shifting of income or provide counter possible reductions in South African tax rates.

An understanding of OBRA's provisions and the factors that could dampen their effect requires a basic understanding of the way the United States taxes foreign-source income. The discussion that follows thus begins by describing the basic structure of U.S. international taxation and how OBRA changed that structure with respect to income earned in South Africa. It continues by assessing the probable impact of OBRA on the taxes of U.S. investors in South Africa and factors that could possibly dampen OBRA's effect. The report concludes with a discussion of actions by U.S. investors and the South African government that could mitigate OBRA's effect.

BACKGROUND ON U.S. INTERNATIONAL TAXATION

At the basis of the U.S. system of taxing foreign income is the manner in which the U.S. determines when it has the right to tax income. The United States tax system can be loosely characterized as a system based on residence. ¹ Rather than confining its tax jurisdiction to income earned in United States territory, the United States asserts the jurisdiction to tax the worldwide income of every U.S. citizen, U.S. resident, and U.S. corporation, whether the income is earned in the United States, South Africa, or any other country. ²

The U.S. Foreign Tax Credit

Most countries -- including South Africa -- impose at least some level of income tax on income foreigners earn within their borders. This practice combines with U.S. taxation of the worldwide income of its residents to create the potential problem of overlapping tax jurisdictions. If some remedy were not provided, the U.S. and foreign governments, in laying claim to the same tax base, would saddle U.S. overseas investors with double taxation. The investors would pay taxes on their foreign income to both the United States and to foreign governments.

The United States provides a remedy for double-taxation with its foreign tax credit, which permits U.S. taxpayers to credit foreign taxes they pay against their U.S. taxes on a dollar-for-dollar basis. ³ In effect, the United States only collects its tax on foreign- source income to the extent that foreign taxes fall short of U.S. taxes. Thus, the United States indeed asserts the right to tax its residents on their worldwide income. But, with its foreign tax credit, the United States also concedes that foreign countries have the first right to tax income earned within their own borders.

The U.S. foreign tax credit is not without limitations. First, under a rule known as the "overall limitation" on the foreign tax credit, foreign taxes are creditable only against a taxpayer's U.S. taxes on foreign-source income, and cannot be used to offset taxes on income earned in the United States. Thus, if a taxpayer's foreign taxes exceed U.S. taxes on foreign income, a portion of the foreign taxes are not creditable and become what are known to tax analysts as "excess credits."

Analysts of the foreign tax credit have traditionally separated foreign countries into two categories, according to their effect on a taxpayer's position vis a vis the overall limitation. "High tax" countries have tax rates that exceed the U.S.tax rate; in isolation, high tax countries generate excess credits, or foreign taxes that exceed the overall limitation and are therefore not creditable. "Low tax" countries have tax rates that are lower than the U.S. tax rate. In isolation, such countries result in a "deficit" of credits for taxpayers; foreign taxes paid to these countries are not sufficient, in other words, to offset a taxpayer's entire U.S. tax liability on income earned in those countries.

But the tax code imposes its limitation on a worldwide basis rather than on a country-by-country basis. That is, foreign taxes are creditable only to the extent that foreign taxes paid to all countries do not exceed U.S. taxes that are due on income earned in all foreign countries. As a consequence, if a taxpayer has income earned in both high- and low-tax countries, at least some of the excess credits from the high-tax country or countries can be used to offset U.S. taxes due on income earned in low-tax countries.

A second limitation on the foreign tax credit was imposed by the Omnibus Budget Reconciliation Act of 1988 (Public Law 99-509), which denied the foreign tax credit for taxes of countries with which the United States does not have diplomatic relations, and for taxes of countries that repeatedly support terrorism. Treasury Department rules have specified that Afghanistan, Albania, Angola, Cambodia, Cuba, Iran, Libya, North Korea, the People's Democratic Republic of Yemen, Syria, and Vietnam meet these criteria. ⁴

It is interesting to note that the 1986 OBRA provision in effect converted each of the proscribed countries into "low-tax" countries for foreign tax credit purposes, regardless of whether the countries' taxes were actually high or low. Because they no longer generate foreign tax credits, the countries are, for foreign tax credit purposes, on the same footing as countries that impose a tax rate of zero. Accordingly, if special provision had not been made in the 1986 OBRA, taxpayers with excess credits from countries that were not proscribed could use those credits to off set U.S. taxes due on income earned in the proscribed countries. OBRA did, however, contain a special provision that prevented such crediting from taking place.

The Internal Revenue Code also gives individuals and firms the option of claiming foreign taxes as deductions from taxable income rather than credits against taxes. A dollar-for-dollar tax credit such as the foreign tax credit, however, generally results in larger tax savings than a deduction of equal amount; most taxpayers therefore opt to claim foreign tax credits rather than deductions.

To recap, the United States levies its income tax on foreign- source income and grants a foreign tax credit to alleviate double- taxation. There is, however, one additional basic element of the U.S. method of taxing foreign-source income: the deferral principle.

Deferral

Deferral is not an explicit provision of the tax code, but rather results from U.S. taxation on the basis of residence. If a corporation is chartered in the United States but earns foreign income, that foreign income is subject to U.S. But the United States does not tax foreign corporations on their foreign earnings. Accordingly, if a U.S. firm conducts its foreign operations through a wholly or partially owned subsidiary corporation that is incorporated in a foreign country, the income earned by the subsidiary corporation is not taxed until it becomes the income of the U.S. parent corporation. This generally does not occur until the subsidiary's income is repatriated to the United States as dividends. Deferral thus permits firms to delay payment of U.S. taxes on foreign-source income as long as the income is re-invested abroad.

While deferral and the U.S. foreign tax credit can both reduce taxes on a U.S. firm's foreign investment, the two provisions should be carefully distinguished: deferral is a tax benefit, while the U.S. foreign tax credit alleviates what would otherwise be a tax penalty (double-taxation). Thus, repeal of deferral denies a tax benefit for foreign investment, while denial of the foreign tax credit denies taxpayers relief from a tax penalty.

We should also note that because of the foreign tax credit, deferral does not always reduce taxes on income earned in a foreign country; it reduces taxes only for income earned in countries whose tax rates are lower than those of the United States. Even if deferral is not used, if a country's tax rates are higher than those of the United States, foreign tax credits can be used to offset any U.S. taxes on income earned in that country. On the other hand, if a country's tax rate is lower than that of the United States, foreign tax credits would ordinarily not be sufficient to offset the entire U.S. tax liability that would be owed in the absence of deferral.

But the tax code contains an exception to the deferral principle itself known as "Subpart F." In general, Subpart F singles out several types of income and denies the benefit of deferral to that income. More specifically, if a foreign corporation that is controlled by a U.S. owner earns the specified types of income, that income is deemed to have been paid as dividends to the foreign firm's U.S. owner, and is thus taxed by the United States even if it is actually retained by the foreign corporation.

Deferral is a major exception to the general U.S. practice of worldwide taxation; the bulk of U.S. direct investment is conducted through separately incorporated affiliates, and is thus in a position to benefit from deferral. The applicability of Subpart F is more limited. It only applies to what is generally income from financial investments and certain other types of income whose geographic source is relatively easy to change. ⁵

Summary

In summary, the United States taxes its resident corporations and individuals on their worldwide income, but grants foreign tax credits to alleviate double-taxation. However, under the deferral principle, if a U.S. firm earns its foreign income through a foreign subsidiary corporation, that income is exempt from U.S. taxes until it is paid to the United States parent corporation. Subpart F restricts deferral in the case of certain limited types of income.

DESCRIPTION OF OBRA'S SOUTH AFRICA PROVISIONS

Section 10231 of the 1987 Omnibus Budget Reconciliation Act denies deferral to income from investment in South Africa and prohibits the use of South African taxes as foreign tax credits. From the preceding discussion, is evident that in doing so, the Act has profoundly altered the U.S. tax treatment of income earned in South Africa.

The Act's denial of the U.S. foreign tax credit was accomplished by modification of section 901(j) of the Internal Revenue Code: the same section that contains the proscription that the 1986 OBRA put in place. The section now prohibits crediting of taxes paid to countries that support terrorism, taxes paid to countries with whom the United States does not have diplomatic relations, and taxes paid to South Africa.

As noted above, the 1988 OBRA contained a rule preventing excess credits from other countries from offsetting U.S. taxes owed on income earned in countries whose taxes are not creditable. Such a prohibition was not contained in H.R. 1005 of the 100th Congress, an earlier version of the foreign tax credit's denial for South African taxes. The 1987 OBRA provisions do, however, rule out the use of excess credits. As with income earned in other section 901(j) countries, this is accomplished by requiring taxpayers to calculate a separate foreign tax credit limitation for income earned in South Africa.

OBRA does not prohibit U.S. taxpayers from claiming South African taxes as tax deductions. Thus, despite OBRA's repeal of the foreign tax credit, a U.S. investor will not pay taxes at a combined rate equal to the South African tax rate plus the U.S. tax rate. Rather, the investor will pay a combined rate that is lower than this and that is equal to the South African tax rate plus the U.S. tax rate multiplied by one minus the South African tax rate.

The 1987 OBRA denies the deferral tax benefit for South African operations by adding income earned in South Africa to the other types of income that was already subject to Subpart F under prior law. Thus, as with other Subpart F income, South African subsidiaries of U.S. firms will be "deemed" to have distributed all of their annual earnings to their U.S. parent corporations whether or not such distributions actually take place. As with other Subpart F income, the U.S. parent corporation will be taxed by the United States on the "deemed" distributions, thus ending deferral for South African income.

Repeal of deferral is not mentioned explicitly in the 1987 OBRA. However, section 952 of the Internal Revenue Code includes as Subpart F income any income earned in a country for which section 901(j) denies the foreign tax credit. Thus, since OBRA includes South African income in section 901(j), it also automatically classifies South African income as Subpart F income.

Not all U.S. investors are subject to Subpart F, even if they earn income that the tax code includes as Subpart F income. Thus, as we shall see in the last section of the report, some investors may be immune to OBRA's repeal of deferral.

EFFECT OF OBRA ON THE TAXES OF U.S. INVESTORS IN SOUTH AFRICA

The American Chamber of Commerce in Johannesburg has calculated that as a consequence of OBRA, the combined South African and U.S. tax rate on income earned in South Africa could increase from its prior level of 57.5 percent to a new rate of 72 percent. ⁶ The U.S. State Department, in announcing its opposition to OBRA's provisions, asserted that the increase in taxes could lead to U.S. firms being bought by South African companies at "bargain" prices. ⁷ The analysis below confirms that OBRA probably will result in a large increase in the tax rate on U.S. investment in South Africa. As a consequence, the amount of South African assets desired by U.S. firms will probably decline.

To assess the impact of OBRA, we look first at the tax situation of U.S. investors prior to the 1987 Act. Despite the deferral principle, that tax treatment of U.S. firms was similar whether they conducted South African operations through a South African subsidiary corporation or through a branch of a U.S. parent corporation. The reason for this is that South Africa was a "high tax" country: a country that generated sufficient foreign tax credits to offset any taxes imposed by the United States. ⁸ If deferral was used, no U.S. tax would be imposed if the South African income was not repatriated; if deferral was not used, South African taxes were probably sufficient for most firms to offset any U.S. taxes due.

Because of the large amount of foreign tax credits that South Africa's high taxes generated, total taxes on most firms' South African income probably consisted primarily of South African taxes. For its part, South Africa imposes a 50 percent tax rate on taxable corporate income plus a 15 percent withholding tax on dividends paid to foreign corporations (in this case, U.S. corporations.) Thus, if we assume the effective tax rate on South African income is at or near the statutory South African tax rate, the effective tax rate on income earned by a South African branch of a U.S. corporation would have been around 50 percent. ⁹ The tax rate on income earned and retained by a South African subsidiary would also have been at or near 50 percent; and the tax rate on income earned by a South African subsidiary and paid out as dividends would have been at or near 57.5 percent (50 percent plus the 15 percent withholding tax imposed on the remaining 50 percent of earnings).

These effective tax rates are probably considerably higher under OBRA. Income earned by branches of U.S. corporations and income earned and retained by South African subsidiaries probably face effective tax rates of around 67 percent. (This rate consists of 50 percent South African income tax plus the 34 percent U.S. corporate tax rate applied to South African income net of South African taxes. The 1987 OBRA does not prohibit the deductibility of South African taxes.) Income earned by South African subsidiaries and paid to U.S. parent corporations as dividends are likely to face an effective rate of 72 percent. (This rate consists of the South African income tax of 50 percent plus the 15 percent South African withholding tax that applies to the 50 percent of income remaining after the imposition of income taxes, plus the 34 percent U.S. tax rate applied to the 42.5 percent of income remaining after South African taxes.)

In summary, the total tax rate on branch income and retained income is probably increased by OBRA from 50 percent to a new level of 67 percent: increase of about one-third; total taxes on remitted income probably increases from 57.5 percent to 72 percent: an increase of about one-fifth. Both increases are thus substantial.

TAX FACTORS THAT MAR MITIGATE THE IMPACT OF OBRA

The foregoing estimate of the impact of OBRA ignores possible actions that either U.S. investors or the South African government may take in response to the Act. There are at least three actions that have the potential of limiting the Act's impact on U.S. investors.

First, if the Government of South Africa determines that the presence of U.S. investors is sufficiently important to its economy, it may reduce its own taxes so as to either fully or partially off- set OBRA's repeal of deferral and the U.S. foreign tax credit. As noted above, South Africa's statutory corporate tax rate is high compared to that of the United States. Thus, it is conceivably within South Africa's power to fully offset the new U.S. taxes.

The cost to South Africa of such a step would be foregone tax collections; it would, in effect, be conceding to the United States the tax revenue generated by U.S. capital employed in South Africa. Nonetheless, if South Africa believes that OBRA will lead to a sizable decline in the level of U.S. investment, it may reason that its tax collections from U.S. investors would decline in any event.

A second response that has the potential of mitigating OBRA's impact relates to the manner in which it repeals deferral; it does so by adding South African income to Subpart F. Like other Subpart F income, income earned in South Africa will be taxed to U.S. investors, even if that income is earned through a South African corporation. But Subpart F only applies to income earned by so-called "controlled foreign corporations (CFCs)," or foreign corporations that are in the control of U.S. stockholders. Conceivably, then, a U.S. investor could escape the moat immediate effects of OBRA by altering South African operations so that they are no longer conducted through a CFC.

The Internal Revenue Code defines a CFC as a foreign corporation where more than 50 percent of the stock is owned by U.S. stockholders; each U.S. stockholder, further, must own at least 10 percent of the CFC's stock. Thus, if only 50 percent of a South African corporation's stock is owned by U.S. investors, then that corporation will not qualify as a CFC and its income can still benefit from the deferral principal. Further, to the extent that the South African corporation retains its income rather than paying it to its U.S. stockholders, the impact of OBRA's repeal of the foreign tax credit will be mitigated.

We should point out that even if a U.S. corporation adjusts its South African holdings so as to avoid classification as a CFC, such an adjustment may still entail a reduction of its South African assets. (Suppose, for example, a U.S. corporation owned 100 percent of a South African subsidiary prior to OBRA; avoidance of CFC classification would require it to shrink its holdings to only 50 percent of the South African subsidiary.) In addition, avoidance of classification as a CFC may also mean the U.S. parent would relinquish control of the subsidiary corporation, since it can only own 50 percent or less of the subsidiary's stock if it wishes to remain beyond the reach of Subpart F.

Finally, U.S. firms may be able to use "transfer pricing" to shift some of their South African income to other countries without reducing their South African investments. While firms using such a mechanism would still not be able to claim South African taxes as foreign tax credits, shifting of income may alleviate some of the effects of deferral's repeal and may allow firms to use excess credits from other countries to reduce U.S. taxes on what was previously South African income.

Suppose, for example, a multinational firm has operations in the United States, a South African operation (conducted through a South African subsidiary), and a subsidiary corporation incorporated in a country that has very low tax rates (Country "C"). In the face of OBRA's repeal of the foreign tax credit and deferral, the firm could reduce its overall tax bill by shifting income from South Africa to Country C. In Country C, the income would benefit from the deferral principal and would be subject only to Country C's low taxes.

Or, suppose the firm's Country C operations are conducted through a branch rather than a subsidiary so that deferral does not apply, and the firm has "excess credits" (see above, page 3) from countries other than Country C. In this case,the multinational would still benefit from shifting income from South Africa to Country C. In this case, however, instead of using deferral, the multinational could use its excess credits to offset U.S. taxes on the income that was shifted from South Africa.

Income might be shifted by a firm through the prices it sets on transfers within the firm. For example, the price might be reduced for goods shipped from South Africa to Country C, thereby reducing the South African subsidiary's share of the firm's profits and increasing that of the Country C subsidiary. Or, the U.S. parent firm may increase its headquarters charges (i.e., the share of headquarters costs charged to each subsidiary on the theory that the entire firm benefits from certain headquarters activities) to its South African subsidiary and simultaneously reduce its charges to its Country C subsidiary.

Section 482 of the Internal Revenue Code gives the Secretary of the Treasury the authority to adjust the way income is apportioned among affiliated firms so as to accurately reflect the share each affiliate earns. The regulations that the Internal Revenue Service has issued under section 482 are based on the principle that accurate allocation of income requires intra-firm transfers to be assigned "arm's length" prices, or prices that a firm would charge if its transfer were being made to an unrelated firm. Nonetheless, there is reason to believe that multinational corporations are still able to shift income for tax purposes. ¹⁰

OBRA's IMPACT ON U.S. INVESTMENT IN SOUTH AFRICA

Notwithstanding the factors that could dampen OBRA's effect on taxes, the stock of U.S. assets in South Africa will probably fall because of the Act's tax sanctions. ¹¹ U.S. investors will find their aftertax return on South African assets has been reduced and will wish to reduce their holdings of South African assets.

The magnitude of the reduction will depend on how sensitive U.S. investors are to changes in the rate of return on their South African assets. As noted above, investors who cannot avoid the full impact of OBRA will register a increase in their tax burden that could be as high as one-third. In general, if U.S. investors are extremely sensitive to changes in the rate of return on South African assets and investors can easily find substitutes for South African investment, they may desire to reduce their holdings by more than one-third. On the other hand,if investors are insensitive to changes in the rate of return and there are few substitutes for South African assets, investors may desire to reduce their holdings by less than one-third.

While an estimate of how much U.S. capital will possibly be withdrawn from South Africa is not attempted here, we can get a rough idea of OBRA's importance to South Africa by looking at the importance to the South African economy of U.S. investments. At the end of 1986, U.S. private assets in South Africa were around $3.3 billion, an amount equal to about 5 percent of South Africa's gross domestic product for that year. ¹² Thus, if ALL U.S. private assets in South Africa were to be withdrawn because of OBRA (a development that is unlikely) South Africa would have to find new investment funds equal to 5 percent of its CDP to replace them. ¹³ Based on this estimate, it is reasonable to conclude that U.S. assets play a significant but not central role in the South African economy. And, since it is probable that all U.S. assets will not be withdrawn because of OBRA, it is also reasonable to conclude that while the impact of OBRA on the South African economy may be significant, it will probably not play a central role in future South African economic performance.

But even this conclusion may overstate the impact of OBRA. First, the investment funds required to purchase liquidated U.S. assets may be less than the market value of those assets prior to OBRA. This is because those U.S. investors who reduce their South African holdings will do so because the aftertax profitability of South African assets has fallen -- at least while the assets are in the hands of U.S. investors. In view of the reduced profitability of South African assets, U.S. sellers may be willing to sell their assets for something less than their market value prior to OBRA. The extent to which the price actually falls, however, will be mitigated to the extent there are competing buyers, either from South Africa or from other countries.

Second,the above estimate of U.S. assets in South Africa is for year-end 1986 and thus does not reflect the full impact of the Comprehensive Anti-Apartheid Act's ban on new investment in South Africa. The CAAA may well have resulted in a decline in U.S. South African holdings, thus diminishing the base of assets that will be affected by OBRA.

SUMMARY

By repealing deferral and the foreign tax credit for investment in South Africa, the Omnibus Budget Reconciliation Act of 1987 has made an important alteration in the way that investment is taxed by the United States. OBRA'stwo provisions will raise the tax rate on South African income significantly, and, in consequence, the level of U.S. investment in South Africa will likely fall (other factors remaining constant).

But both the South African government and U.S. investors could take actions that would mitigate the impact of OBRA. South Africa, for example, could reduce its own taxes on U.S. investors to compensate for OBRA's increase in U.S. taxes. U.S. investors could seek to ease the effects of OBRA by shifting income from South Africa to other countries and by reducing their holdings in South African subsidiary corporations.

² A U.S. corporation is a firm incorporated in the United States.

³ Numerous other countries tax foreign income on the basis of residence as does the United States; these countries typically provide foreign tax credits to alleviate the problem of double- taxation.

⁴ U.S. Department of the Treasury. Internal Revenue Service. Revenue Ruling 87-35.

⁵ For additional information on Subpart F, see: U.S. Library of Congress. Congressional Research Service. Taxation of Overseas Investment: Subpart F and the Tax Reform Act of 1986. Report No. 87- 167 E, by David L. Brumbaugh. Washington, 1987.

⁶ U.S. Tax Measure Angers Pretoria. New York Times, December 25, 1987. p. D1.

⁷ Washington Roundup. Tax Notes, January C, 1988. P. 26.

⁸ The conclusion that South Africa was a high-tax country is based on its 50 percent statutory corporate income tax rate and the 15 percent withholding tax it applied to dividends paid to U.S. parent firms. This compares to a top U.S. corporate tax rate of 34 percent. See also the classification of South Africa as a high-tax country by Thomas Horst in his Overall vs. the Per-Country Limitation on the U.S. Foreign Tax Credit, in U.S. Department of the Treasury. Office of Tax Analysis. 1978 Compendium of Tax Research. Washington, U.S. Govt. Print. Off., 1978. p. 238.

⁹ The term "statutory" tax rate means the tax rate that a country's tax code applies to the portion of a taxpayer's income that is taxable. "Effective" tax rate, as used here, means the percentage of a taxpayer's total income (taxable and non-taxable) that is paid in taxes.

¹⁰ See, for example: U.S. General Accounting Office. IRS Could Better Protect U.S. Tax Interests in Determining the Income of Multinational Corporations. Report to the Chairman, House Committee on Ways and Means, by the Comptroller General of the United States. Washington, 1981. p. i.

¹¹ This ignores possible direct actions by the South African government to prevent repatriation of capital to the United States.

¹² Data for U.S. direct investment in South Africa is from: U.S. Department of Commerce. Survey of Current Business. August, 1987. p. 85. U.S. claims on South Africa reported by banks and by non-banking enterprises are from: U.S. Department of the Treasury. Treasury Bulletin, September 1987. p. 71, 76. Data was unavailable for U.S. holdings of South African securities. A figure was estimated by assuming that the ratio of securities holdings to all private assets is the same for U.S. holdings in South Africa as it was for U.S. worldwide foreign investment.

Data for South African GDP is from: South African Reserve Bank. Quarterly Bulletin, September 1987. p. 82.

¹³ The replacement funds may be generated by increased saving on the part of South Africans or may be in the form of an increase in capital from other countries. Alternatively, South Africa may decide not to replace any U.S. capital that is withdrawn, and accept a lower capital/labor ratio for its economy.