TAX NEWS - June 2010

South Africa Tax: New draft tax law may put off foreign investors, says expert

Foreign investors may look at investing in their own territories rather than bringing funds into South Africa, says Rob Stretch, a director for tax at Ernst & Young.

New draft tax laws to tax non- residents on interest earned from cross-border shareholder loans and private loans may be a deterrent to foreign investment, Mr Stretch warned. He was speaking at a media briefing earlier this week on the implications of the Taxation Laws Second Amendment Draft Bill .

The legislation provides for nonresidents to be taxed on interest they receive or which accrues to them in SA. Nonresidents would not be able to qualify for tax exemptions contained in the draft proposals, he said. These included interest earned on qualifying debt instruments; interest from qualifying borrowers; interest on certain qualifying transactions; and interest earned under a portfolio of a collective investment scheme.

"The legislation is draconian and very clumsily worded. Not much thought has gone into the consequences of it," he said.

Nonresidents would also be liable for provisional tax in the future.

Mr Stretch said the South African Revenue Service was concerned about "plugging the loopholes" where there had been avoidance of tax. "If there is avoidance, then they must target that avoidance." Mr Stretch proposed that the Treasury instead implement a withholding tax on interest, that applied across the board .

Ryan Killoran, a tax associate at commercial law firm Webber Wentzel, recently called for the entire proposed provision to be deleted as foreign creditors in the private equity sector would not be able to take advantage of tax exemptions.

As of December 31, the private equity industry had R106,1bn in assets under management. Mr Killoran said the tax exemption for nonresidents had played an important role in promoting the environment for these capital injections.