South Africa Tax: Six new tax changes that affect you
The Draft Taxation Laws Amendment Bill, 2010 has been released for public comment. The Bill proposes various effective dates for the amendments contained therein. In this note, we highlight some of the significant new changes. The continuing revision of the proposed new dividend tax and its related administrative and ant-avoidance provisions will be addressed separately.
Cross border related tax changes
The participation exemption currently applies to foreign dividends declared by a foreign company in circumstances where, inter alia, a South African resident holds at least 20% of the ordinary shares in that entity. The scope of this exemption will be narrowed. This is intended to ensure, inter alia, that the participation exemption only applies to dividends which do not relate to any South African sourced income which is exempt from normal tax and where the quantum of such dividends is not determined, inter alia, with reference to a rate of interest or an amount of capital subscribed for.
The participation exemption in respect of capital gains arising from the sale of shares in a non-resident company will also be narrowed to exclude shares where, inter alia, the shareholder has a contractual right to dispose of such shares or the non-resident company is obliged to redeem such shares.
South Africa's current thin capitalisation provisions will be extended to apply to the South African branches of foreign companies.
South Africa's transfer pricing rules will be amended to focus on the economic substance of transactions. In particular, these rules will apply where:
- a transaction has been entered into on a cross-border basis between related parties;
- any term or condition of that transaction is different from any term or condition that would have existed had those parties been independent persons dealing at arm's length; and
- the transaction will result in a tax benefit being derived by any party thereto.
In these circumstances the Commissioner may determine the taxable income of any such party to the transaction as if the transaction had been entered into on arm's length terms and conditions.
Provision is being made for a regional holding company regime (headquarter companies). The idea is that such companies will qualify for a beneficial tax regime in South Africa. Inter alia, the foreign subsidiaries of such companies will not be subject to South Africa's controlled foreign company rules. In addition, dividends declared by such companies will be exempt from secondary tax on companies (or dividend tax once this tax comes into effect).
Foreign investment funds investing into South Africa often do so under a partnership or trust arrangement. In many circumstances the general partner is located in South Africa and creates a permanent establishment for the other investors in the fund. In certain circumstances, the trustees of a trust may also create a permanent establishment for the other investors in the fund. It is proposed that as a matter of South African domestic law the general partner or trustees should not be considered to constitute a permanent establishment for the other investors in respect of specified foreign investment funds.
Interest received by non-residents other than from, inter alia, investments in government debt, bank deposits and listed debt instruments will no longer be exempt from South African tax in the hands of the non-resident under South African domestic law. However, a double taxation agreement may still allocate exclusive taxing rights to the state of the non-resident.
Local corporate tax changes
New concepts accommodating Shari'a compliant financing have been introduced into the Act. The main concepts have been introduced into a new section 24JA and consequential amendments have been made to legislation such as the Transfer Duty and VAT Acts.
In particular, from a VAT perspective, the bank is deemed to act as the agent of a client, thereby avoiding a partnership arrangement where the partnership is required to register separately for VAT purposes. Any mark-up by the bank or rent charged is deemed to be interest, which is exempt from VAT, but only to the extent that it does not comprise a fee, in which case the fee is subject to VAT.
A number of changes have been made consequent upon the imminent introduction of the new Companies Act and include the following:
- The definition of equity share,
- The definition of connected person;
- The definition of shareholder;
- Section 8E (dealing with hybrid equity instruments).
It seems that changes will be introduced in two phases: the first phase includes the above and the new "dividend" definition; whilst the second will introduce the new dividend tax, and the associated administrative and anti-avoidance rules. The latter remains on hold pending the renegotiation of DTA's. We will address various of the changes to the latter category proposed by this draft in a separate note.
Substantive new provisions have been introduced regulating the deductibility of premiums paid pursuant to group life or keyman insurance and dealing with the inclusion in income of payments received pursuant to such a policy.
The trading stock rules have been amended to exclude therefrom the normal valuation rules, insofar as it pertains to financial instruments. Henceforth all holders of such financial instruments must include them in closing stock at cost (and not at the lower of cost or market value) subject to the existing bad and doubtful debt rules. There are consequential extensions to the rules for "allowance assets" relating to bad and doubtful trading stock in the corporate reorganisation rules.
A substantive new provision (section 12N) has been introduced to facilitate a wide range of allowances to be extended to leasehold improvements effected by a taxpayer in terms of a public private partnership or land owned by the state whether national, provincial or local or any entity which is exempt in terms of section 10(1)(cA) or (t).
A new section 23K has been introduced to limit the deduction of expenditure and losses incurred in respect of financial instruments to the extent that it does not exceed the amounts of exempt income (eg, dividends) from such financial instruments. This does not apply to the extent such financial instruments were funded solely from amounts other than loans, debts or similar arrangements. The burden of proof in this regard will rest upon the taxpayer.
Various changes are proposed to the corporate reorganisation rules. Many of them concern the manner of dealing with trading stock. It is proposed that assets transferred by a transferor constituting trading stock that is regularly and continuously disposed of by the transferee should be excluded from the so-called de-grouping charge. In addition, inter-group relief will be applicable when the election is made at the time of conclusion of the agreement rather than on an automatic basis. Other changes are proposed relating to share for share listed company reorganisations.
Residential property amnesty
Substantive new provisions have been introduced to regulate the process for extracting residences from companies and trusts. Small changes have been made to the current rules which will continue to govern transfers until September 30 2010. A new section 51A will govern the transfers of such properties between 1 October 2010 and 1 January 2012. (There is a reference to 2013 in the draft which may be a typographical error). The new regime appears to be more restrictive in certain respects. In addition, certain difficulties with qualification for such relief which we have previously identified continue to remain unresolved.
Section 8C - share incentive schemes
Capital distributions in respect of restricted equity instruments will be treated as gross income unless they consist of another restricted equity instrument. Dividends in respect of equity instruments will also be treated as gross income unless they take the form of restricted equity instruments. The wording of the draft Bill and the Explanatory Memorandum do not coincide and it is possible that the draft Bill goes beyond what was intended. Certain further changes have been proposed in addition thereto relating to rollover treatment for swaps and acquisition by co-employees or directors. In addition a joint and several liability has been introduced to include an associated institution which is neither resident nor has a representative employer in South Africa.
Value-Added Tax
Where a vendor acquired goods or services on credit on which Value-Added Tax (VAT) was claimed, and the amount remains unpaid for a period longer than 12 months other than in instances where credit terms are provided, the purchaser must pay the Value-Added Tax (VAT) previously claimed back, because it is assumed that the seller will after 12 months write the debt off as irrecoverable and claim the bad debt relief for the VAT previously paid.
This provision also applies to inter-company loan accounts, where there may be valid commercial reasons where the debt remains outstanding for longer than 12 months. It is proposed that the pay-back provision does not apply to group companies, unless there is a written agreement between the parties that the debtor's debt is cancelled.
Individual and employees tax related changes
As mentioned in the 2010 Budget, taxpayers are encouraged to come forward and avoid the future imposition of interest in the form of a VDP, which will be instituted from November 1 2010 to October 31 2011. The VDP has caused certain changes to be made to Sars' discretion to waive interest charged on unpaid provisional tax, once the application period commences.
Changes are proposed to bring the taxation of company cars in line with travel allowances. The changes are based on the presumption that all employees' use is deemed to be for private purposes.
It is proposed that the annual fringe benefit value on company cars be increased to 4% per month of the determined value of the motor vehicle, which now includes VAT and the cost of a maintenance plan. The percentage can be reduced on assessment where an employee keeps a log book or incurs certain expenses, e.g. fuel or insurance.
PAYE is based on 3.2% of determined value of the motor vehicle per month.
Mention is made that employees can obtain an "across-the-board reduction" of the fringe benefit value to the extent that proof of actual business kilometre use can be provided. This reduction will be calculated based on the travel allowance tables.
The liability for withholding is clarified to also cover an associated institution in relation to a South African employer which is not a resident nor has a representative employer in South Africa. This has relevance for shares offered by non-resident entities and now means that the local employer is jointly and severally liable to withhold PAYE from the gains made on these shares.
Professional fees paid by an employer on behalf of an employee will only be non-taxable if membership of such body is a condition for practicing the profession and the services rendered by the employee relate to that profession.
Going forward, the official rate of interest will be determined on the South African repurchase rate plus 100 basis points where the loans are made in South African Rands. Where loans are made in a foreign currency, the equivalent of the South African repurchase rate applicable in the foreign currency plus 100 basis points will apply.
It is proposed that retrenched workers who receive a lump sum upon retrenchment will be subject to the same tax treatment regardless of whether that lump sum is obtained from an employer or by withdrawing funds from pre-existing retirement funds.
These lump sums will therefore receive the same treatment as lump sum retirement benefits. This means that the R300 000 lifetime exemption and the table of special tax rates will apply.
The resident interest exemption levels will be increased, but will be limited to certain interest bearing investments, such as bonds, bank interest and collective investment (money market) schemes, ie, the exemption will not be applicable to interest on ordinary loans.
TAX NEWS - may 2010
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