According to reports in the national media, speaking before the National Assembly's Finance Portfolio Committee this week, the Treasury's chief tax policy official, Keith Engel explained that under the proposed legislation, payments made for the use of intellectual property will not be tax deductible if the property was previously owned or developed in South Africa.

Under current rules, a South African entity can develop a product or process and transfer the intellectual property to an offshore patent holder, which then charges the local firm for use of the IP in question, a charge which is tax deductible. The royalty payments are then usually transferred back to the South African taxpayer by the offshore entity in a format attracting lower taxes, for example as dividends.

Other measures included in the draft Revenue Laws Amendment Bill include:

Base broadening for the Secondary Tax on Companies

The STC rate on dividends will be dropped from 12.5% down to 10% as of 1 October 2007. The proposed amendments will also deal with a number of schemes designed to avoid the STC through artificial distributions of share capital and share premium.

Capital versus ordinary treatment of shares:

Capital gains face a much lower rate of tax than ordinary revenue (e.g. in the case of individuals, the top capital gains rate is 10%; whereas, the top ordinary rate is 40%). Subject to anti-avoidance rules of limited application, the proposed legislation clarifies that the disposal of all shares will be
treated as having a capital nature as long as those shares are held for at least three years.

Depreciation incentives:

The proposed amendments provide depreciation incentives for various assets that are currently ineligible. Depreciation incentives will be added to rolling stock, railway lines, port infrastructure assets, commercial buildings and environmental manufacturing assets.