Pending Tax Reform Creating Uncertainty For SA Firms

by Robert Lee, Tax-News.com, London

04 July 2003

A South African tax expert has suggested that proposed reforms to international tax legislation will create uncertainty, and increase the compliance burdens on the South African Revenue Service, multinational businesses and taxpayers with plans to invest abroad.

At present dividend income received from certain designated countries is exempt from taxation in South Africa, provided that the shareholder has a 10% stake in the overseas company. However, Sean Kruger, a tax director at Ernst and Young, suggested that government plans to abolish tax on South African companies that hold a "meaningful interest" in foreign subsidiaries are far from clear, and argued that until legislation hits the statute book, domestic firms will be unable to plan their affairs effectively.

"Companies need every bit of competitive advantage they can get; certainty of a company's tax burden is a critical part of that," Krueger told Business Day, adding that uncertainty over tax costs will hamper companies' plans to bid for contracts, as it could affect future profits.

There also appears to be a certain amount of ambiguity surrounding the definition of 'meaningful interest' according to Michael Butler, an international tax manager at PricewaterhouseCoopers. Domestic firms paying dividends to controlled foreign companies are exempt from tax provided their interest in the controlled firms is at least 25%. "It is hoped that the meaningful interest is 25%" Mr Butler noted.

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