South Africa Introduces Tax Amendment Bills

by Lorys Charalambous, Tax-News.com, Cyprus

26 August 2010

South Africa’s Finance Minister, Pravin Gordhan, has tabled before parliament two taxation amendment bills which, as amended after going through a consultation process, give effect to the tax proposals announced in the 2010 budget, announced in February.

He summarized the proposed bills as providing personal income tax relief, while closing various tax loopholes, to ensure an equitable tax system. Both tax bills, he said, contain a mix of limited tax relief measures, together with anti-avoidance measures needed to protect the tax base.

For example, severance packages paid by employers will qualify for the ZAR300,000 (USD40,800) exemption and, at the same time, the preferential rates that currently apply to lump sum payments out of retirement savings will now also be extended to severance packages. A number of other measures are intended to provide relief for various forms of lump sum pension payouts so that taxpayers can more readily access their full retirement savings after retirement.

However, he said, the bills also ensure that workers whose employers provide them with a motor vehicle are treated equitably. While the current tax rules treat this free use of a motor vehicle as a taxable fringe benefit, the proposed amendment increases the tax charge to reflect fully the value of the economic benefit received by the employee.

While the government wishes to promote South Africa as an ideal location for multinationals to base their regional operations for investments into sub-Saharan Africa, Gordhan pointed out that certain domestic tax anomalies, the exchange control regime and fierce competition from certain low tax countries, remain stumbling blocks to South Africa taking full advantage of the opportunities that are available.

To remedy this situation, proposed amendments in the bills remove various tax hurdles that a multinational company would face if it based its regional headquarters in South Africa, and revises exchange controls to support such initiatives.

With reference to the growing use of Islamic financing, and its lack of recognition by South Africa’s present tax system, he said that the proposed amendments will level the playing field in respect of certain Islamic financial products when undertaking savings and investments, and when attempting to obtain bank finance.

To attract foreign investment into South Africa, foreign investors based in South Africa are currently exempted from tax on interest received or accrued from their operations outside the country. As that exemption appears to be far wider than the international norm, Gordhan said that substantial funds are flowing out of South Africa, free of tax.

A proposed amendment will therefore close this gap by narrowing the cross-border interest exemption, mainly to listed government and corporate bonds. Most other forms of cross border interest payments will become subject to a 10% withholding tax. However, this amendment will have to be delayed until 2013 because it will require the renegotiation of certain tax treaties and the implementation of administrative measures to allow for a withholding tax regime.

Gordhan further pointed out that, while the proposed vehicle carbon emissions tax forms part of this year’s tax proposals, it is not included in the bills under consideration, as it will be imposed in terms of amended schedules and rules to the Customs and Excise Act.

He confirmed that the vehicle emissions tax on passenger cars will proceed as scheduled on September 1, 2010. However, having taken into account some concerns of the motor industry, it has been agreed that the tax on double cabs will be delayed and come into effect on another date in the next few months. This tax will be extended to all other light commercial vehicles at a later date.

He added that a discussion paper on carbon taxes will be published shortly. Though not implemented this year, the government is considering a vehicle emissions tax on all cars by reviewing its approach to vehicle license fees, which are implemented by provinces. Higher fuel levies could also be imposed.

Finally, Gordhan reported that the South African Revenue Service is “extremely gratified” by the response of taxpayers in filing their tax returns for 2010. To date, he said, 1.3m returns have been filed, compared to only 950,000 returns for the same period last year. This is an annual increase of 32%, and 98% of returns have been received electronically.

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