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SA Tax More Complex Under Residence-Based System

by Robert Lee,, London

05 August 2003

The change in South African taxation from a source-based to a residence-based regime has made the tax system more complicated in recent years, local experts have noted.

As the government attempted to address capital outflows following the relaxation of foreign exchange rules in the 1990's, the conversion to a residence-based system- designed to widen the tax base- in combination with the introduction of capital gains tax and more sophisticated anti-tax evasion laws conspired to increase the complexity of the system, according to Ernie Lai King, a Werksmans tax director.

Speaking to the South African Sunday Times, he explained that this is particularly the case with regard to the law surrounding the taxation status of foreign firms based in South Africa which derive income from abroad.

According to South African tax law, tax is imposed on foreign income earned by a "controlled foreign entity". Therefore, as Wildu du Plessis, a tax expert at Werkmans points out, the definition of such an entity is key. If the firm is managed from South Africa, then the firm is not classified as a foreign firm, is taxed on the same basis as a resident company, and would therefore be required to submit a tax return in South Africa.

Many other factors are then considered once it is established that a firm is not managed from within South Africa, according to Lai King. These include defining the degree of control enjoyed by resident shareholders and the voting rights that they hold, in addition to the say which they have in deciding capital and profit distributions in the firm.

Lai King also points out that certain exemptions are granted to foreign firms controlled by resident shareholders, such as royalties and rental income received by the company from another overseas firm. However, in such cases the firm's net income has to be calculated as if it were a resident company using local rules. "The administration and compliance burden is self-evident," the Times report quoted the Werksmans director as concluding.

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