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South Africa Consults On Budget Tax Reform Bill

by Lorys Charalambous,, Cyprus

11 July 2013

The South African National Treasury has published for public comment the draft 2013 Taxation Laws Amendment Bill (TLAB), which will give effect to most of the tax proposals announced in the 2013 Budget.

Those tax proposals requiring more consultation (for example, trust reforms and the taxation of long-term insurers), and those that require specific legislation (such as, the employment tax incentive and gambling tax), will be dealt with later this year, whilst others (for example, the carbon tax) will be published for comment next year.

However, included in the draft bill is the provision that, as from March 1, 2015, most individuals will be able to qualify for a higher deduction in respect of contributions made to South African retirement funds and, to ensure greater transparency, employer contributions to any retirement fund will be taxed as a fringe benefit in the hands of the individual.

The sum of the contributions from employer and individual will be deductible in the hands of the individual taxpayer up to 27.5 percent of the greater of taxable income or remuneration, or up to a monetary cap of ZAR350,000 (USD34,350), whichever is the lower. Employer contributions towards a defined benefit fund will be valued through the application of a formula.

The TLAB includes an amendment that seeks to address tax avoidance through the re-characterization of income when dividends are paid in respect of services rendered. Under this revised approach, the party receiving the dividend will be taxed on the dividend as ordinary income if the dividend is received or accrued by virtue of services rendered.

Tax base erosion in the form of profit shifting through excessive interest deductions, with income being shifted to low-tax (or zero-tax) jurisdictions, or the conversion of interest income into a different type of income in another jurisdiction, is also dealt with in respect of hybrid debt instruments, with the proposals focusing on the debt instrument itself and its yield.

The proposal denies the interest deduction for the payer and treats the interest payments on hybrid debt instruments as dividends if the debt is unlikely to be redeemed within 30 years, it can be converted into shares, or payments in respect of the instrument are subject to the solvency of the issuer. It also denies the deduction and treats interest as dividends if the interest payment is not determined with reference to a specified interest rate or the time value of money.

A further proposal limits an interest deduction to 40 percent of the debtor's taxable income if the creditor (together with related parties) holds more than 70 percent of the equity shares or voting rights in the creditor company. The limit for acquisition debt will be based on 40 percent of the adjusted taxable income of the acquired company.

In addition, the TLAB attempts to rectify the lack of targeted tax incentives that has hindered the success of South Africa's Industrial Development Zones (IDZs). It is proposed that companies operating within Special Economic Zones (SEZs) (approved by the Minister of Finance after consultation with the Minister of Trade and Industry) will be eligible for accelerated depreciation allowances and an employment incentive.

Companies carrying on qualifying activities within an approved SEZ will also be subject to a reduced corporate tax rate (15 percent instead of 28 percent). All SEZs will qualify for value added tax (VAT) and customs relief similar to that for the current IDZs.

To revive the maritime sector in the country, it is further proposed that a new tax regime for shipping companies will be introduced. In the main, the new shipping tax regime exempts qualifying shipping companies from income tax, capital gains tax, dividends tax, and withholding tax on interest. These complete exemptions will be more favorable than the initially proposed tonnage tax for South Africa.

It is suggested that a domestic treasury management company regime will encourage the establishment of group treasury management functions in South Africa, and leverage the country's advantage as a "gateway to Africa." In the main, any company listed on the Johannesburg Stock Exchange will be able to establish a South African subsidiary to manage its group treasury functions without adverse currency tax implications.

Finally, introducing a place of supply rule will be introduced into the VAT law. Under the current law, foreign suppliers of e-commerce services are not compelled to register as VAT vendors, owing to the fact that they transact wholly over the internet and have no physical place of business in South Africa. The new rule will ensure that those foreign suppliers to South African customers register for VAT in South Africa. The local e-commerce service industry will benefit as the foreign suppliers will now be on an equal footing with their local counterparts.

Written comments on the various proposals in the TLAB are due at the close of business on August 5, 2013. Thereafter, the bill will be revised before its introduction for the more formal parliamentary process.

TAGS: individuals | South Africa | compliance | Finance | tax | business | value added tax (VAT) | tax compliance | tax avoidance | tax incentives | commerce | law | retirement | corporation tax | internet | e-commerce | treasury management | legislation | tax rates | tax breaks | dividends | tax reform | legislation amendments | services | Africa

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