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South Africa Cuts Business Tax

by Robert Lee,, London

25 February 2005

Finance Minister, Trevor Manuel has announced that South Africa’s corporate tax rate will be cut by one percentage point this year, in one of a number of measures aimed at improving the country’s business environment and competitiveness.

In his annual budget address to parliament on Wednesday, Manuel declared that with effect from April 1st, 2005, the South African corporate income tax rate will be reduced from 30% to 29%, a move that it has been estimated will cost around R2 billion in tax revenues.

Other significant tax measures affecting businesses include a proposed change to the tax treatment of company restructurings to support “more efficiently realigned business structures”. This will mean a reduction in the 75% shareholder threshold for intra-group tax-free transfers to 70%.

In addition, attention will be given to the 75% ‘look-through’ test for determining passive financial instrument company status which, it is thought, may be too high in the case of domestic and foreign restructurings involving multi-tier company structures. Furthermore, the ‘more than 25 per cent threshold’ for tax-free formations will also be examined, as it is considered a hindrance in company formations.

Manuel has also pledged to reduce the tax burden surrounding equity transactions by eliminating all financial transaction taxes on share issues from January 2006, a move to designed to encourage firms to undertake equity financing rather than debt financing.

Tax incentives aimed at helping South Africa re-establish its shipping register will see the introduction of a tonnage tax regime, which taxes shipping companies at fixed rates according to the size of their ships, and not according to the company’s business income results, lowering the effective tax rate paid by companies in the industry.

Meanwhile, a number of measures were announced by Manuel to help the development of the small business sector, which will expand the categories of small business companies eligible for relief to cover personal services, and increase the turnover limit for eligible companies from R5 million to R6 million.

In addition, small businesses will be subject to a new rate structure and a simplified and enhanced depreciation regime, while the frequency of value added tax filings is to be reduced from two month intervals to four month intervals.

On the issue of place of supply rules concerning VAT, clarification will be issued this year to provide certainty for those undertaking certain international transactions, such as the buying of services, and purchases conducted via the internet.

International taxation rules will come under fresh scrutiny after Manuel revealed that the authorities have discovered that new legislation in certain offshore jurisdictions has rendered some legal tests ineffective at lessening the impact of “harmful tax practices by tax havens”. Moreover, Manuel reported that recent experience with the South African controlled foreign company rules means that the residence-based income tax system needs to be improved.

On the personal income tax front, the budget has brought about some minor tax benefits through adjustments in tax bracket thresholds and an increase in the primary tax rebate, while in an attempt to attract skilled foreign workers to South Africa, consideration will also be given to possible changes to the tax residence definition, to allow for extended South African visitation.

Manuel conceded that the switch to a worldwide taxation system has put foreign workers at a disadvantage when relocating to South Africa, and as an alternative, suggested tax amendments which could seek to alleviate the capital gains tax burden on foreign assets acquired before entry into the country, in addition to certain subsequently acquired foreign assets.

The full text of the 2005 South African Budget can be found in the Tax News Resources section.

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