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South Africa Relaxes Business Tax Amnesty Terms

by Robert Lee,, London

15 June 2006

The South African government has decided to improve the terms of a tax amnesty aimed at small businesses, after listening to the concerns of small business owners regarding the original proposals.

Finance Minister Trevor Manuel announced at a press briefing earlier this week that an incremental levy will be imposed on income declared under the amnesty up to a maximum level of 5%. This replaces the original plan to impose a 10% flat rate of tax on the previously undeclared income.

Under the new proposal: a 2% rate will be applied to taxable income of R35,000-R100,000; 3% on income of R100,000-R250,000; 4% on income of R250,000- R500,000; and 5% on income of R500,000 or above.

An additional change will mean that the levy will be based on taxable income for the 2005/6 tax year rather than the the 2004/5 year, as initially proposed.

The amnesty will begin on August 1, 2006 and will remain in place until May 31, 2007.

Commenting on the new proposals, Mr Manuel observed that: “From the perspective of businesses that qualify for the amnesty, the conditions are significantly more generous."

The amnesty, first announced in the 2006/7 budget, is being put in place by the government in an attempt to entice the substantial number of small businesses currently operating in the 'informal economy' to regularise their tax affairs without fear of punishment by the tax authorities.

Manuel also hopes that the amnesty will help to broaden South Africa's tax base and encourage more of a compliance culture.

The government is due to publish additional regulations at a later date to offer a limited amnesty for small businesses who are already being dealt with by the South African Revenue Service (SARS) for non-compliance. Mr Manuel explained that these firms will receive relief from interest, penalties and other additional charges while maintaining SARS claims against underlying capital.

The Finance Minister went on to note that these business would “undoubtedly feel unfairly treated” given the terms now extended to other similar non-compliant businesses.

The amnesty will cover corporate and personal income tax, PAYE, the skills development levy, secondary tax on companies, value-added tax, unemployment insurance contributions and withholding tax on royalties paid to nonresidents. It will be open to any individual, private company, close corporation, trust, unlisted public company, co-operative, insolvent estate or deceased estate that meets the amnesty conditions.

The amnesty will however exclude complex entity structures, such as consolidated financial groups, all of which typically involve sophisticated businesses falling outside the typical small business sector, Mr Manuel added.

The minister also warned that businesses that chose not to apply for the amnesty will face "vigorous" enforcement and heavy penalties after the May 2007 deadline, with the help of the law enforcement agencies.

"If there are people who believe they will get away with not being registered and not paying tax, we will have to demonstrate that it's unfair on tax payers," Manuel stated.

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