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South African Budget Bill Closes Corporate Tax Loophole

by Robert Lee,, London

21 March 2008

South African Finance Minister, Trevor Manuel has laid before parliament the first of several bills giving effect to measures he announced in the budget speech last month while also closing a popular corporate tax 'loophole'.

The Taxation Laws Amendment Bills, 2008, introduced on March 19th, will give effect to the cut in the corporate tax rate by 1% to 28%, personal income tax brackets adjustments, and other administrative actions designed to improve the South African Revenues Services's (SARS) e-filing scheme.

However, Manuel also used the first set of annual tax bills, which are generally designed solely for rates, thresholds and other straight-forward matters, for the "urgent closure of tax avoidance schemes".

"This closure is important if we are to maintain the necessary ingredient of a broad base to facilitate low rates," he argued.

According to Manuel, the most notable target of concern was the misuse of the corporate intra-group rollover regime. He said that although this regime was intended solely as a mechanism for deferring taxable gains when a group of companies passes assets from one group member to another, "certain manipulated schemes achieved a whole lot more".

"In these schemes, deferral became outright exemption, thereby allowing group companies to be sold to independent parties wholly free from tax. It is worth noting that some private equity stakeholders played a central (but by no means exclusive) role in this arena," he explained.

"At the end of the day, our approach has been to be 'tough but fair.' After fully taking into account all comments received, we chose a course that fully closed the loopholes of concern without undermining legitimate commercial transactions," he added.

Manuel told parliament that the government had also uncovered another corporate tax avoidance scheme during the informal hearings process. These schemes, he stated, allowed legitimate and important commercial transactions to generate artificial deductions through excessive financing.

"Whilst we do not wish to hinder transactions necessary for our economy, we again cannot sit idle while legitimate transactions are used as a masquerade for tax avoidance," he argued.

Manuel also announced that the bill contains further changes in the area of private pension reform, streamlines the tax filing process by removing obstacles inhibiting more use of electronic tax returns, and puts in place a more transparent system of administrative penalties.

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