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South African Guidance Issued On HQs, Currencies

by Lorys Charalambous,, Cyprus

17 February 2015

The South African Revenue Service has issued two draft tax interpretation notes on special tax relief for the regional headquarter companies of foreign multinationals, and on the application of foreign-currency conversion rules.

The first note provides guidance on section 9I of South Africa's Income Tax Act. That section was initially inserted to promote South Africa as a gateway for investments into Africa, and has been effective for years of assessment commencing on or after January 1, 2011.

As part of that initiative, the Government amended certain provisions of the Act in order to create a more favorable tax environment for headquarter companies. Such a company is subject to tax in the same way as any other resident company, but is entitled to certain relief from corporate income tax, capital gains tax, and dividends tax, which are not available to resident companies that are not headquarter companies.

However, as a consequence of the special tax relief granted to headquarter companies, they are also subject to special anti-avoidance rules. For example, when a company that is a resident becomes a headquarter company during any year of assessment, it must be treated as having disposed of each of that company's assets at market value on the date immediately before the day on which the company becomes a headquarter company.

In addition, a foreign person receiving interest or royalties from a headquarter company will, under specified circumstances, be exempt from withholding tax on interest and royalties respectively.

The second interpretation note, concerning "foreign currency translation rules," points out that, in determining taxable income, foreign currency amounts must be converted to an equivalent amount in rand using either a spot rate or an average exchange rate. The Income Tax Act generally prescribes which rate must be used depending upon the nature of the underlying transaction and the type of taxpayer involved. Depending on the circumstances, the determination of a person's normal tax liability may require the application of more than one of these provisions.

An individual may use the spot rate to convert foreign currency amounts includable in taxable income for an assessment year, but, assuming some of the foreign currency income was from a foreign source and the individual qualified for a foreign tax rebate on the foreign tax paid on that income, he or she would then apply the average exchange rate to translate the amount of foreign tax to a value in rand.

Comments on both notes must be submitted to SARS by May 31, 2015.

TAGS: capital gains tax (CGT) | South Africa | tax | business | royalties | law | corporation tax | tax authority | multinationals | legislation | withholding tax | dividends | currency | Africa | Tax

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