On February 22, the South African Minister of Finance
delivered the 2017 budget, which proposed raising an additional
ZAR 28 billion ($2.2 billion) primarily by collecting ZAR 16.5
billion more in personal taxes and ZAR 6.8 billion through an
immediate increase in the dividend withholding tax rate from
15% to 20%. Apart from any treaty relief, profits extracted
from South African companies will now suffer an effective rate
of 42.4% (up from 38.8%) once 28% corporate tax and 20%
dividends tax is accounted for.
The top individual tax rate is also increasing from 41% to
45% with a corresponding increase in the capital gains tax
(CGT) rates for individuals and trusts from 16.4% and 32.8% to
18% and 36%, respectively. Although no changes were proposed to
corporate tax rates, proposals likely to increase tax payable
by companies were announced, many of them targeted at perceived
tax avoidance strategies.
Dividends are generally exempt from income tax and it is
proposed that structures seeking to take advantage of this,
such as the use of share buybacks (classified as dividends)
rather than share sales which would trigger CGT, will be
targeted. Dividend stripping rules already exist to reclassify
otherwise exempt "dividends" as taxable, where a company
borrows funds from its prospective purchaser in order to
declare a dividend to its shareholder (seller) prior to the
sale of the shares in the company. These rules are likely to be
broadened to apply irrespective of the source of the borrowing
used to fund the dividend.
Not surprisingly in this BEPS environment, the theme of tax
avoidance was also a key focus in the cross-border context.
New rules may be introduced to limit situations in which
distributions from a South African company to non-resident
shareholders can be classified as tax exempt repayments of
capital rather than as dividends subject to dividends tax. With
regard to controlled foreign corporations (CFCs), a fresh
attempt will be made to draft legislation targeting structures
in which trusts are interposed between South African taxpayers
and foreign companies, resulting in those foreign companies
escaping the ambit of South Africa's CFC rules.
The Treasury also announced that South Africa will sign the
OECD Multilateral Instrument in June 2017 and will adopt the
principal purpose test (PPT) because it is the preferred
measure to prevent treaty abuse. The Treasury believes the PPT
approach is appropriate because the wording of this test aligns
with the wording of the "sole or main" purpose test found in
South Africa's domestic General Anti Avoidance Rule.
The tax exemption that applies to foreign earnings of South
African tax resident employees working abroad for more than 183
days in any 12-month period, including a continuous period
exceeding 60 days, is narrowing. Going forward, this exemption
will only be available if the employee pays tax on the foreign
earnings in another country.
On a more positive note, it was announced that the
regulatory framework regarding cross-border intellectual
property (IP) transactions will be relaxed in light of
unintended challenges that are making South Africa
uncompetitive as a jurisdiction in which to develop and own IP.
The relaxation will involve amendments to the related income
tax provisions and exchange control policies.
More detail in regard to all of the proposals mentioned
above will only be available when the first round of related
draft legislative amendments is released for comment later this
Anne Bennett (email@example.com)
Tel: +27 11 5305886