A number of proposed tax changes were highlighted in
documents released as part of South Africa's annual budget on
February 20 2019. The draft legislation dealing with these will
only be released for comment later in the year, but some of the
key takeaways have been highlighted below.
There were no proposed increases in either direct or
indirect tax rates. There were also no adjustments to the
income tax brackets for individuals, which will result in
significant additional tax simply as a result of inflation.
South Africa's corporate rules, which provide tax neutral
treatment for certain types of qualifying group
re-organisations, are to be amended in order to make it clear
that any transfer between group companies of assets (which on
transfer could trigger foreign exchange gains or losses) will
be excluded from this group relief. This will result in
unrealised exchange gains or losses being triggered in the
transferring company, despite the transfer meeting the general
requirements for tax neutral tax treatment. The policy reason
for this proposal is unclear.
In 2017, changes were made to the rules governing share
buybacks and dividend stripping to prevent taxpayers from
avoiding tax payable on certain disposals of shares. The
National Treasury now intends to target an arrangement which it
perceives to be a disguised disposal involving the distribution
by a company of a substantial dividend to its existing
shareholder(s), followed by an issue of shares in that company
to a new shareholder. This perceived loophole will be closed
with effect from February 20 2019.
On the international tax side, all income of a controlled
foreign company (CFC) can be sheltered from potential
attribution to the CFC's South Africa shareholders, if that CFC
has suffered foreign tax equal to at least 75% of the tax that
it would have paid under South African tax rules, had it been a
tax resident. In view of the global trend towards reduced
corporate tax rates, consideration will be given to reducing
the 75% rate to a lower exemption threshold.
The rules currently in place targeting profits made by CFCs
from selling goods sourced from South Africa-connected persons
or providing services to South Africa-connected persons are to
be expanded in order to take account of structures which
involve more than one CFC in the relevant supply chain.
South Africa's transfer pricing (TP) rules apply to
transactions between "connected persons" as defined in the
Income Tax Act. Consideration is being given to amending this
definition (at least for TP purposes) to bring it more in line
with the concept of "associated enterprises" as defined by the
OECD. South African rules aimed at limiting deductions for
interest payable on cross-border debt funding are also to be
reviewed against international best practice.
A new commissioner to lead the South African Revenue Service
(SARS) will be announced shortly and structural changes will be
made at SARS to increase the agency's efficiency.
Anne Bennett (email@example.com)
Tel: +27 11 5305886