Corporate tax issues in South Africa’s 2019 budget
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.