International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa: Proposed international tax amendments

Sponsored by

sponsored-firms-ww.png
AdobeStock_258702014_trust

Proposed changes to the Income Tax Act, contained in the 2018 draft Taxation Laws Amendment Bill (DTLAB), were released for comment on July 16 2018. This update focuses on certain international tax-related proposals.

Foreign trusts with South Africa-resident beneficiaries



The South African Revenue Service (SARS) has previously unsuccessfully attempted to broaden the controlled foreign corporation (CFC) rules to target structures involving South Africa (SA)-resident beneficiaries of foreign discretionary trusts that hold a majority stake in one or more foreign companies. There are no such proposed changes to the CFC rules in the DTLAB, but it does include amendments aimed at ensuring that certain foreign dividends and foreign capital gains derived by such trusts will not qualify for any type of tax exemption when distributed to SA resident beneficiaries.

Treaty relief and secondary adjustments

Since January 1 2015, a secondary adjustment under South African transfer pricing rules has been deemed to be a dividend in specie distributed by the South African taxpayer. Dividends in South Africa are subject to 20% dividends tax unless treaty relief applies. Despite this characterisation, SARS has been adamant that secondary adjustments are penalty provisions and do not qualify for treaty relief. Although many of South Africa's tax treaties do not explicitly include secondary adjustments in the definition of 'dividend' in the dividend article, some do. Article 10(3) of the treaty between South Africa and Ireland, for example, includes in the dividend definition "any income or distribution assimilated to income from shares by the laws of the contracting state of which the company paying the income or making the distribution is a tax resident".

To prevent taxpayers from arguing that this type of wording clearly entitles them to treaty relief, SARS is proposing that the definition of dividend in the Income Tax Act (which refers to amounts transferred by a South African company in respect of shares in that company) be changed so as to explicitly exclude secondary adjustments. A secondary adjustment will still be deemed to be a dividend, but only for dividends tax purposes. It can no longer (in SARS's view) be argued to be "a distribution assimilated to income from shares" for treaty purposes. In addition, SARS is seeking to ensure that the administrative requirements for claiming treaty relief are framed in a way that will make it impossible for taxpayers suffering secondary adjustments to comply with them.

These proposals are likely to result in criticism not just from the South African companies affected but also from some of South Africa's tax treaty partners which could justifiably argue that these amendments are deliberate attempts to negate treaty provisions negotiated in good faith.

Broadening of CFC 'high tax' exemption

No income will be imputed from a CFC if that CFC is subject to an aggregate amount of foreign tax which is at least 75% of the amount that would have been payable had the CFC been tax resident in South Africa. The 2018 budget referred to the possibility of dropping the 75% to a lower percentage, given that South Africa's company tax rate of 28% is now high by global standards. Disappointingly, no change has been made in this context in the recent proposed amendments.

more across site & bottom lb ros

More from across our site

Premier League football clubs are accused of avoiding paying up to £470 million in UK tax, while Malta is poised to overhaul its unique corporate tax system.
Bartosz Doroszuk of MDDP offers insights on Poland’s new tax legislation on shifted profits, as the implementation deadline looms nearer.
Four tax specialists preview the UK’s transfer pricing requirements, which come into effect on April 1.
The rise of the QDMTT will likely change how countries compete on tax and transfer pricing policy, but it may not reverse decades of falling corporate tax rates.
ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.