South Africa: Proposed international tax amendments
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.