South African Minister of Finance Malusi Gigaba delivered the 2018 Budget Speech and tax proposals today, 21 February 2018. Relatively few changes to existing tax rates were proposed. The remainder of the Budget includes proposals for further tax reform and amendments to take place during the course of the year. The most significant of these for corporate and high net worth clients are summarised below, as are the changes to existing tax rates. The full scope of proposed tax changes will be addressed once draft legislation is available.
- increase in the value-added tax (VAT) rate from 14% to 15%, but no changes to the zero-rating or exempt categories.
- no change in the corporate or individual income tax rates.
- no change to dividend tax.
- no change to transfer duty or other indirect taxes (apart from VAT).
- increase in the rate of estate duty to 25% for estates with a net value of over ZAR30-million.
Corporate and business tax
- The amendments introduced in 2017 regarding the debt relief rules will be considered further to remove unintended consequences.
- Share buybacks and dividend stripping have been the subject of significant attention, and legislation was introduced in 2017 to target perceived avoidance. One area in which concerns have been raised is the interaction of the anti-avoidance rules and the corporate reorganisation rules. The interaction of these rules will be reviewed to eliminate adverse implications for legitimate transactions. In addition, the rules dealing with share buybacks, dividend stripping and preference shares will be clarified.
- Section 24O was introduced to permit a company a limited interest deduction for acquisition and funding of shares in operating companies. Amendments will clarify the application of the 80% test for tax purposes and, in addition, to determine whether the test should be applied when an operating company transfers its business as a going concern to a company that forms part of the same group.
- It has been suggested that existing South African tax legislation sufficiently addresses cryptocurrencies. It has, however, been proposed that the Income Tax Act, 1962 and the VAT Act, 1991 be amended to address administrative issues relating to transactions involving the supply of cryptocurrencies. However, it has been confirmed that the South African Reserve Bank (the SARB), together with additional domestic financial sector regulators, will publish a position paper (the New Position Paper) this year on the evolving uses of private cryptocurrencies. It is not yet clear how the New Position Paper will interact with the SARB position paper on virtual currencies, which has been in issue since 3 December 2014.
- It was noted that South Africas corporate tax rate is high by international standards and, accordingly, the corporate income tax rate remains unchanged at 28%.
- The effective capital gains tax rate applicable to companies remains 22.4%.
- The tax treatment of trading profits by collective investment schemes is to be reviewed.
- Six special economic zones have been approved by the Minister, which will make qualifying companies subject to a reduced corporate tax rate and entitled to claim an employment tax incentive.
- Parliament is considering the draft Carbon Tax Bill, which is proposed to be implemented from 1 January 2019.
- Concerns regarding the unintended consequences of recent amendments to legislation concerning debt relief rules were noted and it was indicated that amendments to address same would be proposed.
- Legislation may be proposed to address dividends tax abuse of collateral lending arrangement provisions.
- It is proposed that criteria for the determination of doubtful debts allowances (section 11(i)) be legislated (as opposed to the publication of such criteria by the Minister by public notice).
- It is proposed that the venture capital company rules be amended to address some administrative and technical issues arising in this regard.
- The period over which electronic communication lines and fibre optic cables are written off will be reduced in order to align the tax system with technological advances and international practice.
- No proposals have been made for changing the basis of taxation of local trusts.
- In relation to foreign trusts, the proposals mooted during the course of 2017 will be revisited. These were aimed at taxing distributions from foreign trusts that in turn held the shares of foreign companies. Last years proposals in this regard were highly prejudicial to taxpayers and there was extensive pushback from tax practitioners and taxpayers alike.
- Although the taxation of trusts is not affected, per se, the increase in estate duty to 25% in relation to estates greater than ZAR30-million continues to make the use of trusts an effective vehicle.
- Donations will also be subject to an increased rate of 25% where the amount exceeds ZAR30-million per annum.
- National Treasury will release a paper later this year on a proposed policy framework for the review and approval of complex cross-border transactions, with a view to supporting cross-border investment and increased transparency.
- The offshore prudential limit for funds under management by institutional investors is increased by five percentage points for all categories, including the African allowance. This is intended to increase investment in diverse assets.
- The SARB has recognised that loop structures may be set up for genuine reasons. Accordingly:
- The loop structure provision is increased from 20% to a maximum of 40% for bona fide business investment, growth and expansion transactions.
- The current minimum requirement of 10% is abolished.
- Loop structures above the prescribed threshold will still require SARB approval with due consideration to transparency, tax, equivalent audit standards and governance.
- This applies to tax resident companies, including private equity funds.
- The policy for holding companies (particularly in the financial services sector) will be extended to help South African companies expand. Transfers to holding companies will accordingly be increased from ZAR2-billion to ZAR3-billion for listed companies and from ZAR1-billion to ZAR2-billion for unlisted companies, subject to SARB reporting requirements.
- National Treasury will release a comprehensive inward listings review paper, which will address various matters, including the standards of reporting and information provision, company track records, arms-length arrangements, valuation of the acquiring company, management arrangements, funding arrangements, deployment of listing proceeds, due diligence, audit history, stakeholder protection, better treatment of holders of securities, and confidence among market participants.
- There is a lower than predicted increase in the VAT rate from 14% to 15%, with effect from 1 April 2018. Transitional measures and impact on existing accounting systems will need to be carefully managed. This is the first time in democratic South Africa that VAT has been raised, the last increase being in 1993.
VAT legislation amendments proposed:
- Insertion of the definition of face value of a debt transferred to prevent double VAT deductions in respect of book debts sold on a non-recourse basis that are subsequently written-off as irrecoverable debts.
- Indefinite postponement of the abolishment of the zero-rating of the supply of goods and services for the national housing programme. Once confirmed, the Minister of Finance will publish the effective date in the government gazette.
- Confirmation that cancellation and reissuing of tax invoices to contain corrected information in addition to correct VAT, value and supply information will not constitute an offence.
- A purchaser of an enterprise as a going concern will be allowed to issue a credit note for goods supplied by the seller of the enterprise and returned to the purchaser after the enterprise has been acquired.
- The records required to be retained in respect of the submission of special returns will be amended.
- VAT debt-collection provisions will apply across all branches and divisions of a juristic person, irrespective of whether they are separately registered for VAT purposes.
- Extension of joint and several liability for VAT to members of a joint venture.
- Amendment of VAT legislation to address tax treatment and administration of cryptocurrency transactions.
- No adjustments will be made to the top four personal income tax brackets, but below-inflation adjustments will be made to the lowest three personal income tax brackets and to the primary, secondary and tertiary tax rebates. The marginal tax rates for each personal income tax bracket will remain unchanged from the current rates.
- The medical scheme fees tax credit will be slightly increased from ZAR303 to ZAR310 per month for the first two beneficiaries and from ZAR204 to ZAR209 per month for the remaining beneficiaries. Below-inflation increases in medical scheme fees tax credits over the next three years will coincide with the rollout of national health insurance and they will be reviewed after the Davis Tax Committee presents its recommendations.
- The rate of estate duty will be increased to 25% (from 20%) in respect of estates valued at ZAR30-million or more, with effect from 1 March 2018.
- The rate of donations tax will also be increased to 25% (from 20%) in respect of donations exceeding ZAR30-million in a tax year, also effective from 1 March 2018.
Future tax proposals include:
- The apportionment of the medical scheme fees tax credit between different taxpayers who jointly make medical scheme contributions or jointly pay the medical expenses of another person.
- Housing loans to employees at preferential interest rates, which are solely for low-cost housing, will not be a taxable benefit if the employees remuneration is less than ZAR250 000 and the value of the loan is less than ZAR450 000.
- Retirement-related reforms include:
- a review of the tax exemption for retirement benefits from a foreign source for employment rendered outside of South Africa to ensure that contributions will only be deductible if the benefits are taxable.
- aligning the tax treatment of withdrawal benefits from all types of retirement funds upon emigration of an individual.
- allowing transfers to pension preservation funds and provident preservation funds after the retirement date of an employee.
- retrospective amendments to rectify unintended tax liabilities triggered for members as a result of transfers of amounts between or within retirement funds at the same employer.
- The rules relating to the interest withholding tax obligation where interest is vested in a non-resident beneficiary by a South African trust will be clarified.
- Rules to classify distributions from discretionary foreign trusts to South African resident beneficiaries as income, which were proposed in 2017 but later withdrawn, will be revisited.
- It is proposed that the official rate of interest, which is the repurchase rate plus 100 basis points (currently 7.75%) for rand-denominated loans, be increased to a level closer to the prime rate of interest. The official rate of interest is used to determine the taxable benefit attributable to low-interest rate loans provided by employers to employees, and the deemed donation in respect of low-interest loans to trusts by connected natural persons.
Customs, excise and levies
- The excise duty on motor vehicles increased from 25% to 30%.
- Excise duty on luxury goods increased from 5% and 7% to 7% and 9%.
- The levy on plastic bags increased to 12c per bag. This is to discourage the use thereof.
- The environmental levy on incandescent light bulbs will increase from ZAR6 to ZAR8 to incentivise more energy-efficient behaviour.
- The vehicle emissions tax will be increased to ZAR110 for every gram above 120 gCO2/km for passenger vehicles and ZAR150 for every gram above 175 gCO2/km for double cab vehicles.
- The health promotion levy, which taxes sugary beverages, will be implemented from 1 April 2018.
- Government proposes to increase the general fuel levy by 22c/litre and the Road Accident Fund levy by 30c/litre, effective 4 April 2018.
- Government proposes to increase excise duties on tobacco products by 8.5%, and excise duties on alcohol by between 6% and 10%.
A number of changes are proposed in the international tax arena, including:
- It is currently unclear which person bears the withholding obligation in respect of interest paid by a South African trust to a non-resident beneficiary after vesting. The rules dealing with the treatment of trust income do not deem the trust to have paid interest to beneficiaries if the beneficiaries are non-residents. Measures to address this anomaly will be introduced.
- Currently, the Income Tax Act provides for a reversal of exchange differences when an exchange item, as defined in section 24I of the Income Tax Act, becomes irrecoverable. Measures to extend the relief to the situation where an exchange item is disposed of as a result of market forces (and not because the debtor is unable to pay) will be considered.
- In the context of the controlled foreign company (CFC) rules, in terms of the so-called high tax exemption, currently the net income of a CFC that operates in countries where the tax payable by that CFC in that country is less than 75% of the tax that such CFC would have paid, had it been a South African resident, must be included in the income of the South African resident shareholder(s). Given the global trend of lower corporate tax rates, a reduction of the 75% threshold will be considered.
For more information, please contact the ENSafrica tax department at info@ENSafrica.com
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