The controlled foreign company (CFC) provisions contained in s9D of the Income Tax Act were amended with effect from 1 January 2008 (applicable to foreign tax years of CFCs ending during years of assessment ending on or after that date). Provided that the ‘net income’ of a CFC be deemed nil if the total amount of tax payable to all spheres of government of any country other than South Africa by the CFC on its net income amounts to at least 75% of the amount of normal tax that would be payable in respect of any taxable income of the CFC had it been a resident for the relevant foreign tax year.
Author: Nyasha Musviba
Budget 2016 – Withdrawal of withholding tax on service fees
The withholding tax on service fees provided for in s51A-s51H of the Income Tax Act was expected to commence on 1 January 2017. In this regard, it was envisaged that the local recipient of services would generally have to withhold 15% of the fee payable to the non-resident service provider, (subject to the application of a relevant international tax treaty).
Budget 2016 – Narrowing the definition of a hybrid debt instrument
The definition of a hybrid debt instrument will be amended to exclude instruments subject to subordination arrangements. The proposed amendment aims to exclude interest-bearing arrangements from the definition of hybrid debt instruments as contained in s8F of the Act, if these instruments become subject to a subordinary agreement.
Budget 2016 – Share incentive schemes
Section 8C of the Income Tax Act acts as an anti-avoidance mechanism that prevents employees from treating what is essentially fully taxable salary or bonus income at reduced tax rates through the use of restricted shares and other incentive schemes. Essentially, s8C delays taxation in respect of the receipt or accrual until such time that the employee becomes entitled to the full value of the share or rights under the relevant scheme. Dividends received or accrued on the underlying shares are also generally not exempt under s10(1)(k) of the Income Tax Act unless the shares are equity shares as defined.
Budget 2016 – Introduction of the environmental levy on tyres
In the 2015 Budget proposals it was indicated that Government intended to introduce an environmental tyre levy, in addition to the environmental levies already in place. The purpose of this levy was to encourage reuse, recycling and recovery of waste in light of the fact that South Africa generates an estimated 108 million tonnes of waste each year.
Budget 2016 – Review of the employment tax incentive
Government formally introduced the employment tax incentive into law on 1 January 2014, through the promulgation of the Employment Tax Incentive Act, No 26 of 2013. The purpose of the employment tax incentive was to reduce the cost to employers of hiring young and inexperienced youth. In other words, the employment tax incentive is essentially a cost-sharing mechanism between the private sector and Government, which operates by reducing the amount of tax that is owed by an employer through the Pay-As-You-Earn (PAYE) system.
Budget 2016 – The attention is turning to trusts
Currently trusts are used as an important vehicle to avoid the payment of estate duty and to create an insolvency remote vehicle through means of which investments can be done. However, it is always problematic how to fund a trust as one cannot subscribe for shares in a trust such that one would, for instance, do in the case of a company. More often than not assets are sold (at market value) to a trust in circumstances where the purchase price is left outstanding as an interest free loan. In addition, no donations tax would be triggered as the assets are not included in the estate of the donor at death.
Budget 2016 – An increase in transfer duty – will it dampen the property market?
Last year’s increase in the threshold for transfer duty to R750 000 was positive, but unfortunately no further relief is provided this year for properties on the lower end of the market. Property owners at the top end of the market will, however, be worse off. The Minister announced that the transfer duty rate on properties above R10 million will increase from 11% to 13%. Consequently a new bracket in the transfer duty table will be formed. Transfer duty in this new bracket will, with effect from 1 March 2016, be R937 500 + 13% of the value exceeding R10 million.
Budget 2016 – The intentional creation of hybrid debt instruments that result in interest being deemed to be dividends
Section 8F and s8FA of the Income Tax Act have been promulgated with a view to convert interest into dividends. These sections deal with a scenario where the debt instrument displays a number of equity characteristics, for instance if amounts are only payable if the assets of the issuer exceed its liabilities and/or where interest is not calculated with reference to the time value of money.
Budget 2016 – BEPS front and centre
The Minister endorsed the work of the Davis Committee and reiterated South Africa’s commitment to the work of the Organisation for Economic Cooperation and Development (OECD) and G20 on base erosion and profit shifting (BEPS). He announced that South Africa would continue to measure its tax system against internationally accepted tax trends, principles and practices, and keep pace with international initiatives to improve tax compliance and deal with problems of base erosion.