Using South Africa as our departure point, s31 of the Income Tax Act, No 58 of 1962 (Act) provides that the tax payable in respect of international transactions is to be based on the arm’s length principle. In brief, s31 of the Act provides that: where any transaction, operation, scheme, agreement or understanding (hereinafter, transaction) constitutes an ‘affected transaction’ has been concluded between connected persons; and such transaction contains a term or condition which differs from any term or condition that would have existed had the parties to the transaction been independent vis-à-vis one another and transacting at arm’s length; and the term or condition results in a tax benefit for a party to the transaction; then the tax payable by the benefitting party must be calculated as if the transaction had been concluded between independent parties transacting at arm’s length.
Author: Nyasha Musviba
Disposals by incentive trusts
Generally, where an employer establishes a trust to hold certain shares for future distribution to its employees as part of a share incentive scheme, the scheme is structured in such a manner that there are no capital gains or losses for the trust upon distribution. In this regard, reliance is usually placed on paragraph 11(2)(j) of the Eighth Schedule of the Income Tax Act of 1962 (the Act), which provides that: “(2) There is no disposal of an asset: … (j) which constitutes an equity instrument contemplated in section 8C, which has not yet vested as contemplated in that section…”
Retroactive application of double tax agreement
On 16 October 2015, a Protocol amending the double tax agreement (DTA) between South Africa and Cyprus was published in the Gazette. In normal circumstances, the promulgation of a protocol does not cause much excitement. However, one of the articles in the Protocol raises unusual issues. Article IV of the Protocol contains two paragraphs: The first paragraph provides that each of the states shall notify the other of the completion of the procedures required by its domestic law to bring the Protocol into effect, and that the Protocol shall come into effect on the date of receipt of the later of these notifications. The operative date in that respect was 18 September 2015.
Employees’ Tax – Contributions to retirement funds
The date of implementation of new rules relating to the tax treatment of contributions to retirement funds, which were expected to take effect on 1 March 2015, was postponed until 1 March 2016, in terms of the Taxation Laws Amendment Act of 2014. Among other changes, the new rules will affect the employees’ tax implications of employer contributions to retirement funds, and the deductibility for income tax purposes by the member of such contributions, thus affecting both participating employers and members. In addition, depending on the nature of the benefits available to members, the retirement fund may be obliged to provide information to the participating employer in respect of contributions for specific categories of fund members. The implications of some of these changes are highlighted below.
Employee’s Tax – Emolument attaching orders
A recent, much publicised decision in the Western Cape High Court declared certain provisions in the Magistrates’ Court Act (MCA) relating to the issuing of emolument attachment orders (EAO) to be invalid and unconstitutional. In the matter of University of Stellenbosch Legal Aid Clinic and Others v Minister of Justice and Correctional Services and Others (Case No. 16703/14) [2015] ZAWCHC 99 application was made to have EAOs issued against a number of clients of the applicant declared invalid. An EAO permits the attachment of a debtor’s earnings and obliges the debtor’s employer (garnishee) to pay a specified amount out of the debtor’s earnings to the creditor or the creditor’s attorney until the debt and legal costs have been fully paid.
Deductability of business trade losses
Where an accident or other mishap results in a taxpayer incurring an involuntary loss, a question can arise as to whether that loss is deductible for income tax purposes in terms of the general deduction formula laid down in section 11(a) of the Income Tax Act of 1962 (the Act) as having been incurred in the production of income. In Port Elizabeth Electric Tramway Co Ltd v CIR [1936] 8 SATC 13, Watermeyer J expressed the underlying principle by saying that – “all expenses attached to the performance of a business operation bona fide performed for the purpose of earning income are deductible whether such expenses are necessary for its performance or attached to it by chance or are bona fide incurred for the more efficient performance of such operation provided they are so closely connected with it that they may be regarded as part of the cost of performing it.”
The definition of ‘controlled group company’ and ‘equity share’
The South African Revenue Service (SARS) released Binding Private Ruling No 205 (Ruling) on 11 September 2015. The Ruling considers the meaning of ‘controlled group company’ and ‘equity share’. An approved venture capital company (VCC) in terms of section 12J of the Income Tax Act of 1962 (the Act), resident company A (Company A), and resident company B (Company B), proposed to incorporate a new company (RentalCo).
Asset-for-share transactions
Section 42 of the Income Tax Act of 1962 (the Act) provides for tax roll-over relief in respect of asset-for-share transactions as defined. Such a transaction generally entails the disposal by a person of an asset to a company, and the issue of new shares by that company to the person, as consideration. One of the requirements is that the nature of the asset must be retained. In other words, if the person held the asset as trading stock, the company must acquire it as trading stock, and if the person held it as a capital asset, the company must acquire it as a capital asset. If the person held the asset as a capital asset, the company may acquire it as trading stock if the person (where the person is a company) and the company do not form part of the same group of companies.
Capital Gails Tax – Disposal of sectional title units to shareholders
The South African Revenue Service (SARS) released Binding Private Ruling, No 206 (the Ruling) on 14 September 2015. The Ruling dealt with the disposal by a share block company of sectional title units to its share block holders. A resident company (Applicant), and a resident trust (Trust), held shares in a resident share block company (Share Block Company). The Share Block Company owned three sectional title units. It was proposed that the Share Block Company would dispose of the sectional title units to the Applicant and the Trust. The Applicant and the Trust would then surrender their share block certificates and rights of use to the Share Block Company. These would then be cancelled.
Capital Gains Tax – Cross issue of shares and tax-free corporate migrations
In the 2015 Budget, the Minister of Finance indicated that paragraph 11(2)(b) of the Eighth Schedule to the Income Tax Act of 1962 (the Act), which deals with the issue of shares by a company, would be reviewed. The Taxation Laws Amendment Bill 2015 specifically addresses paragraph 11(2)(b). The issue of shares by a company (whether for cash, shares or other assets) generally does not constitute a disposal for capital gains tax purposes, although there may be capital gains tax consequences in terms of section 24BA of the Act to the extent that there is a mismatch between the value of the shares issued and the cash or assets received.