Removal of Prohibition of “loop structures” – Dont Forget to Check the Tax Consequences

Authors: Denny Da Silva, Tax Specialist, Baker McKenzie in Johannesburg. In line with the South African Reserve Banks (SARB) undertaking to implement a new capital flow management system, changes began to come through in early 2021. In the first circular for the year, issued on the 4th of January 2021 (Circular), the SARB announced that with effect from 1 January 2021 the full “loop structure” restriction for private individuals and companies that are tax resident in South Africa had been lifted to encourage inward investments into South Africa.

Changes to the South African Exchange Control Rules

Authors: Cor Kraamwinkel,a Partner, Keith Veitch,a Consultant & Sean Franken, an Associate from Webber Wentzel. ​​​​​​On 4 January 2021 the South African Reserve Bank released Exchange Control Circular No. 1/2021 which provides for the long-awaited relaxation of the South African exchange control rules relating to loop structures and investments. As background, in 2020 the Minister of Finances announced in the 2020 Medium Term Budget Policy Statement that the prohibition on “loop” structures for exchange control purposes would be relaxed.As a result, the South African Reserve Bank has advised that from 1 January 2021 the full “loop” structure restriction has been lifted to encourage inward investments into South Africa; subject to the normal criteria applying to inward investments and reporting to the Financial Surveillance Department (FinSurv).

Sars is aware of your offshore assets

The days where Sars shuts its eyes to taxpayers offshore holdings are a thing of the past. Sars is finally utilising the Automatic Exchange of Information regime to pin down taxpayers who have not disclosed their offshore interests and numerous taxpayers have already received some alarming notices to this effect. The notice The notice informs the taxpayer that Sars intends to initiate a review of their tax affairs, based on information it received from 87 foreign jurisdictions through the Automatic Exchange of Information, regarding the offshore holdings of South African taxpayers. After recovering from the shock of the introductory words of the notice, Sars extends an olive branch and states that it wishes to engage with the taxpayer first, in the interests of administrative justice. The consolation is short-lived though because Sars then proceeds to direct a detailed and onerous information request at the taxpayer.

TLAB 2020: Section 45 Proposed rollover relief amendments tabled

Author: Louis Botha. The rollover relief provisions contained in Part III of the Income Tax Act 58 of 1962 (the Act) provide valuable commercial flexibility to corporate groups. This is achieved by enabling corporate groups to undertake certain transactions in a tax neutral manner and defer the tax costs, where such transactions would otherwise give rise to immediate income tax and/or capital gains tax costs. The intra-group transactions covered by the rollover relief provisions include the introduction of assets into a group company, transfer of assets between group companies, and the unbundling of indirectly held subsidiaries to a group holding company.

BEPS ACTION 1: Tax challenges of the digital economy a brief history and forecast

Author: Keshen Govindsam. The internet and allied technologies have blossomed from a mere communication revolution into an increasingly indispensable part of everyday life. The growing range of what we can achieve online has allowed new ways of doing commerce and creating economic value, whether through cell phone based payments in underbanked countries, reimagined global retail offerings, or free to use digital services which indirectly generate advertising revenue. Appropriately and fairly taxing the value earned online is the next major challenge for international tax policy.

Trusts to be subject to further anti-avoidance provisions: The proposed amendment to section 7C

Author: Louise Kotze. Section 7C of the Income Tax Act 58 of 1962 (ITA) contains various anti-avoidance provisions in respect of loans or credit advanced to trusts. These provisions were introduced to curb the abuse of trusts by taxpayers who transfer their wealth to trusts, tax-free, by means of low interest or interest-free loans or credit. At present, the anti-avoidance provisions apply to schemes in terms of which natural persons or companies, at the instance of a natural person:

SA Budget 2020/21 – Export of dual listed securities – Proposed income tax amendments

Authors: Tsanga Mukumba and Louis Botha. Under South Africas current exchange control (Excon) rules, South African residents are required to seek approval from the South African Reserve Bank (SARB) should they wish to export a South African listed security outside of the Common Monetary Area. As a result of the proposed modernisation of South Africas Excon regime, discussed in the Exchange Control section of our Budget Alert, under which the SARBs permission will no longer be required, it is proposed that such an export results in income tax consequences. Specifically, the Budget proposes that such a transfer now constitute a deemed disposal of that security for income tax purposes, with further consequences once the share is traded on the relevant foreign exchange.

SA Budget 2020/21 – Proposal to prevent tax avoidance through the use of loop structures

Author: Louis Botha. According to the Budget, the current exchange control provisions restrict the use of loop structures, in part to protect the tax base. The current policy is that a South African resident may not collectively hold more than a 40% interest in an offshore entity, which in turn, holds interests in a South African entity or made loans to a South African company. Where an interest is held in this manner, it is known as a loop structure.

Utilisation of trusts as a planning tool remains under the microscope

Author: Jerome Brink Historically many individuals made use of estate planning schemes through trusts, whereby taxpayers would transfer assets to a trust and the purchase price owed by the trust to the taxpayer in respect of the assets would be left outstanding as a loan, advance or credit in favour of that taxpayer on which no interest or very low interest would be charged. Alternatively, taxpayers would advance a low interest or interest-free cash loan, advance or credit to a trust in order for the trust to use the money to acquire assets.

The end of NRV for closing stock (or not?)

Author: Joon Chong, a Partner at Webber Wentzel. The Supreme Court of Appeal (SCA) has for the second time in CSARS v Atlas Copco South Africa (Pty) Ltd, confirmed that the net realisable value (NRV) method is not a suitable method to value closing stock for income tax purposes. The SCA referred with approval to its earlier decision of CSARS v Volkswagen South Africa (Pty) Ltd and held that the NRV method is forward looking, taking into account estimated costs which would still need to be incurred before the stock is sold. The Income Tax Act 58 of 1962 (Act), and calculation of taxable income, is backward looking. The reduction from the cost price of the closing stock should only be allowed in two circumstances: (i) when an event that caused the value of the trading stock to diminish occurred in the tax year; and (ii) when the taxpayer knows Read More …