Group tax: A simple solution?

Ingé Lamprecht
New bill introduces complications.

JOHANNESBURG – The benefits of a group taxation system should be investigated.

Zweli Mabhoza, head of taxation services at SizweNtsalubaGobodo, says one of the reasons why group taxation – where legal entities within a group of companies are treated as one taxpayer – has been opposed in the past, is because South Africa does not have sufficient skills to support the introduction of such a complicated tax system.

The US as well as European countries like France and Germany permits group taxation subject to certain limitations.

But, says Mabhoza, some of the proposals in the recently published taxation amendment bills, introduce complications to the extent that the legislation is moving towards such complexity that criticism against the difficulty of a group tax system can no longer apply.

Complexity

One of the recently proposed changes to tax legislation relates to finance structures, Mabhoza says.

National Treasury is trying to limit the deductions that taxpayers may claim with regards to interest. This could spell the end for transactions that were previously entered into for the sole purpose of reducing the tax liability.

Mabhoza says it often happens that one company within a group would be in a taxpaying position (company B) while another is not (company A). In order to reduce the tax liability, company A would then provide funding to company B and charge interest. Company A would subsequently use the interest income to reduce the tax loss while company B would use the interest expense to lessen the taxable income.

The proposals now seem to try and curtail the deductions in respect of interest that taxpayers may claim by introducing a complicated formula that would limit the interest deductibility to 40% of the adjusted taxable income.

Mabhoza says the proposed calculation is further complicated by the fact that in order to determine the applicable adjusted taxable income, the calculation will have to be repeated twice – once in the year during which the transaction was entered into and also during the year of assessment in which the interest is deducted.

For a business, the costs of the proposed changes will not only be the limitation of the interest deductions, but also to engage advisors to help them with the calculation, he says.

The introduction of the formula is also problematic since it could require companies to revisit calculations that were done a number of years back (when the companies first engaged in the transaction). Often the employees that were responsible for capturing the initial transaction are not working at the company anymore which means that someone else has to take time to try and decipher the calculations, Mabhoza says.

The proposed effective dates could result in a transaction entered into five years ago, also being affected by the change. Although the tax return will not need to be reopened the information that was used during that year of assessment will be required for current tax calculations.

Mabhoza says the new provisions also lack clarity on what the implications would be if the South African Revenue Service (Sars) requests an audit for prior years that results in a change of the taxable income. Since the interest rate deduction that will be allowed is linked to the taxable income, this could result in additional recalculations, he says.

Mabhoza says South Africa has to deal with these complications since it does not use a group tax system. Although corporate rules were intended to address some issues, it is not comprehensive, he notes.

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