A reform of South Africa’s tax system is high on the agenda. This comes in the wake of Finance Minister Nhlanhla Nene’s recent Medium Term Budget Policy statement that changes are set to be made to tax policy in the 2015 Budget. The government is proposing a fiscal package that reduces the expenditure ceiling and raises tax revenues by at least R44 billion over the next three years.
Tax News
The treatment of foreign pensions
In terms of s10(1)(gC)(ii) of the Income Tax Act, No 58 of 1962 (Act) a pension received by or accrued to a resident from a source outside South Africa as consideration for past employment outside South Africa is exempt from the payment of tax. In terms of s9(1)(i) of the Act it is indicated that an amount is deemed to be sourced within South Africa if the amount constitutes a pension or annuity and the services in respect of which the amount is received or accrued were rendered within South Africa.
What is simulation really
Author: Emil Brincker – DLA Cliffe Dekker Hofmeyr Since the judgment of the Supreme Court of Appeal (SCA) in CSARS v NWK 73 SATC 55 there has been a bone of contention as to the real meaning of a simulated arrangement. In the NWK case it was indicated that “[i]f the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that the parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation.”
Base Erosion and Profit Shifting (“BEPS”) – are you BEPS proof?
Author: Okkie Kellerman – ENSafrica BEPS is a term used by the Organisation for Economic Co-operation and Development (“OECD”) to describe tax planning strategies exploiting gaps and mismatches in tax rules so that profits disappear for tax purposes or profits are shifted to locations with little or no real activity and where profits are subject to little or no taxes. Although BEPS is not illegal it distorts competition between those companies operating cross border and those operating domestically and it leads to inefficient allocation of resources and it seems unfair that some companies can legally avoid paying tax.
OECD proposes curtailing use of commissionaire and other arrangements that aim to avoid PE Status
The OECD Focus Group on the Artificial Avoidance of Permanent Establishment (PE) Status recently issued its Proposed Discussion Draft that proposes 14 possible changes to the definition of a PE under Article 5 of the OECD Model Tax Convention. The proposals were a response to the OECD Action Plan on Base Erosion and Profit Sharing (BEPS) published in July 2013. The primary focus is on the perceived abuses associated with: (i) using a “commissionaire arrangement” instead of a local distributor arrangement in order to shift profits out of the country where sales take place; (ii) using certain specific activity exemptions to prevent the application of the PE rules; and (iii) certain uses of construction and insurance contract provisions.
Landmark judgement in Supreme Court of Appeal upholds deferred delivery share scheme
In its first and much anticipated judgement in relation to the interpretation of section 8A of the Income Tax Act, and to Deferred Delivery Share Schemes, a full bench of the Supreme Court of Appeal unanimously upheld the taxpayers’ contentions as to the tax effects of a so-called Deferred Delivery Share Scheme. In this test case, the Court rejected the main contentions by the South African Revenue Service (“SARS”), that the share scheme was subject to various conditions, or alternatively that it was a simulation. The taxpayers’ argument that the exercise of an option agreement constituted the sole point at which tax could be levied in terms of the then applicable tax law, was upheld. This confirms the interpretation which had been accorded to section 8A of the Income Tax Act by many tax practitioners over the years as well as (until recently) SARS itself.
BEPS tail shouldn’t wag global investment dog
Author: Claire M.C. Kennedy of Bennett Jones LLP I spoke recently on a panel in Tokyo on the future of international tax planning after BEPS (the OECD’s & G20’s Action Plan to counter Base Erosion & Profit Shifting). The panel also featured a senior official at the OECD and practitioners from the US, Japan, Germany, France, Ireland and the Netherlands It was refreshing to hear the OECD official acknowledge that the international corporate tax planning targeted by BEPS constitutes legal arrangements and transactions and not illegal tax evasion.
The thin capitalisation provisions of section 23M and further amendments proposed thereto
Author: Okkie Kellerman and Esther Geldenhuys – ENSafrica In line with recent pronouncements by the OECD relating to so-called Base Erosion and Profit Shifting Project (BEPS), section 23M was introduced by the Taxation Laws Amendment Act, 31 of 2013. Section 23M of the Income Tax Act, 58 of 1962 (“the Act”) will come into effect on 1 January 2015 and has a similar purpose to the thin capitalisation provisions of section 31 of the Act. The Taxation Laws Amendment Bill, 13 of 2014, as tabled in parliament, contains a number of substantial amendments to the current provisions of section 23M. A summary of the provisions of section 23M following these amendments is set out below.
Pensions received by SA residents from SA pension funds for services rendered partly abroad
Author: Jenny Klein – Tax Manager at ENSafrica Many South Africans spend significant periods of time working outside the country. Due to the fact that South Africa taxes the world-wide income of its residents, payments received by residents for services rendered outside the country are included in their gross income for South African tax purposes, but may subsequently be excluded from their taxable income in terms of any available exemptions. Whilst this may be the case the question is often posed whether any similar exemption may apply to their pension benefits received upon retirement from their South African pension fund in relation to the period of services rendered abroad.
Dividend payments to Holland – did you spot the aperture?
Author: Stephan Spamer and Howmera Parak – ENSafrica By now it is accepted that the payment of dividends to non-South African shareholders are subject to dividends tax which is levied at a rate of 15%, unless such rate is reduced by an applicable double tax agreement (DTA). To this end, most DTAs are drafted in such a manner that the rate of dividends tax is reduced to 10% or 5%, depending on the percentage of shares the beneficial owner holds in the South African company.