The Davis Tax Committee (‘the DTC’) released its First Report on Estate Duty. The DTC decided in favour of a modified estate duty and against the introduction of a Capital Transfer Tax. The DTC recommends that the estate duty exemption that currently applies to inheritances by surviving spouses be removed or that it be limited to a specific amount. This will result in earlier collection of estate duty. As the contribution of estate duty to the total tax take is actually marginal, this change will arguably have a minute effect on tax collections, but will result in increases administration and estate planning costs. The DTC also addressed trust taxation. To curb tax avoidance it proposes that South African trusts be taxed on income distributed to beneficiaries. Trust income will then be subject to tax at the
Tax News
Withdrawal of foreign tax credits for South African-sourced income
Johannesburg, 23 July 2015 – The 2015 Budget announced by Finance Minister Nene included a number of measures to bolster tax revenues from an international perspective. According to David Warneke, a Director and Head of Tax Technical with BDO South Africa, these measures include potentially removing tax relief currently afforded to South African companies on service income received from outside South Africa. This could negatively impact foreign direct investment into South Africa. “This was originally introduced to relief South African companies of withholding taxes (sometimes in contravention of the Double Taxation Treaties) imposed by foreign entities that became unrecoverable,” says Warneke.
DAVIS TAX COMMITTEE OPENS THE DOOR FOR HIGHER VAT RATE TO BE CONSIDERED
Author: Ferdie Schneider, National Head of Tax at BDO South Africans can be justifiably proud of the fact that our country is deemed to have one of the most efficient VAT systems in the world. This accolade emerged from the Davis Tax Committee’s first interim report on Value Added Tax (VAT) which was released for comment recently, with the source of the favourable rating coming from none other than the International Monetary Fund. But perhaps the most important take-away from the interim report is that it definitely opens the way for a potential “moderate” increase in the VAT rate, especially as this is seen by the committee as having a less distortionary effect on macro-economic activity than an increase in direct taxes would have – both personal taxes and corporate taxes.
Third party returns – exchange of information in accordance with international tax standards
In order to provide the necessary legislative amendments required to implement the tax proposals that were announced in the 2015 National Budget on 25 February 2015, the National Treasury (Treasury) published the 2015 Draft Tax Administration Laws Amendment Bill (TALAB) on 22 July 2015 for public comment. One of the important proposals relates to greater tax transparency and the automatic exchange of information between tax administrations in various jurisdictions in order to counter cross-border tax evasion and aggressive tax avoidance. To this effect, s32 of the TALAB proposes the insertion of a definition of “international tax standard” in s1 of the Tax Administration Act, No 28 of 2011 (TAA), to mean “an international standard as specified by the Commissioner by public notice for the exchange of tax-related information between countries”.
Shares incentive schemes – Innocuous binding private ruling or perhaps not
We often comment that the tax legislation applicable to share incentive schemes is complex and, as a result, a number of advance tax rulings have been published by the South African Revenue Service (SARS) dealing with the issues. Another Binding Private Ruling, No 199 (Ruling), was released by SARS this week which dealt with the questions of whether: the participation rights held by beneficiaries of a share incentive trust constituted “restricted equity instruments” for purposes of s8C(7) of the Income Tax Act, No 58 of 1962 (Act); and the dividends received by the beneficiaries by virtue of these participation rights will be tax as income or exempt from normal tax in terms of s10(1)(k)(i) of the Act.
Securities transfer tax exemption where parties opt out of roll-over relief
The South African Revenue Service (SARS) released Binding Private Ruling No 195 (Ruling) on 26 June 2015. The Ruling deals with the application of the exemption provision contained in s8(1)(a) of the Securities Transfer Tax Act, No 25 of 2007 (STT Act) in circumstances where parties have entered into an asset-for-share transaction as defined in s42 of the Income Tax Act, No 58 of 1962 (Act), but elected that any relief provided for in s42 of the Act should not apply. The Applicant, a company incorporated and resident in South Africa, was a wholly-owned subsidiary of HoldCo, a non-resident company incorporated in a foreign jurisdiction.
Distribution of a debit loan account in anticipation of deregistration of a company
The South African Revenue Service (SARS) published Binding Private Ruling No. 198 on 7 July 2015 (Ruling). The Ruling deals with the distribution by a South African resident company (Subsidiary) of its loan account to its South African holding company (Holding Company) in anticipation of the Subsidiary’s deregistration. The applicable provisions in the Income Tax Act, No 58 of 1962 (Act) are s10(1)(k), s47, s64D and s64FA(1)(b). The relevant facts relating to the Ruling are as follows:
Shuttleworth’s exit charge was valid and did not constitute a tax
In an about-turn the Constitutional Court handed down judgment in the Shuttleworth matter on 18 June 2015. Not only was it found that Shuttleworth’s exit charge constituted a regulatory charge as opposed to a tax, but it was also found that the Exchange Control Regulations were not unconstitutional. Should one consider the history of the matter, Shuttleworth made application to the South African Reserve Bank (Reserve Bank) to transfer approximately R2,5 billion out of South Africa. This approval was granted subject to an exit charge of 10% being imposed on the capital that was exported. The payment of this exit charge was challenged by Shuttleworth:
VAT clauses in sale agreements relating to immovable property
Parties to sale agreements of immovable property should take great care when drafting the value-added tax (VAT) clauses. Consider the recent case of Lezmin 2358 CC v Tomeridian Properties CC and others [2015] JOL 33210 [GJ]. The facts of the case are complex. Put simply, the seller sold commercial immovable property to the buyer. The sale agreement, which went through a few permutations, stated that: “The purchase price is the sum of R25 000 000 (Twenty Five Million Rand) exclusive of VAT which is payable…”
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, No 58 of 1962 (Act), which deals with the issue of shares by a company, would be reviewed. National Treasury has now released the first batch of proposals forming part of the draft Taxation Laws Amendment Bill 2015, which 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 s24BA of the Act to the extent that there is a mismatch between the value of the shares issued and the cash or assets received.