Author: David Warneke, Tax Partner, BDO South Africa.
From 1 April 2014, South African (SA) resident companies engaged in international shipping have enjoyed a far better income tax dispensation than before. If you are involved in this industry, make sure your company is enjoying the benefits described below.
Prior to this date, international shipping income derived by such companies was generally subject to SA tax at the rate of 28%, the rate applicable to other types of companies. The only particular incentive for such companies was related to tax depreciation on the cost of their ships. SA had a wholly uncompetitive tax dispensation for such companies, whereas in order to attract such companies, many other jurisdictions have either introduced a ‘tonnage tax’ – tax based on the tonnage of the ship rather than profits of the shipping company – or exempted such income from tax altogether.
National Treasury is now seeking to attract ships to the SA flag, presumably due to the benefits that should ensue by, for example, having companies operate from a South African economic base.
To this end, the 2013 Taxation Laws Amendment Act introduced the following amendments.
- The complete exemption of ‘international shipping income’ of an ‘international shipping company’ from SA income tax. As a result, ships used in deriving the international shipping income no longer enjoy any income tax depreciation;
- The complete exemption from the dividends tax of dividends declared from ‘international shipping income’ by an ‘international shipping company’;
- The complete exemption of interest from the withholding tax on interest where the interest relates to foreign debts that were used to acquire, construct or improve a ‘SA ship’ utilised for ‘international shipping’. This exemption applies to interest that is received or accrued by the foreign creditor on or after 1 January 2015;
- Proceeds from the disposal by an ‘international shipping company’ of a ‘SA ship’ engaged in ‘international shipping’ are not taxed;
- An ‘international shipping company’ is permitted to use a currency other than the Rand as the company’s functional currency for tax reporting;
- Remuneration paid to officers and crew of a SA ship mainly engaged in ‘international shipping’ enjoys complete exemption from income tax in the hands of such officers and crew regardless of the number of days spent outside SA territorial waters; and
- A SA ship engaged in ‘international shipping’ is defined as a foreign business establishment for purposes of section 9D. The import of this is that if a SA ship is owned by a non-SA company which in turn is controlled by SA resident shareholders, the income attributable to the ship is generally not subject to income tax in the hands of the SA resident shareholders.
It is important to note that the complete exemption from SA income tax applies only to ‘international shipping income’ of an ‘international shipping company’. The definition of ‘international shipping income’ only extends to the income derived by the international shipping company from SA ships mainly engaged in international traffic. If the international shipping company earns income unrelated to the activities of such a ship, such income would remain fully taxable. Courts have indicated that the term ‘mainly’ means more than 50 per cent. So, provided that the SA ship is engaged more than 50 per cent in international traffic, then all income derived from the operation of the ship in the conveyance of passengers or goods is exempt from SA income tax. However there are some areas of uncertainty. For example, the term ‘international traffic’ is not defined in the Income Tax Act. Furthermore, it is unclear whether the 50 per cent criterion refers to a time-based measure, a mileage measure or a revenue measure.
Considered in their totality, the above measures should go a long way towards reviving the fortunes of the, dare I say, ‘flagging’ shipping industry in SA.
 From years of assessment commencing on or after 1 April 2014.
 ‘International shipping income’ means the receipts and accruals of a person derived from international shipping.
 ‘International shipping company’ means a company that is a resident that holds a share or shares in one or more SA ships that are utilised in international shipping.