Corporate income tax: A bittersweet reduction

Despite recent implications to the contrary, the Minister of Finance (Minister) announced in the 2022 Budget Speech that the corporate income tax (CIT) rate will be reduced to 27% for years of assessment ending on or after 31 March 2023. SHARE PAGE The reasons outlined by the minister for proceeding with this reduction, against many expectations, are as follows: Corporate income and profits have been more resilient than anticipated with tax collection recently buoyed by strong increases in the prices of exports relative to imports. South Africa’s corporate income tax rate exceeds the Organisation for Economic Co-operation and Development’s average of 23%. The CIT rates of countries with strong investment and trading ties to South Africa have significantly lower rates of CIT, which provides a strong incentive for tax avoidance. The reduction in CIT is part of a broader restructuring of the corporate income tax system in South Africa. While the Read More …

SA Budget 2022 – Changes to the intra-group transaction rule

The intra-group transaction rule allows for tax-neutral transfers of assets within a group of companies. However, it comes with many caveats that need to be managed. One of these is that, where an asset is transferred on intercompany loan or for shares, the transferor is deemed to have a nil base cost for such loan or shares. Before last year, this nil base cost was only ignored where the loan was repaid, or share capital was returned, within the same group of companies. This nil base cost rule could result in economic double tax in some circumstances. For example, if the transferee de-groups within six years, the de-grouping claw back would be triggered in the hands of the transferee, whereas the transferor would still have a nil base cost for the loan and would trigger tax on the repayment or sale of the loan. The 2021 amendments provided for additional Read More …

SA Budget 2022 – Contributed tax capital changes put on hold for now

“Contributed tax capital” is defined in section 1 of the Income Tax Act 58 of 1962 and is a key concept in differentiating between distributions that are regarded as dividends and distributions that are regarded as returns of capital for tax purposes. In a very general sense, the contributed tax capital of a company (in relation to a particular class of shares) is the aggregate of all capital that has been contributed to a company by shareholders in that class, less the capital that has been returned to them. Where a company distribution reduces the contributed tax capital, it is considered a return of capital, and where there is no reduction it is a dividend for tax purposes. The definition of “contributed tax capital” contains a proviso to the effect that no shareholder (in relation to a particular class of shares) may receive contributed tax capital in excess of that Read More …

SA Budget 2022 – The debt forgiveness rules are being widened

The debt forgiveness rules set out a waterfall of adverse tax consequences that are triggered where debt is forgiven or capitalised. To apply these rules, the debtor needs to identify what the forgiven debt was used for. For example, if the debtor used the proceeds of the debt to fund operational expenditure and claimed an income tax deduction for such expenditure, the debtor must recoup the income tax deduction. Likewise, if the debtor used the proceeds of the debt to acquire a fixed asset which is written off annually for tax purposes, the debtor must recoup the wear and tear allowances. According to the 2022 Budget Speech, there is a perceived gap in these rules in relation to assets that were sold in previous years, and where the debtor claimed a scrapping allowance or realised a capital loss. It has been proposed that the debt forgiveness rules be amended to Read More …

SA Budget 2022 – The end of an era (or four): Further tax incentives discontinued

Tax incentives are applied to encourage certain behaviours and activities by providing businesses and individuals with favourable tax treatment. The introduction of a tax incentive is generally based on a social, economic or environmental need that has been identified and can be alleviated by the actions or behaviours of taxpayers in exchange for a tax benefit. SHARE PAGE Although tax incentives are introduced in order to remedy or improve a particular circumstance or behaviour, there are potential negative effects from these incentives that make them economically less desirable, including: the reduction of the tax base; increasingly complicated governing legislation; greater benefits to larger entities that can obtain specialised tax advice; and additional South African Revenue Service resources required to monitor and audit the incentives. In order to mitigate these possible negative effects, tax incentive provisions often include a sunset clause that indicates a predetermined date on which the relevant incentive will Read More …

SA Budget 2022 – The end of an era (or four): Further tax incentives discontinued

Tax incentives are applied to encourage certain behaviours and activities by providing businesses and individuals with favourable tax treatment. The introduction of a tax incentive is generally based on a social, economic or environmental need that has been identified and can be alleviated by the actions or behaviours of taxpayers in exchange for a tax benefit. Although tax incentives are introduced in order to remedy or improve a particular circumstance or behaviour, there are potential negative effects from these incentives that make them economically less desirable, including: the reduction of the tax base; increasingly complicated governing legislation; greater benefits to larger entities that can obtain specialised tax advice; and additional South African Revenue Service resources required to monitor and audit the incentives. In order to mitigate these possible negative effects, tax incentive provisions often include a sunset clause that indicates a predetermined date on which the relevant incentive will cease Read More …

SA Budget 2022 – You can run, but you can’t hide: Taxation of collective investment schemes up for further discussion

Collective investment schemes (CISs) essentially pool funds together for the purpose of operating as a type of investment vehicle for investors. CISs have a special taxation regime in that for income tax purposes, distributions (that are not of a capital nature) from a CIS to unit holders within 12 months after that income is accrued (or in the case of interest is received by a CIS) follow the flow-through principle and are deemed to accrue to the unit holders on the date of distribution and subject to tax in the hands of the unit holders. This is in accordance with the well-established conduit pipe principle in South African law. SHARE PAGE Notably, the conduit principle only applies for income tax purposes, whereas in the event a CIS realises a capital gain or loss, then such gain or loss is disregarded for capital gains tax purposes under para 61(3) of the Eighth Read More …

Resolving the anomaly between new assessed loss utilisation restrictions and section 36 mining capital allowances

In 2021 amendments were proposed relating to section 20 of the Income Tax Act 58 of 1962 to limit corporate taxpayers’ ability to utilise assessed losses carried forward to 80% of the value of such assessed losses in a given year of assessment. With the remainder of the assessed loss rolling over for use in the next year of assessment. SHARE PAGE The capital deductions regime for miners is contained in section 15(a) of the Act, read with section 36(7C). Section 15 provides that a deduction shall be allowed as per section 36, in lieu of an ordinary deduction under section 11. Section 36 in turn provides for a deduction of any capital expenditure to be allowed from income derived from working any producing mine. The mining industry is thus entitled, subject to certain limitations, to claim the capital expenditure incurred as an income tax deduction against mining income in the Read More …

SA Budget 2022 – Lay-by arrangements and debtors allowances

by Heinrich Louw. Lay-by arrangements and debtors allowances A lay-by arrangement can be characterised as one where a prospective purchaser agrees with a prospective seller that a particular item or asset will be set aside or reserved for purchase. The prospective purchaser usually pays a deposit for the reservation (sometimes followed by further payments). Once the prospective purchaser has presented full payment, the sale is concluded and the purchaser takes possession and ownership of the item. (There may be different characterisations depending on the relevant terms of the agreement.) SHARE PAGE Section 24 of the Income Tax Act 58 of 1962 essentially provides for a deemed accrual for a seller of goods or other property in certain circumstances, mainly in the context of credit agreements. The circumstance in which section 24(1) applies is where transfer to the purchaser is subject to receipt by the seller of the whole or a certain portion Read More …

SA Budget 2022 – The BEPS Project: Introducing the Two-Pillar Solution and implementation framework in South Africa

by Louise Kotze2022 SPECIAL EDITION BUDGET SPEECH ALERT The BEPS Project: Introducing the Two-Pillar Solution and implementation framework in South Africa The shifting of profits by multinational enterprises (MNEs) to lower or no-tax jurisdictions has an adverse impact on economies globally as this practice (amongst others) erodes the tax base in countries with higher tax rates and undermines the integrity of tax systems, often taking undue advantage of developing countries and low-income jurisdictions. SHARE PAGE In order to curb tax base erosion and profit shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) (in conjunction with the G20) first introduced the BEPS Project in 2013 with the 15-point Action Plan announced in 2015. The BEPS Project aims to ensure that profits are taxed in the jurisdiction where the economic activities generating such profits are performed. On 8 October 2021, the members of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) agreed Read More …