Tax News

Transfer pricing has finally washed up on South Africas shores

With increasing economic globalisation, revenue authorities around the world continue to shift their focus to issues of transfer pricing. Broadly, this fits in with the global move to combat so-called profit shifting, a practice where multinational groups attempt to concentrate their profits in low-tax countries in which they operate. In a moment that many tax practitioners have eagerly awaited, the Tax Court finally passed down its first judgment dealing with transfer pricing in the case of ABD Limited v Commissioner, SARS (IT14302). Between 2009 and 2012, the taxpayer licensed its intellectual property to subsidiaries operating in various other countries (opcos) against payment by these opcos of a royalty. For all of these opcos, this royalty was charged at the same flat rate of 1%. The South African Revenue Service (SARS) took the view that this 1% royalty was, in fact, not arm’s length and should have been higher. However, the Read More …

SA Budget 2024/25 – Tax policy on Tax administration of various taxes

Customs and Excise Act Reviewing the process on packages imported through eCommerce The approach to packages imported through eCommerce will be reviewed to ensure that the appropriate balance between simplicity and compliance with customs and excise requirements is being maintained.   Timeframe for delivery of export bills of entry Certain exporters face legitimate challenges in complying with the timeframe for submitting export bills of entry. It is proposed that the Customs and Excise Act be amended to enable the SARS Commissioner to provide, by rule, for a process by which exporters can be allowed to submit export bills of entry at a different time than what is currently provided for in the act.   Simplifying the process of substituting bills of entry in certain circumstances It is proposed that the Customs and Excise Act be amended to simplify the process of substituting a bill of entry in certain circumstances where Read More …

SA Budget 2024/25 – Tax policy on VAT and amendments and clarifications

Amendments to schedule 2 part B for fruit and vegetables It is proposed that items 12 and 13 of part B of schedule 2 of the Value‐Added Tax (VAT) Act (1991) be amended to clarify that the zero‐rating of VAT does not apply to pre‐cut or prepared fruit or vegetables. Amendments to schedule 1 part 1 of the Customs and Excise Act (1964) may also be needed in order to align both the schedules.

SA Budget 2024/25 – Tax policy on international taxation

Clarifying the translation for hyperinflationary currencies The net income of a controlled foreign company (CFC) is determined in the currency used by that CFC for financial reporting (the functional currency) and is translated into rand at the average exchange rate for that foreign tax year. An exchange item, as defined in the Income Tax Act, is treated as not attributable to any permanent establishment of the CFC if the currency used for financial reporting is that of a country with an official rate of inflation of 100 per cent or more throughout the foreign tax year. However, in contrast to the intention that a hyperinflationary functional currency not be used for translation purposes, section 9D(2A)(k) of the Income Tax Act requires the local currency to be used. It is proposed that the rules be changed so that section 9D(2A)(k) does not allow the use of a hyperinflationary functional currency for Read More …

SA Budget 2024/25 – Tax policy – Refining contributed tax capital provisions

The contributed tax capital of any company is a notional and ring‐fenced tax amount derived from a deemed market value amount when a foreign company becomes a South African tax resident and the consideration for the issue of a class of shares by a company. It is reduced by any amounts referred to as capital distributions, transferred by the company to the shareholders. It has come to governments attention that the following amendments are needed to further refine the contributed tax capital provisions.

SA Budget 2024/25 – Tax policy – Clarifying anti‐avoidance rules dealing with third‐party backed shares

Third‐party backed share anti‐avoidance rules deem dividend yields of preference shares, backed by third parties through an enforcement right of the holder, to be income except where the funds derived from the issue of these third‐party backed shares are used for a qualifying purpose. The anti‐avoidance rules do not apply if the funds derived from the issue of the preference shares in question are used for a qualifying purpose, for example, if the funds are used directly or indirectly to acquire equity shares in an operating company. It has come to governments attention that the following amendments are required to clarify the rules.

SA Budget 2024/25 – Tax policy on Corporate reorganisation rules

Corporate reorganisation rules Clarifying the interaction of the value shifting provisions and the definition of value shifting arrangement in paragraph 1 of the Eighth Schedule Disposals between group companies falling within the ambit of the corporate rollover relief provisions should, in principle, be tax neutral. In essence, rationalising a group of companies can result in the market value of an existing shareholding of one group entity decreasing and another group entitys newly acquired shareholding increasing (this would trigger the application of the value shifting rules). However, commercially, the market value of the ultimate holding companys combined direct and indirect interests in all the subsidiary companies remains unchanged. It is proposed that the definition of value shifting arrangement be amended to exclude certain corporate rollover transactions between groups of companies or where the value of the effective interest of the connected person remains unchanged.   Reviewing the prohibition against transfers of Read More …

SA Budget 2024/25 – Tax policy on business in general

Reviewing the connected person definition in relation to partnerships Paragraph (c) of the definition of connected person in section 1 of the Income Tax Act provides that, in the context of a partnership or foreign partnership (as defined in section 1), each member of the partnership is a connected person in relation to any other member of the partnership and any connected person in relation to any member of such partnership or foreign partnership. Therefore, partners are connected to each other as well as to all connected persons of the partners in the partnership. It has come to governments attention that limited partners in an en commandite partnership (a partnership carried out in the name of only some of the partners; the undisclosed partners contribute a fixed sum and are not liable for more than their capital contribution in the case of a loss) are affected by the wide ambit Read More …

SA Budget 2024/25 – Tax Policy considerations on Individuals, employment and savings

Curbing the abuse of the employment tax incentive scheme Changes were made to the Employment Tax Incentive Act (2013) in 2021 and 2023 to curb abuse of the employment tax incentive from aggressive tax schemes, which used training institutions to claim the incentive for students. It is proposed that punitive measures to support those amendments be refined in the legislation to address the abusive behaviour of certain taxpayers towards the incentive. Amending the definition of remuneration proxy in section 1 In 2013, the definition of remuneration factor in the Seventh Schedule to the Income Tax Act (1962) was replaced by a new definition of remuneration proxy in section 1. The new definition of remuneration proxy refers to an associated institution in relation to the employer without referencing paragraph 1 of the Seventh Schedule, where this term is defined. It is proposed that the definition of remuneration proxy be amended to Read More …