South Africa’s transfer pricing and thin capitalisation regime, as contained in s31 of the Income Tax Act, No 58 of 1961 (Act) has undergone some extensive principle changes over the past two years. In respect of transfer pricing, the focus had always been on the supply of goods and services between certain connected persons, usually a resident and a non-resident. Where the price for such goods or services was not at arm’s length, the South African Revenue Service (SARS) could adjust the consideration paid so that the parties would be taxed as if they did deal at arm’s length. A secondary adjustment also entailed a deemed distribution of a dividend in respect of which the now-repealed secondary tax on companies would have had to be accounted for.
Tax News
Cash versus in specie dividends
With the introduction of the new dividends tax on 1 April 2012, the distinction between cash dividends and dividends in specie requires consideration. Where a company declares and pays a dividend and that dividend consists of a distribution of an asset in specie, the amount of the dividend is dee
South African tax case considers application of capital gains treaty exemption to deemed disposition
A recent decision of the Supreme Court of Appeal of South Africa considered the application of the capital gains article in a double tax convention based on the OECD model to a deemed disposition of property occurring as a result of an “exit tax” imposed on an emigrating corporation. As the Court’s decision concerns capital gains exemption language that is similar to that used in most double tax treaties based on the OECD Model, it provides a helpful glimpse into how such provisions may be interpreted in other jurisdictions, including Canada.
Sent packing – Sent v Commissioner of Taxation [2012] FCA 382)
Mr Eduard Sent (Sent) was sent packing by the Federal Court of Australia (FCA) on 16 April 2012, in an appeal against a decision by the Administrative Appeals Tribunal (Tribunal) on whether some or all of a payment of $11,600,000 to an executive share trust (Trust) was assessable as income in the hands of Sent (Sent v Commissioner of Taxation [2012] FCA 382). While the taxation of share incentive schemes in Australia differs from the position in South Africa, the case does highlight certain principles that are equally applicable in South Africa.
Disastrous tax consequences for share incentive schemes
The current wording of the tax legislation has the result that both employers and participants in share incentive schemes will suffer substantial negative tax consequences when participating in these types of schemes that are actually designed to incentivise employees and to align their interest with the employer companies.
Carbon tax – writing on the wall?
A renewed interest in the concept of carbon pricing was ignited by the publication of the “Discussion Paper for Public Comment Reducing Greenhouse Gas Emissions: The Carbon Tax Option” (the “Discussion Paper”) published by the National Treasury in December 2010.
The payment of dividends out of negative reserves
The issue has often arisen as to whether the payment of a dividend that results in the creation of negative reserves can still be said to be a dividend or whether it is effectively funded from the share capital of a company. For instance, a company can have 100 as equity that is reflected as 100 in assets. However, the company then declares a dividend that results in it effectively having negative reserves of 100 in circumstances where the assets of 100 are used to fund the dividend.
Dividends tax and the beneficial owner – should a dividend be paid to a trust?
The issue pertaining to whether a trust is liable for dividends tax should a company pay a dividend to the trust as the registered owner of the shares has recently been clarified by SARS. By way of background, dividends tax must be paid by the beneficial owner, the concept being defined as the person that is entitled to the benefit of the dividend attaching to a share.
Withholding employees' tax in respect of an incentive scheme
The South African Revenue Service (SARS) recently released Binding Private Ruling 117 in which it had to be considered whether, and by whom, employees’ tax had to be withheld in respect of certain share options granted to employees in circumstances where the employer and the person granting the share options are not the same person.
Loans to shareholders and deemed dividends
Draft legislation confirming transition from STC to dividends tax released IN the 2012 Budget Speech delivered by Minister of Finance, Pravin Gordhan, on February 22, it was announced that the taxation of dividends will be increased from the current 10 percent secondary tax on companies (STC) to a 15 percent dividend withholding tax, with effect from April 1, 2012. Draft legislation confirming this proposal has now been released.