Key changes from Draft TLAB 2020

Please see below our summary of the key takeaways from draft tax legislation released by the South African National Treasury and South African Revenue Service on 31 July 2020 for public comment.

Personal income tax

• Persons who emigrate from South Africa for tax purposes may only be paid out lump sum benefits from their retirement funds after three years from the date of ceasing tax residence;
• Further measures are to be introduced to prevent individuals from transferring wealth to trusts in a tax-free manner. The new measures deem preference share funding of companies held by certain trusts to be loan finance in prescribed circumstances.

Tax Administration

• Where taxpayers fail to submit the information requested by SARS more than once, SARS is now empowered to issue an estimated assessment of that taxpayer;
• Taxpayers may now face criminal prosecution for non-compliance with certain administrative tax rules even where the non-compliance was not intentional.

International tax

• Transfer pricing rules will be extended to cover transactions between a non-resident and a controlled foreign company of a South African resident from which the South African resident derives a tax benefit;
• An “exit tax” will be imposed on South African resident holders of listed shares that are migrated to a listing on a foreign stock exchange (i.e. they will be deemed to have sold and reacquired such shares at their current market values and would be taxed on any deemed gain);
• Real Estate Investment Trust (“REITs”) and their controlled companies will not be entitled to claim the so-called “participation exemption” i.e. the exemption from SA tax on foreign dividends or capital gains where 10% or more of a foreign company is held;
• South African resident shareholders of resident companies that emigrate from South Africa will be subject to an “exit tax” on the shares in such company and will not be permitted to make use of participation exemptions in calculating this exit tax;
• Foreign dividends received or accrued by South African residents will be taxed in full where that foreign dividend is linked to an expense which that resident claims as a tax deduction;
• Following recent relaxation of exchange control rules relating to “looping structures” (i.e. corporate structures designed to export capital from South Africa), measures are to be introduced to limit tax planning opportunities related to such structures. For example, the participation exemption will no longer apply to the disposal of shares in a CFC to the extent the value of the assets of the CFC is derived from South African assets.

Employees’ Tax

• Employees will no longer be taxed when their employer reimburses them for meals and incidental costs incurred when they are obliged to go on day trips for work reasons provided the amount do not exceed limits set out in the relevant Government Gazette;
• Employer-sponsored bursaries/ scholarships awarded to relatives of employees will only give rise to a tax deduction for the employer and a tax exemption to the relevant employees if such bursaries/ scholarships are open to the general public and do not involve salary sacrifice by the employee;
• Employers who are not compliant with tax rules will no longer be permitted to roll over amounts of PAYE they have not been able to claim under the Employment-Tax-Incentive beyond the end of the PAYE reconciliation period.

Corporate Tax

• Measures are to be introduced to prevent connected taxpayers abusing special tax rules for asset-for-debt transactions so as to transfer assets at non-arm’s length prices. Going forward, no such special tax rules will apply and assets transferred in exchange for debt will have a base cost determined as expenditure actually incurred under normal tax principles;
• Measures are to be introduced to refine the anti-avoidance rules used against taxpayers who exploit the laws providing for tax-neutral corporate reorganisations, specifically the intra-group transactions and corporate unbundlings;
• The tax benefits (i.e. reduced tax rates, increased capital allowances) government granted companies operating in Special Economic Zones in South Africa will now cease from the tax years commencing on or after 1 January 2028;
• The allowance for doubtful debts that taxpayers can claim as a deduction will be calculated in the case of taxpayers who do not apply IFRS 9  for financial reporting purposes after taking into account any security provided for that debt. Taxpayers who apply IFRS will furthermore be permitted to claim a doubtful debts allowance in respect of lease receivables that have accrued to them;
• Tax benefits (e.g. increased capital allowances) afforded to taxpayers operating in the mining sector are now restricted to taxpayers that actually hold mining rights;
• The 20% limitation on shareholdings in a Venture Capital Company (“VCC”) will be relaxed for a six-month period upon application by shareholders when the underlying investment in the VCC is wound up into a qualifying company;
• Mine owners may now apply to SARS under prescribed circumstances to lift “ring-fencing” provisions which prevent capital expenditure incurred on one mine to be deducted against income from another.

Value Added Tax (VAT)

• New rules for taxpayers for applying for VAT rulings are to be put in place. These include provision for SARS to charge for such rulings and to limit the circumstances under which such rulings may be made;
• Vendors deemed to be foreign electronic services suppliers may apply to SARS to account for VAT on the basis of the payments;
• Taxpayers will be permitted to elect out of VAT relief for corporate reorganisation transactions where alternative relief from VAT is available on the basis that a business is to be supplied as a going concern;
• Taxpayers will be required to calculate output tax payable on an irrecoverable debt by applying to so-called “tax fraction”;
• Non-resident lessors of goods leased to resident lessees in South Africa will not be required to register as VAT vendors by virtue of such lease;
• Premiums charged by long-term insurers that do not embed fees/ commissions will be exempt from VAT.

Other

• Export duties are to be imposed on certain categories of scrap metal.

Should you wish to learn more about any of these changes, please drop us a mail.

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.