South Africa’s 2014 budget speech had surprisingly few proposals in respect of cross-border activities. Most South African taxpayers and tax practitioners are quite thankful and will also be hoping that once the 2014 Taxation Laws Amendment Bill is finalised, 2014 will have turned out to be a relatively ‘uneventful’ year.
Since South Africa’s move to a residence basis of taxation in 2001, almost every year has seen an exhausting set of new proposals. The volume and complexity of annual amendments has made it nigh-impossible to stay in touch with the country’s international tax landscape, and this has been exacerbated by the plethora of amendments-to-amendments – many of them retrospective. The 2013 amendments continue that tradition (of significant new rules), but we wonder whether 2014 might be a year in which we can pause to catch our breath?
In this article we take the opportunity to summarise the 2013 amendments and consider what is expected in 2014 and beyond.
Below are some of the main amendments legislated in the 2013 Taxation Laws Amendment Act, which was promulgated on 16 December 2013. Most of them come into effect in 2014.
Where a South Africa-resident company issues shares as consideration for the acquisition of shares in a foreign company, the South African company’s share-issue will be considered to be a disposal and tax on a capital gain in South Africa will arise. The deemed proceeds will be the market value of the foreign shares acquired.
South African holding and treasury management companies
Together with the South African Reserve Bank’s announcement of a dispensation to exclude certain corporate holding companies from the country’s exchange control regulations, the tax rules will also permit these companies to recognise another currency – that is, other than the South African rand – as its ‘functional currency’ for South African tax purposes.
A new regime is introduced to provide tax exemptions to international shipping companies.
The withholding tax on royalties remains at 12 per cent, with an increase to 15 per cent scheduled for 1 January 2015. However, new administration rules came into effect on 1 July 2013.
The 15 per cent withholding tax on interest is scheduled to come into effect for the first time on 1 January 2015. So South Africa will continue to have no withholding tax on interest paid out of the country until 31 December 2014.
The withholding tax on service fees of 15 per cent on South Africa-source service fees is proposed to come into effect 1 January 2016.
Deduction-restriction on interest
Where a South Africa-resident company borrows from a connected lender, and that lender is not subject to South African tax on the resultant interest income, the interest deduction for the South African borrower will be restricted (from 1 January 2015). There is a formula-based restriction, determined mainly with reference to the concept of ‘adjusted taxable income’, which is vaguely akin to the notion of EBITDA.
VAT on e-commerce
In order to ensure the charging and collection of VAT on specified electronic transactions (such as e-books and music), certain foreign e-commerce suppliers will be required to register for VAT in South Africa.
Dividend participation exemption
This exemption for foreign dividends (received from foreign companies in which the South African shareholder owns at least 10 per cent of the equity) will now apply only to equity shares. For example, dividends on preference shares will no longer be exempt.
Transfer pricing on quasi-equity
South Africa’s transfer pricing rules will not apply to loans granted to a foreign company in which the South African lender holds at least 10 per cent, if the debt is not repayable within 30 years and repayment is conditional upon the foreign borrower’s solvency.
Indirect interests in South African fixed property (for example shares held in a property-rich company) will now result in a capital gain in South Africa (the capital gains tax ‘exit charge’) when South African residents – either companies or individuals – emigrate. However, actual direct ownership of fixed property in South Africa will remain outside the exit charge and thus only attract capital gains tax when actually disposed of.
Foreign subsidiaries tax-resident in South Africa
The 2012 amendment to allow certain foreign-incorporated companies to disregard the ‘place of effective management’ test for tax-residence – and, in effect, treating them as controlled foreign companies with tax-exempt net income – has been retrospectively withdrawn. It is thus as if this special proviso never existed. So a foreign-incorporated subsidiary (of a South African resident) could once again be fully locally tax-resident if it is effectively managed locally.
Controlled foreign company financial instrument income
The 5 per cent de minimus rule that exempts financial instrument income of a foreign business establishment will no longer be available to treasury companies and captive insurers.
2014 Budget Speech
As mentioned, we were pleasantly surprised by the very limited international tax proposals mentioned in the budget speech. There was something about replacing the horrendous transfer pricing ‘secondary adjustment’ (deemed loan), addressing the cumbersome high tax calculation for controlled foreign companies (CFCs) where the income is attributable to a foreign business establishment (see section 9D of the Income Tax Act), extending the exchange-control-free treasury company regime to unlisted groups, and really not much else.
So, after many of us have for years been calling for a period of rest and ‘stability’ (and so forth), 2014 might be just such a year. Not only do taxpayers and tax practitioners need time to get to grips with what has been an ever-changing environment, but National Treasury itself needs time to tweak, refine and re-assess existing provisions (including a myriad of technical and textual corrections). Certainly, the criticism of provisions like the section 23M interest deduction limitation and the withholding tax on service fees warrants further consultation.
Is this just the calm before another storm?
On the international front, there is no doubt that 2013 was characterised by a spike in the hype around base erosion and profit shifting (BEPS) and the Organisation for Economic Co-operation and Development’s Action Plan on BEPS. Naturally, the question arises as to how South Africa’s tax landscape will evolve in that context.
It might perhaps then be less of a surprise if 2014 turns out to be uneventful as regards new international tax proposals. It may make sense for National Treasury to adopt a wait-and-see approach this year, because:
- First, the earliest deadlines for the OECD’s initial reports on its various action points are September 2014 (with many reports scheduled for 2015)
- Second, South Africa’s own Tax Committee (the so-called Davis Committee) is only scheduled to present its own initial BEPS report to the Finance Minister some time later this year – and one wonders whether the committee will also be asking for a postponement until the OECD’s recommendations are published and studied
It is quite conceivable that, based on pronouncements from the Davis Committee and the OECD, we could eventually see substantial further developments in the international tax space. But it seems doubtful that it will be in 2014.
That said, some of us are wondering whether we do in fact need significant new laws. Is the global BEPS paranoia really relevant in the South African context? Is South Africa’s international tax regime not already sufficiently sophisticated? Are other areas of the country’s tax system not more deserving of National Treasury’s limited resources?
In this respect, the work of the Davis Committee is probably critical. It seems clear that the committee’s recommendations are taken seriously by National Treasury – given that the only report they’ve presented so far (on small business) has already been referred to with approval in the 2014 budget speech. In addition, the committee’s research and reports will obviously be specific to South Africa, as opposed to those of the OECD. But as regards timing, it seems likely that the Davis Committee may consider it prudent to wait for the OECD reports.
In summary, indications are that 2014 may well be a period of calm – which could even extend into 2015. What remains to be seen is the intensity of the storm that follows. ❐
Author: Osman Mollagee is a partner at PwC