WHAT BUDGET 2021 HAS IN STORE FOR ‘THE WEALTHY’
Author | Patricia Williams, tax partner at Bowmans and SAICA Tax Administration Act committee member
Finance Minister Tito Mboweni delivered his 2021 Budget Speech on Wednesday 24 February 2021. While the news for taxpayers was generally good, with more than inflationary adjustment to personal income tax rates and a 1% reduction in corporate income tax for tax years starting on or after 1 April 2022, there were some indications that life could soon become more difficult for ‘the wealthy’
Restricting tax deductions
According to the budget documentation, the progressivity of our tax system ‘will be enhanced by restricting deductions for the wealthy’. It is unclear which tax deductions are considered to be ‘for the wealthy’.
One tax deduction that has already been capped for higher income taxpayers is retirement contributions. An amendment from 1 March 2016 introduced a ‘cap’ on tax deductions for retirement fund contributions of R350 000. Given that the tax deduction was based on 27,5% of relevant income, this potentially impacted taxpayers earning over R1,27 million per year.
Differentiating between taxpayers does not automatically comprise discrimination, and unlawful discrimination in particular. This is not to say that it may not feel that way to persons who are the recipients of the differentiation. The ‘wealthy’ are certainly being specifically identified for higher effective taxation.
SARS is in the process of establishing a dedicated unit to focus on ‘individuals with wealth and complex financial arrangements’. According to Minister Mboweni, the ‘first group’ of taxpayers have been identified and will receive communication during April 2021.
If this ‘first group’ were politicians and politically connected persons, in respect of whom there have been numerous public calls for ‘lifestyle audits’, this announcement may be very well received within the market. Absent this, it will simply cause frustration.
There is general consensus that improving the audit capacity at SARS would be a positive development. The issue is that SARS’ tendency to audit ‘easy targets’ and argue about ‘timing differences’ (seeking to shift a tax deduction into a subsequent year) is very frustrating when taxpayers feel that SARS should be ‘catching the criminals’.
Tax evaders are the ones who SARS should be dedicating the most effort to catching. There is indeed place for SARS to audit taxpayers who have filed their returns properly, with all relevant supporting documentation, and where a potential tax dispute relates to legal interpretation of complex tax provisions; but these taxpayers should be treated with respect and not feel that they are being unfairly targeted for their wealth, higher income, or because they are perceived to be ‘soft targets’. And all taxpayers should know that SARS is spending significant time and effort in curbing tax evasion.
Wealth tax is being considered
SARS is going to use third-party information to consolidate ‘wealth data’ for taxpayers. This will be used to assess the feasibility of a wealth tax (as well as for audit purposes, as discussed above). In the circumstances, if taxpayers were celebrating the absence of heavier taxes on ‘the wealthy’, this celebration may be short-lived.
Given the very small pool of higher income taxpayers, the sizeable contribution that these taxpayers make to the tax collections for the whole country, and the economic mobility of many of these taxpayers, it may be beneficial to carefully consider the message that Budget 2021 is sending to this group. Many of us who fall within this group would feel comforted, if reassured, that the intention is to focus on people who have failed to properly file their returns and pay their taxes, or those with asset levels that are inconsistent with their declared earnings.
SARS RECEIVES A FINANCIAL INJECTION
Author | Marelize Loftie-Eaton is the chairperson of the SAICA Tax Administration Act and Tax Technology Committees
In the 2021 Budget Speech, the Minister of Finance allocated an additional R3billion to the South African Revenue Service (SARS) to improve technology, data and machine learning capability and upskill SARS officials to improve the efficiency and effectiveness of SARS
In the last two years, SARS re-established an Illicit Economy Unit that investigates complex illicit fund flow crimes and other corruption cases, including, but not limited to state capture, the illicit tobacco industry, PPE tender fraud and fraud in relation to COVID-19 grants. This unit − which joined forces with the Hawks, the Financial Intelligence Centre (FIC), the National Prosecuting Authority (NPA) and the South African Reserve Bank (SARB) to ensure that there is full disclosure of all information obtained by the different regulators and agencies − has raised considerable assessments and obtained many preservation orders. This collaborative approach will de-risk the criminal networks and have the desired outcome for all these organisations and for the wider taxpayer base in South Africa. In the past, these regulators and agencies worked in silos to meet their own objectives. The current objective is to stop corruption in the public and private sector to ensure a stronger economy and repay the massive state debt. With the success and effectiveness of this unit, I will be surprised if SARS does not add specialised resources to curb the illicit flows and corruption.
It is a step in the right direction that SARS will establish another specialised audit unit that will deal with investigations into the tax affairs of high-net-worth individuals that sail close to the wind with highly complex financial structures to reduce their tax liabilities. SARS has already identified a batch of taxpayers that will receive communications as early as April 2021 and, as suggested by Judge Dennis Davis, these communications will most probably lead to in-depth lifestyle audits. SARS will in all likelihood reap even greater financial benefits if it stops harassing elderly taxpayers with providing proof of medical aid slips, querying the format of a travel logbook, or similar Micky Mouse audits that are time consuming and add pennies to the coffers. It is time that SARS focuses on the big guns and industries where there is a high level of white-collar crime and not on tax-compliant companies and individuals that are audited to death despite getting clean audits every year.
The Minister indicated that SARS would expand specialised audit and investigation skills. This can be interpreted that they will employ more skilled auditors; however, it can mean that SARS will train existing staff. Training is one area that has been neglected for years. It is clear from some assessments and the reasons for disallowing an objection that the assessor or auditor has not considered all the facts, has limited knowledge of the legislation, or uses a sense of humour argument to raise an unfounded liability against a taxpayer that has no means to follow the dispute resolution processes.
The focus on the abuse of transfer pricing, tax base erosion and tax crime will be intensified, and this will come at an increased cost. With the international sharing of information under the Common Reporting Standards of the OECD and Country-by-Country reporting, SARS is in an excellent position to identify the taxpayers that under-declare income or erode the tax base.
All of the reasons the Minister provided to justify the R3 billion boost will yield positive results for SARS and the economy of South Africa; however, it is imperative that SARS improve its debt collection processes and upskill collectors as the increase in assessments raised can also result in more tax debts when taxpayers revolt against paying taxes. It is therefore important that SARS improve the integrity of its data and follow due processes when it collects outstanding debt. In the last couple of months, SARS lost numerous cases where due process was not followed in the collection process. Debt is a constant in any business therefore it is vital to have a robust debt collection process and follow all legal steps to recover amounts owing.
Tax compliance and the payment of taxes is still the responsibility of each taxpayer in South Africa and compliance will increase if there is an improvement in the quality of assessments raised, clarity is provided, and the SARS system constraints are resolved. With improved technology and skilled resources, SARS can become the excellent revenue authority it was, and the R3 billion will assist the organisation to meet its goals.
2021 BUDGET ABOUT BEPS AND TRANSFER PRICING
Author | Christian Wiesener, Associate Director at KPMG and chairperson of the SAICA Transfer Pricing Sub-committee
Base erosion and profit shifting (BEPS), which is often mentioned in the context of transfer pricing, concerns the shifting of profits from one entity within a multinational group to another through strategic tax planning, from a higher tax jurisdiction to a lower one. Specifically in Africa and South Africa, this is said to have a very negative impact on tax collections and BEPS.
Finance Minister Tito Mboweni delivered the 2021 Budget Speech on 24 February 2021 and the immediate feedback by representatives from opposition parties was that the budget contains too little action. However, it was expected that South Africa would face the biggest budget deficit recorded in history, and faced by talk of a tax revolt and broad resentment against the cutting of the public wage bill, combined with the significant financial impact of the pandemic, the Minister was clearly in a position where treading very carefully was the only sensible thing to do. Thus it could be argued that taking little action was the appropriate thing to do. Besides, minor relief for individual taxpayers in terms of a move of the tax brackets has seemingly provided some positive flavour. Additionally, the announcement of a reduction of the corporate tax rate to 27% next year should take the pressure off and hopefully help attract business going forward.
An area in which the Minister did indicate some action is BEPS and transfer pricing. In 2016, the Organisation of Economic Co-operation and Development (OECD) finalised the (first) BEPS initiative, which targeted the abuse of existing international tax rules by creating rules that would not be to the detriment of international trade. The BEPS initiative resulted in 15 action points. The G20 Group of Finance Ministers, which had tasked the OECD with this project, adopted the BEPS Action Plan comprising 15 actions. South Africa, one of the members of the G20 Group, has implemented or is in the process of implementing the actions.
One of the BEPS Actions, Action 4, deals with rules to limit excessive interest deductions. While South Africa has had interest limitation rules, for example in terms of section 23m of the Income Tax Act 58 of 1962, as amended, the South African rules deviated from the recommendations in Action 4. At the time of last year’s budget presentation, however, National Treasury published a discussion document announcing the review of the tax treatment of excessive debt finance, interest deductions and other financial payments. The document discusses a move towards interest limitation rules aligned to BEPS Action 4 as well as a simplification of the existing rules, including an alignment with the existing transfer pricing rules.
Following broad public consultation processes, the Minister has now announced that with the lowering of the corporate income tax rate, the new set of interest limitation rules will be introduced. Thus, the new simplified and enhanced interest limitation rules will, together with the transfer pricing rules, aim at curbing BEPS in South Africa. If both rules are implemented as envisaged, this will have a significant impact on existing intragroup finance arrangements as well as future structures.
A further BEPS and transfer pricing-related announcement by the Minister relates to the taxation of the digital economy, for example companies providing digital services which sell, for example, services to users in South Africa. While Action 1 of the BEPS Action Plan already addresses digital services, it focuses on the indirect tax treatment of such services. South Africa was one of the first countries, and the first in Africa, to introduce VAT legislation addressing the provision of digital services.
However, Action 1 does not cover corporate income tax. The first BEPS initiative was soon followed by a second one, BEPS 2.0. The purpose is to develop rules that ensure that digital services providers are taxed, at the appropriate level, in the right jurisdictions. The proposed rules encompass two proposed target areas, also referred to as pillars:
- Tax allocation rules in a changed economy, and
- Four new rules granting jurisdictions additional taxing rights where other jurisdictions have not exercised their primary taxing rights or income is subject to low rates of tax
While the second BEPS initiative was expected to be finalised by the end of 2020, the COVID-19 pandemic has certainly contributed to the delay experienced. Also, significant disagreement between different role players and the inability to find some reasonable consensus have pushed out finalisation of the initiative. Although South Africa is one of only two African countries participating in the group and would be expected to aim for consensus, the Minister, in his Budget Speech, made it clear that should consensus not be reached soon, South Africa would implement unilateral rules. A unilateral approach may not be in the best interest of flourishing international trade relationships.
The two BEPS and transfer pricing-related actions addressed in the Minister’s Budget Speech tie in with the Commissioner for SARS’ consistent talk about SARS’ focus on countering transfer pricing and the recent increase in transfer pricing reviews and audits in South Africa. SARS’ focus on transfer pricing should be noted and taxpayers should expect further significant activity in this regard.
CORPORATE TAX RATE REDUCTION – NOT AS SWEET AS IT SOUNDS? (CPD 1 Hour)
Corporate tax rates around the world have been reducing in recent years. Consequently, the budget announcement that there will rate reduction in 2022 has been a long time coming, but it may not be as sweet as it sounds
In his Budget Speech on 24 February 2021, Minister Theo Mboweni announced that the corporate income tax rate will be lowered to 27%, with possible further rate decreases in future. The objective is to make the South African tax system more attractive. At first glance, this would appear to be wonderful news, but the Minister’s comment that ‘we will do this in a revenue-neutral manner’ ensures that the fiscus has no intention of giving up this 1% of corporate tax and that it will be recovered elsewhere.
The first point to note is that the proposed reduction will only be effective for corporate years of assessment commencing on or after 1 April 2022. That means that the benefit will only be seen for tax years ending March 2023 and beyond.
Then, scouring the Budget Review, it becomes clear that there are a number of methods that Treasury will use to ‘make up the difference’ of this proposed rate change and it is likely that we will see more in the 2022 Budget, in other words just before the reduced rate becomes effective.
It is also possible that the confidence to make such an announcement may have arisen from the increased collections seen from the mining sector (largely the mining royalties) over the December-January 2020/21 period, which clearly demonstrates that when the mining industry is working well, there is a significant amount of tax money to be collected.
Reference is made in the Budget Review to two large gas finds in Mossel Bay and the fact that a discussion paper will be issued by National Treasury together with the Department of Mineral Resources and Energy on possible tax reforms ‘to move towards a fairer and more certain fiscal and regulatory regime’. Such statements are in themselves concerning and likely to exacerbate the uncertainty that was highlighted by the Davis Tax Committee in its Oil and Gas Report in 2017. Resolution should have been reached before the finds, but better late than never.
Some of the changes to offset the tax rate reduction were set out clearly in the 2020 Budget Speech and Review, being the imposition of limitations to the use of brought-forward assessed losses, limitations to interest deductions, and the removal of various incentives. These proposals need unpacking.
In the 2020 Budget, it was announced that corporates would be limited to setting their assessed loss against only 80% of their taxable income, meaning that the remaining 20% would be taxed in full even if the company’s brought forward assessed loss exceeds the current year’s income. The effect of this would be that corporates which are profitable in the tax year are forced to make a contribution to the fiscus even though they may not have been profitable in the past. The remaining assessed loss would then be carried forward and, provided the company remains profitable, would be used up in future. This, in essence, would simply be to delay the use of the full assessed loss.
The proposal was innovative in that it created the opportunity for cash flow to the fiscus without being overly detrimental to the relevant company. It seems fair as some countries limit the period of carrying forward for assessed losses such that any balance which is, say, five years old is forfeited. Owing to the COVID-19 pandemic and its impact on companies, the proposal didn’t appear in the tax legislation promulgated in January, but it was clearly not off the table.
The Review acknowledges that many corporates will have suffered losses during the pandemic lockdowns. Thus, if the assessed loss proposal is implemented in the form contemplated also in, say, 2022, companies should not be unduly prejudiced by a limitation of this nature.
Cross-border interest limitation provisions are recommended by the Organisation for Economic Co-operation and Development (OECD) in a base erosion profit shifting (BEPS) context. Significant work has been performed, the outcome of which is provided in the OECD BEPS Action 4 Report. This was used as the basis for a discussion document on limiting interest in South Africa that was issued by SARS in February 2020.
Research has shown that, globally, an interest deduction of around 30% of earnings is a reasonable benchmark for corporates. It is this, together with comments given on the discussion document, that has presumably led to the proposal that this ratio will be applied to all corporates in South Africa but that the limitation will only be applied to connected party interest and not total interest. It would seem that interest paid to third parties is to be left out of the limitation as such interest cannot be manipulated by taxpayers and third parties will have ensured that the company is ‘good for the money’ − in other words, the interest rate won’t be excessive if charged by third parties.
Finally, the removal of incentives. Here one can see the influence of the Davis Tax Committee − this time in its Corporate Tax Report, which suggests consideration could be given to assessing and removing incentives that are not achieving their goals and rather applying a lower tax rate in order to incentivise business generally. Removing incentives to make room for lower tax rates has been a method adopted by a number of countries such as the UK.
In the 2020 Budget Review, National Treasury proposed a 28 February 2022 sunset date for tax incentives dealing with airport and port assets, rolling stock, and loans for residential units after reviewing each of them to determine whether they should be extended. This year that theme is continued and the proposal is made that the sunset date for the venture capital company incentive will not be extended beyond 30 June 2021 since it allegedly assists wealthy taxpayers to obtain a tax deduction rather than develops small businesses, generates economic activity and creates jobs, as intended. The incentive providing exemptions for films is considered to be equally ineffective. However, a short period, to 31 March 2021, is provided for submissions as to why they should be retained.
The promise is made that urban development zones and learnership tax incentives will also be evaluated but that they will be extended for two years while their reviews are completed.
Even though the initially sweet announcement that corporate tax rates are to be reduced is perhaps not quite as sweet as it may seem, it is considered that it is nevertheless a positive step (albeit initially small) in the right direction to bringing South African corporate taxes more in line with some of its peers.
SOUTH AFRICA FINALLY ON BOARD THE CORPORATE RATES REDUCTION TRAIN
Author | Mikatek Mtsetweni, Accounting member of the Tax Court and member of the SAICA Northern Region Tax Committee
For over a decade, the South African corporate tax rate has remained unchanged at 28%, even in the face of a global trend that saw many countries reduce corporate tax rates. Many commentators have long called for the corporate tax rate to be lowered to boost the country’s competitiveness and attract foreign investment, and for some time now, National Treasury has expressed intentions to restructure the corporate tax system and grow the tax base
The Minister of Finance has finally heeded the call to lower the corporate tax rate and announced in his 2021 Budget that it is proposed that corporate income tax rates will be lowered by 1% from years of assessment commencing from 1 April 2022. This is coming at a time when least expected, especially given the pressures on revenue collections and the massive government debt levels. The revenue shortfall is at a record high and with a debt crisis looming, the timing of the announcement of this rate reduction, although unexpected, may help generate much-needed business confidence.
Corporate income tax stands as the third-largest contributor to tax revenue collected by SARS and in 2019/2020 that translated into R215 billion in revenue collected. Estimates indicate it will remain the third-largest contributor for the year 2020/21 although at a much lower contribution of R159 billion. All else the same, a 1% reduction in the corporate tax rate could see total revenue collected reduce by about R6−8 billion, and therefore it is important that this decrease in the corporate tax rate generates the right taxpayer behaviour and encourage companies to invest and contribute towards resuscitating the South African economy and growing the tax base. This is important especially if we are to see further rate reductions in future.
As a good safety net to manage any potential negative impact on revenue collection, National Treasury will couple this rate reduction with the implementation of measures to limit interest deductions and assessed loss utilisation and a reduction in incentives that are seen as not delivering on their intended objective.
The impact of this rate decrease will only really be felt by most companies in 2023/24. Based on the report by SARS, 33% of companies have a December year-end and 23% have a February year-end − for these companies, the rate reduction will impact profits earned starting January 2023 and March 2023 respectively. Most companies may have preferred a more immediate application of the lower rate, but what will require assessment in the immediate future is the impact this change has on deferred tax balances as reported for accounting purposes in the financials as soon as this change is enacted.