Taxation Laws Amendment Bill, 2017 - Individuals and International Tax

- 09 November 2017

Author: Joon Chong, Partner, Webber Wentzel

The Taxation Laws Amendment Bill, 2017 was released on 25 October 2017 and has since been tabled to the Standing Committee on Finance. In this article, we discuss amendments in the bill on international tax as well as a few notable amendments relevant to individuals and trusts. 

All references to "section" below are to sections of the Income Tax Act, 1962.

International tax

1. Definition of "controlled foreign company" expanded

  • Currently, a "controlled foreign company" (CFC) is defined as a foreign company where more than 50% of its participation rights in the shares of or voting rights in the company are held by residents.
  • The definition of CFC is expanded to include any foreign company which has its financial results reflected in the consolidated financial statements of a resident company in terms of International Financial Reporting Standard 10 (IFRS 10).
  • The percentage participation rights of the resident company will be equal to the net percentage of the financial results of the foreign company which is included in the consolidated financial statements in terms of IFRS 10.
  • The definition of CFC in the final bill does not include foreign companies that are subsidiaries of foreign trusts or foundations and where residents hold interests in such trusts or foundations. This inclusion was proposed in the draft bill and debated at length.

2. "Domestic treasury management company" requirements simplified

  • The domestic treasury management company regime was introduced to encourage South African listed multinationals to relocate their treasury operations to South Africa. The regime provides relief from the normal rules on the taxation of foreign exchange gains and losses.
  • The TLAB proposes to make the regime more effective by removing the requirement that a domestic treasury management company is to be incorporated or deemed to be incorporated in South Africa.

3. Prohibition of deduction of royalty payments refined

  • The current section 23I essentially limits residents from claiming a deduction for royalties paid to non-residents for intellectual property developed in South Africa. However, royalties paid to CFC may be claimed as a deduction if the royalty income is fully imputed back to South Africa.
  • Section 23I was never meant to be overly restrictive and the TLAB proposes that this section not apply if the income of the CFC is deemed to be nil due to the high-tax exemption. Effectively, royalty payments to CFCs that are in a high-tax jurisdiction (at least 21%) should be fully deductible.

Individuals and trusts

1. Foreign employment income exemption narrowed

  • The initial repeal proposed in the draft bill of the foreign employment exemption has been replaced with a narrowed exemption, and with a later effective date of 1 March 2020.
  • The first ZAR 1 million of foreign remuneration would be exempt from tax in South Africa if the individual is outside South Africa for more than 183 days, including being outside South Africa for a continuous period of at least 60 days during a 12 month period.

2. In duplum rule does not apply in certain circumstances

  • The in duplum rule provides for interest and finance costs to stop accruing when the total of these amounts equal the capital portions of the debt.
  • The TLAB proposes that the in duplum rule will no longer apply in various anti-avoidance provisions countering the use of zero or low-interest loans.
  • For example, loans by employers to employees could be taxable fringe benefits if the interest on the loans is less than the official rate of interest (currently, 7.75%). The taxable benefit of a zero interest loan to be included as "remuneration" is the loan amount multiplied by 7.75%. The effect of the amendment means the value of the taxable benefit is not limited to the capital amount loaned to the employee.

3. Scope of section 7C widened and employee share schemes excluded

  • Zero or low interest loans provided to trusts are subject to an anti-avoidance provision (section 7C) where the rand difference between actual interest and the official rate of interest (7.75%) could result in a deemed donation by the lender.
  • This provision currently applies to loans provided to a South African trust by (i) a natural person that is a connected person in relation to the trust; or (ii) a company, at the instance of that natural person, and that natural person holds at least 20% of the equity shares in the company.
  • The scope of the provision will be widened to include zero or low interest loans to companies that are connected persons in relation to the trust. This is to target the common circumvention where loans were made to companies owned by trusts, instead of to the trusts directly.
  • Further, where the initial loan claim to the trust is transferred to another natural person, the transferee of the loan claim is deemed to have made a loan to the trust or company on the date the loan claim was acquired from the transferor. This was also a common circumvention where the loan was transferred to another individual to break the link.
  • This provision is subject to various exclusions, and a new exclusion will be added in recognition of loans made to trusts used to facilitate employee share schemes.

4. Trust "conduit rules" clarified for employee share schemes

  • The trust conduit rules essentially provide for capital gains realised by a trust which is vested in a beneficiary to be taxed in the hands of the beneficiary and not in the trust.
  • An amendment introduced from 1 March 2016 provided for the above rule not to apply when a capital gain vests in a beneficiary by reason of the (i) vesting of a restricted equity instrument (REI); (ii) exchange of a REI for another REI; or (iii) a disposal of the REI in terms of a restriction at less than market value.
  • The amendment resulted in the anomaly of the gain potentially being subject to CGT in the hands of the trust, and also income tax in the beneficiary employee.
  • The TLAB clarifies the above to provide that should the gain be taxed as income tax in the hands of the beneficiary, the gain is to be disregarded in the hands of the trust.