The Budget Review 2019 (Budget) was released by the National Treasury this afternoon. Chapter 4
and Annexure C of the Budget introduce on a high-level changes to tax policies or tax clarifications that would be implemented in the draft taxation law and tax administration law amendment bills to be circulated mid-2019. In this e-alert, we
discuss some of the notable points in Chapter 4 and Annexure C.
All references to "section" below are to sections in the Income Tax Act (ITA), and to "para" are
to paragraphs in the Eighth Schedule of the ITA.
Under "Business (general)", the proposals include:
The anti-dividend stripping provisions aimed at share buybacks (section 22B and para 43A) are proposed to be amended to curb certain abusive transactions where the target company makes a substantial distribution to
its current shareholder, and subsequently issues shares (at relatively, a reduced value) to a third party. The value of the current shareholder's shares is diluted and the current rules are avoided as the shareholder does not sell its shares
immediately. The proposed amendments will take effect on 20 February 2019.
- Where assets are exchanged for issued shares and the market value of the shares and the assets are not equal, section 24BA provides for a capital gain on the company issuing the shares (where asset value is less than
the share value) or dividends withholding tax in a distribution in specie (where the share value is less than the asset value). Currently, section 24BA does not take into account the impact of any deferred tax liabilities on the
value of the acquired asset. Amendments are proposed to confirm that any difference in value due to the deferred tax liabilities should not be subject to this section. Further, amendments are proposed to take into account the deemed capital gain
arising from the value mismatch in future disposals of the asset by the company issuing the shares. This is to prevent double taxation of the growth in value of the asset being disposed.
- Section 24O allows the deduction of interest where loan funding is used to acquire the shares of operating companies. Amendments are proposed which could potentially exclude interest deductions for debt-funded
capitalisations of newly incorporated companies. Further, the shareholder claiming the interest deduction is required to assess on an annual basis whether it still qualifies for the deduction. This requirement is to be reconsidered if the
shareholder remains a (direct or indirect) controlling shareholder after certain reorganisation transactions.
- Amendments are proposed to clarify the interaction of the corporate rules (sections 41 to 47) which provide tax rollover relief, and the other sections of the ITA.
- The transfer of exchange items and interest bearing assets would be excluded from the application of the corporate rules with the intention that unrealised gains should be triggered in the transferor companies. This could potentially have
significant effect on the transferor companies.
- The various anti-avoidance provisions throughout the corporate rules would be streamlined to avoid double taxation and punitive effects.
- A deemed capital gain would arise where a company leaves a group but retains an asset acquired within six years using the corporate rules. The capital gain is deemed to occur in the year of assessment in which the degrouping takes place. The
degrouping of controlled foreign companies (CFC) in sections 9D and 9H are deemed to take place in a year of assessment which starts and ends on the same day. Amendments are proposed to harmonise these provisions.
- Certain corporate rules require companies to be deregistered within 18 months of the relevant transaction. Amendments are proposed to section 41 to include deregistrations by operation of law.
Under "Business (financial sector)", the proposals include:
Various inconsistencies in the current real estate investment trusts (REITs) would be clarified, including on the definition of rental income as applied to foreign exchange differences and the application of the
corporate rules. Further, the regulation and taxation of unlisted REITs that are widely held or held by institutional investors would also be considered.
Under "Business (incentives)", the proposals include:
The section 12J venture capital regime is again in the spotlight this year as various anti-avoidance rules are being circumvented. Amendments are proposed to address the abuse. However, there is no information in the
Budget on the mischief targeted.
Under "International Tax", the proposals include:
The high-tax exemption threshold currently stands at 75% of the South African corporate income tax rate, or effectively 21%. The Budget proposes to reduce the exemption threshold in light of worldwide trends of
reducing corporate income tax rates.
- Amendments are proposed to section 9D to address schemes which circumvent the anti-diversionary rules where CFCs (that are part of a group) are interposed in the supply chain between South African connected parties
and unconnected non-resident customers or suppliers.
- Amendments are proposed to require domestic treasury management companies to be incorporated in South Africa, as this is a requirement for exchange control purposes.
- The broader definition of "permanent establishment" in the ITA would be reviewed to determine whether the definition should be replaced with the narrower definition used in South African double tax agreements.
- The definition of "affected transaction" in the arm's length transaction rules in section 31 could be amended to include transactions between associated enterprises in line with the OECD definition.
- Amendments are proposed to clarify how the general exclusion of "foreign debt" from specific capital gains tax rules would apply to disposals of foreign bonds.
Notable amendments to VAT include:
- New regulations expanding the scope of "electronic services" is anticipated to come into effect on 1 April 2019. These regulations exclude electronic services supplied between companies in the same group. The
requirement that companies are in the same group if 100% of equity shares in each controlled company are directly held by the controlling company in the group is proposed to be revised to take into account shareholding by employee incentive schemes
or empowerment transactions.
- The sale of business as a going concern using the corporate rules is deemed to occur between one and the same person. However, transfers of immovable property in terms of corporate rules may not always involve a
going concern. The VAT Act would be amended to clarify how such transfers should be treated.
- Section 72 provides SARS with discretionary powers to apply provisions relating to calculation or payment or tax or the application of any provision, exemption or zero rating where difficulties, anomalies or
incongruities have arisen. The constitutionality of this section is being considered.
Under "individuals, employment and savings", the proposed amendments include:
- From 1 March 2020, employers of employees that spend more than 183 days outside South Africa (60 days of which are continuous) and who earn remuneration of more than R1 million will be required to withhold employees'
tax on the remuneration paid to them. These employers will be able to reduce the employees' tax withheld and paid to SARS by any foreign taxes withheld on the remuneration.
- Non-resident employers may also be exempt from having to submit monthly EMP201 and bi-annual EMP501 returns to SARS.
- Contributions after 1 March 2016 to provident funds or provident preservation funds if annuitized, and which did not qualify for deductions, would be tax exempt when determining the member's taxable income.
In addition, National Treasury proposes to introduce the OECD's model mandatory disclosure rules for financial
account reporting under the OECD's Common Reporting Standard. Similar penalties for non-disclosure of reportable arrangements could apply for non-compliance with the mandatory disclosure rules.