Tax rate on external companies
External companies are currently taxed at a rate of 33% on income earned domestically, while domestic companies are taxed at a rate of 28% plus a 10% secondary tax in respect of dividends declared. As a result of the impending repeal of the secondary tax charge on domestic companies as of 1 April 2012, it is proposed that the rate applicable to external companies be reduced to 28% as well.
South African investment into Africa
It has been announced that initiatives introduced in the past few years that were aimed at reducing potential double-tax costs when investing into Africa will be scrutinised so as to clarify anomalies, in particular the eligibility of foreign withholding taxes for foreign tax credit relief in South Africa.
It is also proposed that the risk of dual-residence tax status will be removed where the tax in the foreign country is similar to the relevant South African tax.
Another welcome proposal is that South African loans to African subsidiaries which essentially operate as additional share capital, will be treated as shares. This proposal aims to eliminate the transfer pricing concerns which otherwise exist where these loans might be interest-free.
Local managers of foreign funds
Foreign investment funds often rely on the advice of South African fund managers in relation to African fund assets. This potentially raised the risk that such funds might be regarded as “effectively managed” in South Africa and therefore taxable here on their worldwide income and assets. It is felt that this risk has deprived local fund managers of foreign investment fund business and has caused such fund managers to relocate abroad in certain instances. It is proposed that legislation be introduced so that these funds are not inadvertently subject to worldwide taxation.
On-going refinements to headquarter company relief
Anomalies in relation to the special rules providing tax and exchange control relief for South African headquarter companies will be addressed. These anomalies mainly relate to transfer pricing and in the context of headquarter companies that rely on foreign currency for their operations.
Dual-listed companies and other offshore reorganisations
In 2011, rollover rules were introduced in respect of certain offshore reorganisations. The purpose of these rules was to provide South African multinational companies with greater flexibility when restructuring offshore subsidiaries. Given the limitations which have been introduced to bring the perceived abuse of section 45 under control, it is proposed that a provision similar to section 45 now be introduced in respect of offshore reorganisations.
In light of the perception that unbundling provisions might be used to shift foreign operations of a local multinational outside the South African tax jurisdiction, it is proposed that the participation exemption will be curtailed if the transaction indirectly strips value from a South African multinational.
Rationalisation of withholding tax on foreign payments
In the absence of any tax treaty protection, international investors are currently subject to a royalty withholding tax charge of 12% and, with effect from 1 January 2013, will be subject to an interest withholding tax charge of 10%. Along with the proposal announced in this year’s Budget speech for the dividends tax to be increased to 15% when it comes into effect on 1 April 2012, it is proposed that the withholding tax rates on royalty and interest income also be increased to 15%. It is also proposed that the procedures in respect of these respective withholding taxes be coordinated in a more streamlined manner.
Cross border cooperation
Notice has been given that SARS will increase its focus on cross-border cooperation.