Administrative issues and other taxes
Aggressive tax planning, base erosion and profit shifting
- SARS has indicated that it will continue its efforts to attack tax avoidance by taxpayers through aggressive tax planning, base erosion and profit shifting. In this regard, South Africa has also committed to the development of a BRICS mechanism to counter abusive tax avoidance, as well as the abuse of tax treaty benefits, incomplete disclosure and fraudulent claims.
South Africa’s participation in the Organisation for Economic Cooperation and Developments (OECD) work in the area of base erosion and profit shifting should prove extremely helpful in assisting SARS with its efforts. Furthermore, changes of significant importance have recently been made to South Africa’s transfer pricing provisions. These changes are effective in respect of years of assessment commencing on or after 1 April 2012. Under the new transfer pricing provisions, taxpayers will be required to make adjustments in their tax returns in respect of transfer pricing, and will no longer be able to wait on SARS to make such adjustments. SARS is expected to continue strengthening their transfer pricing enforcement capacity, by increasing their staff complement. Guidelines on how SARS views the provisions will be helpful to taxpayers.
Taxation of Trusts
- To curtail perceived tax avoidance (including estate duty) government has proposed to introduce legislative measures in respect of discretionary trusts, trading trusts as well as offshore foundations.
It is proposed that the flow-through (conduit pipe) principle will no longer be applied to discretionary trusts but that taxable income or losses (including capital gains and capital losses) will instead be determined at trust level, with distributions to beneficiaries being tax deductible payments to the extent of current taxable income. Where distributions to beneficiaries are claimed as deductible in the trust, the distribution will be taxed as ordinary revenue in the hands of the beneficiary.
Trading trusts (trusts conducting a trade or trusts in which beneficial ownership is freely transferrable) will similarly be taxable at the trust level, with distributions being deductible payments to the extent of current taxable income.
Finally, it is proposed that distributions from offshore foundations be treated as ordinary revenue.
The above proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities.
These proposals will have a significant effect on the taxation of trusts and trust beneficiaries and will be extremely prejudicial. For example, the income exemption enjoyed by a beneficiary on interest that flows through a trust will not be available. Also a capital gain in the trust will have a 66.6% inclusion rate (compared to a 33.3% inclusion rate for an individual beneficiary), and the income will be taxable in the hands of the beneficiary as ordinary income and not as a capital gain. If this new regime is to be introduced, it seems that there should be similar provisions to those that allowed the transfer of residences to beneficiaries without incurring any immediate tax consequences in order to prevent prejudice to beneficiaries.
As regards to distributions from offshore foundations, it is unclear what type of entity would qualify as an offshore foundation and whether the proposed amendments would apply equally to capital distributions made by these entities.
As the proposed legislative changes are to be introduced to guard against perceived tax avoidance, it may very well be that these changes, once introduced, would target specific transactions / entities.
- Refinements to the penalty provisions and relief for bona fide errors are proposed. No further detail has been provided regarding the nature of the refinements.
This proposal is welcomed as the present provisions for understatement penalties are onerous without the ability of taxpayers to apply for a reduction.
Streamlining registration and filing
- It is envisaged that a single registration process for multiple tax types will be introduced to simplify registration for all businesses. A simpler company income tax return form will also to be introduced for smaller businesses.
Tenders and tax compliance
- An automated tax clearance certificate process is currently being tested by SARS with implementation expected later this year. Once introduced, it is expected that the system will allow for real-time tracking of the tax compliance of the person who tendered for government contracts.
- The national gambling tax, applied at a rate of 1%of gross gambling revenue is to be implemented by the end of 2013.
Tax policy research projects
National Treasury is to undertake the following research during 2013/14:
- Review the VAT treatment of financial services and VAT apportionment within the financial sector
- Explore a sustainable framework for financing local government
- Assess the effectiveness of various tax incentives
- Investigate the taxation of alternative transport fuels such as liquefied natural gas and liquefied petroleum gas
- Review the taxation of various innovative financial instruments.