Further easing of cross-border anomalies
In recent years, several tax amendments have been introduced to make it easier for South African taxpayers to invest in offshore active operations. Further tax amendments in this regard are expected in order to address certain remaining anomalies, including the acceptably taxed exemption.
It is also proposed that certain aspects of the threshold for the participation exemption in respect of dividends received from foreign companies will be attended to.
It appears that we can expect specific transfer pricing legislation in respect of management activities performed by South African head offices for the benefit of their foreign branches.
Finally, the headquarter company relief will also be made more effective and easier to understand. International headquarter company status will now be allowed for companies with shares and debt listed on the JSE.
Gateway subsidiary for treasury purposes
Due to South African exchange control requirements, South African multinationals often use an offshore subsidiary company as the group’s treasury operation in a country where currency can be moved more freely.
In order to incentivise the use of local treasury companies, listed South African multinationals will be allowed to treat a single local subsidiary as a non-resident company for South African Reserve Bank purposes. In addition, such entities will remain South African tax residents, but will be allowed to use their functional currency, rather than necessarily ZAR, as the basis for tax calculations (as in the case of headquarter companies). Government may expand this relief to other companies with legacy offshore operations in future.
See commentary on Exchange Controls elsewhere in this publication.
Streamlining currency taxation
The calculation of currency gains and losses for tax purposes can be highly complex. Following the recent trend, it is proposed that the tax rules be amended to be more aligned with accounting principles to simplify this area from a tax compliance perspective. Specific changes are expected in respect of basic measurement methods for capital gains tax purposes, e.g. spot rates versus weighted average rates.
Reforming the taxation of trusts
Tax amendments are proposed to reform the taxation of trusts during 2013/14. These will include changes to address areas of perceived tax avoidance associated with certain offshore trusts. In this regard, it is suggested that distributions from offshore foundations should be treated as ordinary revenue. This proposal targets schemes designed to shield income from so-called global taxation.
Deferral of expenditure incurred by certain connected persons
The South African tax system generally seeks to tax an amount upon the earlier of receipt or accrual and, similarly, allows expenditure to be deducted upon the earlier of payment or incurral. There is a perception that taxpayers are incentivised to accelerate deductions for expenditure incurred where a connected counterparty lacks immediate or deferred corresponding income. An example referred to is the case of a South African subsidiary that incurs expenditure in relation to a foreign parent company. Under such a scenario it is proposed that a tax deduction be deferred until payment is actually made so as to limit the potential for the perceived abuse by taxpayers.
Controlled foreign company activities
The Budget Review states that an imputation for controlled foreign companies should theoretically apply only in the case of passive income and certain forms of income likely to lead to transfer pricing avoidance (known as diversionary income). Although it is felt that the current rules achieve this result in most cases, the Review submits that certain anomalies have arisen over the years that require clarification. In particular, active offshore research and development activities appear to be inadvertently falling within the controlled foreign company net, as well as international shipping activities, international pipelines, and commodity hedges associated with active operations. It is also a concern for SARS that intra-controlled foreign companies’ insurance premiums are not receiving the same relief as their other payments. These anomalies will be removed.
Removal of source focus for initial copyright authors
Under current tax law, the initial author of a copyright is exempt from tax on a foreign source of income if that income is subject to foreign tax. As this relief was initially enacted many years ago when South Africa taxed only on a source basis, it is felt that it is not relevant under the taxation of worldwide income model that was introduced in 2001. It is proposed that this relief should therefore be removed.
Uniform cross-border withholding to prevent base erosion
It is proposed that the cross-border withholding tax regime on interest and royalties (increased rate) be extended to cross-border service fees as well. However, in many instances this withholding tax should not apply due to tax treaty relief. To facilitate administration, all three sets of withholding tax regimes (interest, royalties and cross-border service fees) will become effective from 1 March 2014. Certain changes previously made to the interest and royalty withholding tax regimes which were to have come into effect on 1 July 2013, will also be deferred to this date.