Employment Share Schemes
Staff equity schemes are usually offered by employers as part of their compensation packages. Equity schemes have been used as a tool to lower overall taxes for executives and other high-income earners. Also in certain cases these schemes may give rise to double taxation in respect of lower-income taxpayers. As such, Government has proposed to introduce a special dispensation to create uniform tax treatment in respect of these equity schemes and the way that employers claim deductions under these schemes will be re-examined.
Restricting Excessive Interest
Debt is a viable financing option in business; however Government is of the view that it is often used as a mechanism to erode the tax base by claiming excessive interest deductions. In order to close artificial and excessive debt schemes, Government has proposed that:
Debt instruments will be re-characterised as shares including their underlying yield if the instruments contain certain features. A particular concern is debt instruments that do not have a realistic possibility of being repaid in 30 years or debt that is convertible into shares at the request of the issuer. Banks and insurers will be excluded from these provisions;
Connected person creditors will be subject to a limitation on the deduction of interest on excessive debt where the creditor is exempt from tax on interest. The deduction will be limited to 40 per cent of earnings and any excessive interest portion will then be rolled over for 5 years; and
Interest on excessive acquisition debt used to fund corporate restructurings will be allowed to be rolled over for a period of 5 years and this will replace the discretionary system applied to interest on discretionary debt.
Share Cross Issues
As an anti-avoidance rule, taxpayers have a zero tax cost when issuing shares in respect of the cross issue for other shares. The cross issue of shares are a common feature in commercially driven share schemes and as such the anti-avoidance rule is impractical. This anti-avoidance rule will be completely revised and it is proposed that the zero base cost rule will either be eliminated or narrowed.
Extension of Depreciation Deduction
Often commercial tenants contractually undertake substantial improvements to immovable property of a lessor, especially under long-term leases. The lessee is unable to claim the depreciation in respect of these improvements as the depreciation deduction is available only to the lessor (as the owner). As such Government has proposed that the ownership test for the deduction of depreciation will be replaced with a new “possession and use” test.
Oil and Gas Incentives
The oil and gas tax incentives were finalised in 2006 in terms of the amendments to Mineral and Petroleum Resources Development Act 28 of 2002. The regulatory approvals are currently being implemented and certain minor issues have emerged that have left new entrants in a worse position than pervious stakeholders. As such Government has proposed to develop a uniform system of fiscal stability agreements.
Mining Dewatering Association
Mining rehabilitation entities are tax exempt, however a comparable tax exemption does not apply to a mining dewatering association. This association restores water levels adversely affected by mining and is funded by several mining houses similar to a mining rehabilitation fund. Government is considering extending the tax exemption status to this association.
Tax Reform of Trusts
Trusts are often associated with tax avoidance schemes and as such Government is proposing new legislative measures that will curb their flexibility and flow-through nature. In particular, it has been proposed that with regard to discretionary trusts taxable income and losses (including capital gains and losses) should be calculated at the trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax free distributions, except where they give rise to deductible payments (which will be included in ordinary revenue).
Cross-Border Withholding Taxes
The new rules applicable to the cross border withholding tax regimes in respect of interest and royalties is proposed to come into effect on 1 July 2013. However the Government has now proposed that the withholding tax regime be extended to include cross border service fees, subject to treaty relief that may apply. As such all three sets of withholding tax regimes applicable to interest, royalties and cross border service fees will only come into effect from 1 March 2014.
Headquarter Companies
Government has proposed to refine the tax relief provided to Headquarter Companies to ensure that it is more effective and easier to understand.
Treasury Operations
South African multinationals often have treasury subsidiaries located offshore, as these offshore entities can freely transfer currency without regulatory approval. As such Government has proposed that listed South African multinationals will be allowed to treat a single local subsidiary as a non-resident for exchange control purposes to encourage treasury operations to remain in South Africa.
Controlled Foreign Company Activities
The current rules relating to the imputation of net income in respect of foreign controlled companies to South African tax residents has led to a number of anomalies. Government has proposed that these anomalies relating to active offshore research and development activities, international shipping activities, international pipelines and commodity hedges associated with active operations be revised.
VAT Registration of Foreign Businesses
Generally goods and services that are imported into South Africa from abroad are subject to value-added tax (“VAT”) at the standard rate of 14 per cent. Government proposes that all foreign businesses supplying e-books, music and other digital services in South Africa will now be required to register as VAT vendors. As such these foreign businesses will be obliged to levy VAT at the standard rate when supplying goods and services to persons located in South Africa and will have to remit the output VAT to the South African Revenue Service.
Streamlining Tax Registration
Government proposes to introduce a single and simplified registration process for multiple tax types in respect of businesses and individuals.
Securities Transfer Tax
Currently only brokers who are members of the Johannesburg Stock Exchange (“JSE”) enjoy exemption from securities transfer tax (“STT”). Other financial intermediaries, including banks, do not receive the same tax exemption. As such it is proposed that the STT exemption be broadened to include certain intermediaries to ensure that transacting on the JSE will be internationally competitive.
Mining Taxation Review
As part of its longer term tax considerations Government has proposed a broader review of the mineral and petroleum royalty regime in order to assess what the most appropriate mining tax regime is to ensure that South Africa remains a competitive investment destination.
Staff equity schemes are usually offered by employers as part of their compensation packages. Equity schemes have been used as a tool to lower overall taxes for executives and other high-income earners. Also in certain cases these schemes may give rise to double taxation in respect of lower-income taxpayers. As such, Government has proposed to introduce a special dispensation to create uniform tax treatment in respect of these equity schemes and the way that employers claim deductions under these schemes will be re-examined.
Restricting Excessive Interest
Debt is a viable financing option in business; however Government is of the view that it is often used as a mechanism to erode the tax base by claiming excessive interest deductions. In order to close artificial and excessive debt schemes, Government has proposed that:
Debt instruments will be re-characterised as shares including their underlying yield if the instruments contain certain features. A particular concern is debt instruments that do not have a realistic possibility of being repaid in 30 years or debt that is convertible into shares at the request of the issuer. Banks and insurers will be excluded from these provisions;
Connected person creditors will be subject to a limitation on the deduction of interest on excessive debt where the creditor is exempt from tax on interest. The deduction will be limited to 40 per cent of earnings and any excessive interest portion will then be rolled over for 5 years; and
Interest on excessive acquisition debt used to fund corporate restructurings will be allowed to be rolled over for a period of 5 years and this will replace the discretionary system applied to interest on discretionary debt.
Share Cross Issues
As an anti-avoidance rule, taxpayers have a zero tax cost when issuing shares in respect of the cross issue for other shares. The cross issue of shares are a common feature in commercially driven share schemes and as such the anti-avoidance rule is impractical. This anti-avoidance rule will be completely revised and it is proposed that the zero base cost rule will either be eliminated or narrowed.
Extension of Depreciation Deduction
Often commercial tenants contractually undertake substantial improvements to immovable property of a lessor, especially under long-term leases. The lessee is unable to claim the depreciation in respect of these improvements as the depreciation deduction is available only to the lessor (as the owner). As such Government has proposed that the ownership test for the deduction of depreciation will be replaced with a new “possession and use” test.
Oil and Gas Incentives
The oil and gas tax incentives were finalised in 2006 in terms of the amendments to Mineral and Petroleum Resources Development Act 28 of 2002. The regulatory approvals are currently being implemented and certain minor issues have emerged that have left new entrants in a worse position than pervious stakeholders. As such Government has proposed to develop a uniform system of fiscal stability agreements.
Mining Dewatering Association
Mining rehabilitation entities are tax exempt, however a comparable tax exemption does not apply to a mining dewatering association. This association restores water levels adversely affected by mining and is funded by several mining houses similar to a mining rehabilitation fund. Government is considering extending the tax exemption status to this association.
Tax Reform of Trusts
Trusts are often associated with tax avoidance schemes and as such Government is proposing new legislative measures that will curb their flexibility and flow-through nature. In particular, it has been proposed that with regard to discretionary trusts taxable income and losses (including capital gains and losses) should be calculated at the trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax free distributions, except where they give rise to deductible payments (which will be included in ordinary revenue).
Cross-Border Withholding Taxes
The new rules applicable to the cross border withholding tax regimes in respect of interest and royalties is proposed to come into effect on 1 July 2013. However the Government has now proposed that the withholding tax regime be extended to include cross border service fees, subject to treaty relief that may apply. As such all three sets of withholding tax regimes applicable to interest, royalties and cross border service fees will only come into effect from 1 March 2014.
Headquarter Companies
Government has proposed to refine the tax relief provided to Headquarter Companies to ensure that it is more effective and easier to understand.
Treasury Operations
South African multinationals often have treasury subsidiaries located offshore, as these offshore entities can freely transfer currency without regulatory approval. As such Government has proposed that listed South African multinationals will be allowed to treat a single local subsidiary as a non-resident for exchange control purposes to encourage treasury operations to remain in South Africa.
Controlled Foreign Company Activities
The current rules relating to the imputation of net income in respect of foreign controlled companies to South African tax residents has led to a number of anomalies. Government has proposed that these anomalies relating to active offshore research and development activities, international shipping activities, international pipelines and commodity hedges associated with active operations be revised.
VAT Registration of Foreign Businesses
Generally goods and services that are imported into South Africa from abroad are subject to value-added tax (“VAT”) at the standard rate of 14 per cent. Government proposes that all foreign businesses supplying e-books, music and other digital services in South Africa will now be required to register as VAT vendors. As such these foreign businesses will be obliged to levy VAT at the standard rate when supplying goods and services to persons located in South Africa and will have to remit the output VAT to the South African Revenue Service.
Streamlining Tax Registration
Government proposes to introduce a single and simplified registration process for multiple tax types in respect of businesses and individuals.
Securities Transfer Tax
Currently only brokers who are members of the Johannesburg Stock Exchange (“JSE”) enjoy exemption from securities transfer tax (“STT”). Other financial intermediaries, including banks, do not receive the same tax exemption. As such it is proposed that the STT exemption be broadened to include certain intermediaries to ensure that transacting on the JSE will be internationally competitive.
Mining Taxation Review
As part of its longer term tax considerations Government has proposed a broader review of the mineral and petroleum royalty regime in order to assess what the most appropriate mining tax regime is to ensure that South Africa remains a competitive investment destination.
