South Africa introduced the dividends tax on 1 April 2012. The withholding tax regime was widened, with the introduction of interest withholding tax (15%) from 1 July 2013, whilst the withholding tax on royalties regime was to be overhauled, and the rate of tax would also increase from 12% to 15% also effective 1 July 2013.
The Minister of Finance announced in the 2013/14 Budget Speech that the effective date for the new interest and royalty withholding tax regimes will be delayed until 1 March 2014. The 2012 draft Taxation Laws Amendment Bill contained certain provisions whereby a deduction in respect of cross-border interest and royalty payments were deferred until the date of payment. These provisions did not form part of the final 2012 Taxation Laws Amendment Bill when it was introduced in parliament for promulgation, and as expected, the provisions were deferred for introduction in 2013 / 14.
South Africa will also introduce a new withholding tax on services from 1 March 2014. It is expected that this tax will be levied at a rate of 15%, with relief provided where a double tax treaty is available.
It is interesting to note that South Africa's double tax treaties provides for a withholding tax to be imposed by the source country in limited instances (for instance, the double tax treaty with India and the double tax treaty with Botswana contain such provisions). Accordingly, South Africa will generally not have the right to impose a withholding tax on cross-border services where a double tax treaty does not provide for such taxation. The reason for this is that the non-resident may be provided with relief under the double tax treaty if it does not have a permanent establishment in South Africa.
Debt and base erosion
The OECD released its initial report on base erosion and profit shifting on 12 February 2013. The report, discusses the key principles that underlie the taxation of cross-border activities, and focuses, amongst others on mismatches in entity and instrument characterisation (hybrids and arbitrage), and related party debt-financing.
The National Treasury took similar preventative measures. The 2012 draft Taxation Laws Amendment Bill contained certain provisions whereby debt would be reclassified as equity in certain instances (i.e. the instrument when reclassified will pay a dividend and not interest).
These new rules were excluded from the final 2012 Taxation Laws Amendment Bill when it was introduced in parliament for promulgation.
As expected, the provisions were deferred for introduction in 2013 / 14. It is proposed in the 2013/14 Budget that certain debt instruments, such as shareholder loans without a date of repayment or profit participation loans will be reclassified as equity.
It seems that the thin capitalisation provisions (dealing with excessive connected party debt) may also be addressed. Under the SARS Practice Note 2, a debt to equity safe harbour of 3:1 existed. South Africa’s revised transfer pricing rules that came into operation for years of assessment commencing 1 April 2012 and thereafter moved away from the safe harbour to an arm’s length test. It is proposed in the 2013/14 Budget that connected party debt be limited so that the interest on this form of debt does not exceed 40 per cent of earnings after interest on other debts is taken into account. It is not clear whether this proposed change may be a new arm’s length test for thin capitalisation purposes, or if it will apply to South African transactions only.
Gateway to Africa
A new cash management gateway regime for African and offshore operations is proposed in the 2013/14 Budget. The new regime should not be confused with the headquarter company regime which was introduced on 1 January 2011, as it serves a different purpose.
In terms of the proposal, a JSE listed company will be entitled to incorporate a South African subsidiary (as intermediate holding company) to hold African and offshore operations. Although the intermediate holding company is a South African tax resident, it will not be regarded as a resident for exchange control purposes, hence does not need approval to invest offshore. Other conditions for the new regime will be as follows –
- Transfers from the parent company is limited to R750 million, but additional amounts may be applied for
- Cash pooling, which is generally restricted for exchange control purposes will be allowed – hence, the intermediate holding company may operate as cash management centre
- Intermediate holding company can raise capital offshore, but South African guarantees are not allowed
- Intermediate holding company may elect their functional currencies and may operate foreign currency accounts. It is also considered that these companies may use a foreign functional currency, hence not being subject to South Africa’s foreign exchange gains and loss rules.