In a previous budget review the national treasury emphasised that “fiscal interventions such as taxes are increasingly recognised as complementary tools…”1
21 February 2018 we heard South Africa’s Finance Minister Malusi Gigaba starting off his budget speech by stipulating that “this will be a tough but hopeful budget”. The Finance Minister had a difficult task. Not only did he need to show fiscal prudence, he also needed to present a credible budget that will allay the concerns of rating agencies and foreign investors.
Minister Malusi Gigaba echoed the concerns expressed by Former Finance Minister, Pravin Gordhan last year in respect of deterioration in the global economy and global rating agencies, severe drought affecting the country, rising prices, slow growth of the economy, unemployment, currency weaknesses and so forth. He emphasised the need to stop funding State-owned entities in an effort to curb government spending.
The consolidated deficit is projected to decrease from 4.3% of GDP in 2017/18 to 3.5% in 2020/21.
The 1% VAT rate increase that has been long expected will contribute to ZAR22 billion in additional tax revenue and has been stated as “unavoidable”. The total revenue to be generated by the tax proposals is ZAR36 billion.
- As already mentioned, VAT rate increase to 15% effective 1 April 2018
- Above inflation increases in social grants to relieve the burden on poor households
- No change in the CIT rate and CGT inclusion rate for corporates
- Relief will be provided for lower income individuals through an increase in the bottom three personal income tax brackets and the rebates.
- Continued focus on ensuring multinational companies are paying their fair share of taxes through initiatives such as Country-by-country reporting; curbing illicit financial flows and focus on transfer pricing
- Vat rate increased from 14% to 15%
- VAT on Rye bread and Low GI bread will be imposed at 15%
- Increase in the alcohol and tobacco excise duties of between 6 and 10 percent.
- 52 cent per litre increase in the levies on fuel, made up of a 22 cent per litre, for the general fuel levy and a 30 cent per litre increase in the Road Accident Fund Levy.
- The Carbon Tax Bill, will be implemented from 1 January 2019.
- South African’s will see an increase in the ad-valorem excise duty rate on luxury goods from 7% to 9 %.
- Cellular phones to attract ad-valorem duties at a progressive rate based on the value of the phone.
- A higher estate duty of 25% for estates greater than R30 million.
- Donations tax has increased from 20% to 25% in respect of donations in excess of R30 million.
State owned companies
Government may need to provide financial support to several SOCs which can be done by disposing of non-core assets, strategic equity partners, or direct capital injections. Government will implement some of the suggestions by the Department of Public Works by better utilizing and disposing of the many buildings owned by government.
Free higher education
An allocation of R57 billion for fee-free higher education over the next three years.
Taxes on Multi-nationals
The impact of illicit financial flows remains a focus for National Treasury and key South African Stakeholders.
The Minister emphasised that tax morality remains a crucial component for a healthy democracy. He reiterated the views expressed by the President in the SONA and the intention to establish a commission of inquiry into tax administration and governance within SARS.
Government is expected to respond to the Davis Tax Commission’s report on the tax administration and to introduce draft legislation to give effect to its recommendations including provisions in respect of SARS accountability to the Minister of Finance.
Special economic zones
The Minister has approved six special economic zones that will make qualifying companies subject to a reduced corporate tax rate, and enable them to claim an employment tax incentive for workers of all ages. These measures will promote investment in those manufacturing and tradable services sectors that encourage exports, job creation and economic growth.
1. 2016 Budget Review.
Business General – Brigitte Keirby-Smith
- No change in CIT rate and CGT inclusion rate for corporates.
- Review and refinement of the debt relief rules.
- Refinement of the anti-avoidance rules dealing with share buy-backs and dividend stripping.
Debt relief rules
Significant amendments were promulgated in 2017 to those provisions in the Income Tax Act governing the tax consequences pertaining to various debt relief transactions. Of particular significance, is that these provisions are now much wider in their application and include various debt restructure arrangements, including debt to equity conversions. These amendments were effective for years of assessment commencing on or after 1 January 2018.
In the tax policy documents released as part of the 2018 Budget, it is noted that the revised debt relief rules may result in unintended consequences for taxpayers undertaking debt restructuring transactions. As such, it is proposed that further amendments be made to these provisions to address these concerns.
Share buy-backs and dividend stripping rules
The anti-avoidance rules pertaining to share buy-backs and dividend stripping were enhanced in 2017 to deter these transactions. Broadly speaking, where a share is disposed of and the holder of that share has received an "extraordinary dividend" in respect of such share within a prescribed period, that extraordinary dividend is deemed to be proceeds for Capital Gains Tax purposes or income (where that share is held as trading stock). Further, one of the legislative provisions specified that these anti-avoidance rules would override corporate reorganisation rules thereby preventing taxpayers from stripping dividends out of a target company before undertaking a reorganization transaction.
Also in the tax policy documents, it is noted that these amendments could have resulted in some legitimate transactions and arrangements being impacted. It is therefore proposed that these anti-avoidance rules be reviewed so as to determine their interaction with the corporate reorganisation rules. Further, the anti-avoidance rules dealing with share buy-backs and dividend stripping as they relate to preference shares also require further clarification as these shares are often used to structure Broad-Based Black Economic Empowerment transactions.
Business Financial Sector – Botlhale Joel (Partner) and Kabelo Malapela (Partner)
- Curbing the abuse of the tax relief for collateral arrangements
- Tax treatment of “capital” profits in a collective investment scheme
- Pending relief for exchange item disposed of at a loss due to external market forces
- Certainty on criteria for claiming doubtful debt allowances
- Venture Capital Rules eased to create greater uptake
- Long-term Insurers and risk policy fund
- Special Voluntary Disclosure Programme triggered by Automatic Exchange of Information projected to yield R3 billion revenue for the fiscus.
Curbing abuse of the tax relief for collateral arrangements
If a listed share or bond (SA or foreign) is transferred as collateral (security), the legislation provides for relief from income and securities transfer taxes, provided the arrangement is for a duration of 24 months.
Authorities have become aware of some abuse by foreign shareholders of these provisions. An example of this mischief is seen where a foreign shareholder obtains a loan from its South African resident company, and provides listed shares as collateral for the loan. If under the collateral arrangement, the resident company receives a tax free dividend within the 24 months period, it in turn pays a manufactured dividend (compensation in lieu of the dividend foregone) to the foreign shareholder. This manufactured dividend will not be subject to dividends tax as it is not a true dividend (a true dividend would have been subject to dividends tax subject at a rate of 20% or such lower rate as provided in the relevant double taxation agreement).
Looking at the collateral arrangement, the foreign shareholder and the South African resident company suffer zero tax, i.e. no income tax, no securities transfer tax and no dividends tax. It is therefore proposed that legislation be introduced to curb this abuse.
Tax treatment of “capital” profits in a collective investment scheme
In 2009, specific provisions were introduced in the Income Tax Act to govern the tax treatment of collective investment schemes (excluding property) (CIS) operating on behalf of investors who hold a participatory interest. Generally, income of a revenue nature received by the CIS is taxed in the hands of the investor, provided the CIS distributes these amounts within 12 months from the date of accrual. Amounts of a capital nature, received by the CIS, are however, only taxed in the hands of the investor when they dispose of their participatory interest.
By default, any profits emanating from frequent trades that have been classified as capital by the CIS are also not taxable until the participatory interest holder disposes of its interest in the CIS.
Based on case law, profits emanating from frequent trading should be taxed on revenue account, therefore the proposal is for current provisions to be amended to give effect to this treatment, in spite of the classification by the CIS.
Relief for exchange item disposed of at a loss due to external market forces
There is uncertainty regarding the calculation and treatment of tax losses on an exchange item (for example a foreign debt) when it has been disposed of at a loss due to market forces and not because the debtor is unable to pay.
The Income Tax Act (in section 24I) currently caters for the reversal of an exchange gain or loss previously included in taxable income to the extent that the related exchange item is irrecoverable. However, when an exchange item is disposed of at a loss, due to external market forces, no relief is provided.
It is proposed that some clarification be provided to deal with losses of this nature.
Certainty on criteria for claiming doubtful debt allowances
The Commissioner’s discretion to grant an allowance for doubtful debts in terms of section 11(j) of the Income Tax Act, was removed in 2015. This was to make way for a criteria to qualify for the claim to be provided under public notice to be issued at a future date. This criteria has to date not been provided and the public notice, not issued. To provide certainty and ease of reference it is proposed that the criteria rather be included in the Income Tax Act.
Venture Capital Rules eased to create greater uptake
Government has implemented the tax incentive regime relating to the venture capital companies to encourage investment in the small and medium size entities 8 years ago and this has shown vast growth over the last 2 years. Section 12J of the Income Tax Act allows for a deduction of the investment amount actually incurred in the acquisition of the venture capital shares.
It is proposed that the rules applied to the retroactive withdrawal of a venture company status of a company as well as the rules relating to the investment income thresholds are reviewed to lighten the administrative and technical burdens of this incentive regime. This will result in an uplift in the uptake of this incentive.
Long-term Insurers and risk policy fund
The introduction of the solvency assessment and management (SAM) framework and the new Insurance Act (still to be promulgated) triggered an array of tax amendments for the long-term insurance industry. For example, amendments for the establishment of a fifth fund i.e. the risk policy fund, which were largely effective from 2016. It is proposed that the effective dates of recent amendments affecting the risk policy be aligned to the date of the introduction of the fund.
Special Voluntary Disclosure Programme triggered by Automatic Exchange of Information projected to yield R3 billion
In the prior year, the Automatic Exchange of Information (AEOI) reporting for South African Financial Institutions was extended to include Common Reporting Standards (CRS). In the 2017 Budget Speech and with the then impending implementation of CRS, the Minister of Finance announced that South Africa remained committed to the AEOI initiative between tax authorities which commenced in September 2017.
In the build-up to implementation of CRS, National Treasury promulgated the Special Voluntary Disclosure Programme (SVDP) with effect from 1 October 2016. The purpose of the SVDP was to provide taxpayers that own offshore assets and income to disclose these to the SARS and SARB prior to the implementation of the next phase of the AEOI and CRS.
The Minister of Finance has now announced that the SVDP has attracted 2000 applications for disclosures of foreign assets to SARS, which are expected to yield revenue of about R3 billion by the end of March 2018. Work continues on the review of remaining applications.
Business Incentives – Marinda Fourie
- Approval of six Special Economic Zones (“SEZ”).
- Removal of complexity under R&D tax incentive scheme under consideration.
- Venture capital tax incentive boosts investments in start-ups.
- Reducing the write-off period for electronic communication lines and fibre optic cables.
The theme from the Medium-Term Budget with regards to tax and business incentives was that the programs are under review by the Department of Planning, Monitoring and Evaluation. This theme appears to remain in place as the process of reviewing these programs is not as yet finalized.
In his Budget Speech, the Minister of Finance notes that he has approved six SEZ’s that will allow qualifying companies to benefit from a reduced corporate tax rate and enable them to claim an employment tax incentive for workers of all ages. Other incentives available in these SEZ’s include potential industrial policy project tax incentives as well as the benefit of a customs-controlled area.
The aim is to promote investment in manufacturing and tradable services sectors that encourage exports, job creation and economic growth.
A welcomed proposal is that the unnecessary complexities currently experienced in the tax incentive for R&D will be considered for removal. This will hopefully align the qualifying criteria for the R&D tax incentive with those of developed countries.
The venture capital tax incentive provides a tax deduction for shares purchased in a venture capital company. The uptake of this tax incentive has increased significantly, and there are currently more than 90 registered venture capital companies with total investments of R2.5 billion. Having said that, it is noted that various administrative and technical issues are preventing an increased uptake of this incentive, and as such, it is proposed that the legislation be reviewed and amended to address these obstacles.
Telecommunication infrastructure upgrades from copper to fibre optic cables are under review to align the tax system with technological advances and international practice. In this regard, it is proposed that the period over which electronic communication lines and fibre optic cables are written off be reduced.
The window period for the industrial policy project tax incentive was extended to 31 March 2020, notwithstanding that the R20 billion budget is fully subscribed. No mention of negotiations to increase this budget are noted. The Black Producer Commercialisation Programme, a sub-component of the Comprehensive Agricultural Support Programme administered by the Department of Agriculture, Forestry and Fisheries, also received special mention in the Minister’s Budget Speech as around R582 million is earmarked to fund the sector’s efforts to leverage capital for the commercialisation of black agricultural producers.
International Tax – Ide Louw
- Increased measures to mitigate the impact of illicit financial flows
- Cryptocurrencies and the impact of the digital economy on business models
- Revisiting the use of offshore trusts to circumvent the South African Controlled Foreign Company rules
Combating illicit financial flows remains of paramount importance to a number of key South African stakeholders including the National Treasury working in close cooperation with the South African Revenue Service, the Reserve Bank and the Financial Intelligence Centre.
Measures that have been introduced to curb illicit financial flows include the introduction of Country-by-Country Reporting (first reporting is due 28 February 2018), entering into various exchange of information agreements, and revenue authorities across Africa cooperating through the African Tax Administration Forum.
In his Budget Speech, the Minister specifically notes that policy measures to deal with transfer pricing and base erosion by multi-national companies will be implemented and will continue to be tightened. Further, measures to approve material cross-border transactions involving state-owned entities will be put in place. Taxpayers can therefore expect continued scrutiny from the South African Revenue Service with regards to transfer pricing. Taxpayers therefore need to ensure that their transfer pricing policies align to their operating models.
The digital economy and its impact on business models is specifically mentioned in the Budget Speech and one can therefore expect more certainty around the use and taxation of cryptocurrencies such as Bitcoin.
Of specific concern remains the use of offshore trusts. In 2017, draft amendments were proposed aimed at combatting the use of offshore discretionary trusts to circumvent the South African controlled foreign company (“CFC”) rules. The draft amendments were, however, withdrawn since it is unclear how the CFC imputation should be determined in relation to discretionary beneficiaries. The Minister notes that these measures will be revisited.
Other international tax matters raised include:
- Revisiting the transfer pricing secondary adjustment (i.e. the deemed dividend treatment);
- Reversing exchange difference for exchange items disposed of at a loss;
- Reviewing the definition of “international shipping income”;
- The taxation of non-resident short-term insurers operating in South Africa through a branch; and
- The rules concerning South African sourced interest paid to non-resident beneficiaries of a trust.
Individuals – Elizabete Da Silva
- A below inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets
- The proposals in this years’ budget was aimed at ensuring minimum impact on the lower income households
- No adjustment to the maximum marginal individual tax rate of 45%
- No adjustment to the CGT inclusion rate for individuals
- Estate Duty and Donations Tax rates increased from 20% to 25% for estates and donations, respectively, above R30 million
Personal income tax
As expected, there were minor changes announced in respect of personal income taxes in the 2018 Budget proposals. The progressive individual tax rates were subject to below inflationary adjustments, with these adjustments being limited to the bottom three tax brackets. This will result in a revenue contribution of R6,8 billion.
Government is focused on introducing the national health insurance (NHI) and therefore the reduced increase in the medical tax credits over the next three years will help to finance the roll-out of this programme. The NHI is still in its early stages and will require further debate among all stakeholders, before it can even be considered. Further, medical tax credits in respect of contributions to medical funds and additional medical expenses will be apportioned in respect of joint contributors so as to avoid duplicate tax credits being claimed.
Other changes include the further alignment of retirement reforms and the removal of fringe benefits tax on loans at beneficial interest rates for low cost housing.
The Minister of Finance also announced an increase in Estate Duty from 20% to 25% for estates with a dutiable value exceeding R30 million. This increase will come into effect on 1 April 2018. Aligned to this is a similar increase in the rates of Donations Tax from 20% to 25% for donations exceeding R30 million.
Tax Administration – Mmangaliso Nzimande and Althea Soobyah
- Tax exempt dividends will no longer require submission of a return
- Correction to VAT invoices will no longer be regarded as a criminal offence
- Provisions relating to the commencement of an audit to be amended to include a formal notification
- These changes are expected to form part of the 2018 Revenue and Taxation amendments
Tax Administration Act changes
Currently a return is required to be submitted to SARS when a dividend is declared by a taxpayer, even in the case of an exempt dividend. This creates an unnecessary administrative burden on both the taxpayer and SARS in having to administer these returns. These provisions will be repealed in instances where the dividend is exempt from tax and this will alleviate the respective burden on the tax payer and SARS.
Under the current dispensation, any correction to a tax invoice in order to claim input tax is seen as an offence under the VAT Act even in legitimate cases where an error is made on a tax invoice. A legitimate correction to a tax invoice is often required but is not allowed under the VAT Act which prevents vendors from claiming valid input taxes.
Correction of tax invoices will no longer constitute an offence where the correction relates to rectifying a legitimate error.
The Tax Administration Act currently requires an auditor to provide a taxpayer with reports on each stage and on completion of an audit but does not make provision for notification at the commencement of audit. The provisions relating to the audit procedures in the Tax Administration Act will be amended to include the notification of commencement of an audit.
Indirect Tax Customs & Excise – Erasmus Theron
- Increased “sin taxes”, luxury ad valorem excise duties and other levies
- Discouraging consumer habits through increased environmental levies
- Date of implementation for increased excise duties and other levies: 1 April 2018
- Introduction of Carbon Tax from 1 January 2019
Excise duties and levies
The general increase in excise duties applicable to the tobacco and alcoholic beverage industries (“sin taxes”) were expected and are aligned with policy considerations. The increase in excise duties on tobacco products is set at 8.5% while those on alcohol range from 6% to 10%.
The 2018 Budget has revived the approach to taxing luxury goods as a further measure to address the budget deficit. These luxury goods will be subject to an ad valorem excise duty that will be increased from the current 5 per cent and 7 per cent duty rates to 7 per cent and 9 per cent, respectively. The classification of cellular telephones will be updated to include “smart phones” so as to ensure they attract ad valorem excise duties.
Government will also consult on a proposal to replace the flat rate for cellphones with a progressive rate structure based on the value of the phone. The maximum ad valorem excise duty for motor vehicles will be increased from 25 per cent to 30 per cent. The impact of this increase will only affect vehicles with a retail value of R1 300 000 and above, whereas the previous ad valorem excise duty rate affected vehicles with a retail value of R1 100 000 and above.
To reduce litter and dissuade consumers from buying plastic bags, the plastic bag levy will be increased to 12 cents per bag, an increase of 50%.
The environmental levy on incandescent light bulbs will increase from R6 to R8 to incentivise more energy-efficient behavior.
The vehicle emissions tax will be increased to R110 for every gram above 120 g CO2/km for passenger vehicles, and R150 for every gram above 175 g CO2/km for double cab vehicles.
The general fuel levy will be increased by 22c/litre and the Road Accident Fund levy by 30c/litre.
Working with the Department of Environmental Affairs, Government intends publishing a policy brief to broaden the scope of environmental fiscal reform, to explore fiscal and regulatory measures to protect the environment and promote the sustainable use of limited resources.
The introduction of Carbon Tax is expected to assist South Africa in meeting its commitments to reduce carbon emissions. National Treasury published the Second Draft Carbon Tax Bill in December 2017, inviting written comments to be submitted on or before 9 March 2018. The bill is expected to be enacted before the end of 2018 and Government proposes implementing the tax from 1 January 2019.
Indirect Tax VAT – Leon Oosthuizen
- The Value-Added Tax (“VAT”) rate will increase from 14% to 15% effective 1 April 2018.
- 35 days to implementation for all VAT vendors.
- In addition to zero rating of basic food items, vulnerable households will also be compensated through an above average increase in social grants.
- Draft VAT regulations will be updated to cover foreign businesses selling electronic services to South African consumers.
An increase in the South African VAT rate has been expected for many years. Due to the impact that an increased VAT rate has on the poor and its political sensitivity, Government has avoided this option for as long as possible. However, given the current revenue deficit, this did not allow for any further delay. A VAT rate increase is the only tax rate increase that generates significant revenue for Government. In this regard, a 1% increase (from 14% to 15%) is expected to generate an additional R22 billion in tax revenue.
The last time that the VAT rate was increased was back in 1993, some 25 years ago. It should also be noted that the South African VAT rate will, even after this increase, remain one of the lowest VAT rates in the world. As South African vendors are not accustomed with a VAT rate increase, this will cause some real challenges. Adding to this, is the fact that the rate increase is effective 1 April 2018. VAT vendors therefore have a mere 35 days to prepare for this event.
As noted above, the VAT rate increase will have a major administrative impact and vendors will, in a very short period of time, need to assess the impact and make the necessary changes. The most important changes that need further consideration include:
- Changes to accounting systems;
- Changes to tax invoices;
- Changes to product labelling and price lists;
- The impact on existing contracts; and
- Supplies that spans the effective date of the increase.
Furthermore, even small businesses not registered for VAT or businesses making exempt supplies will need to consider the impact of the rate increase on their expenses. These businesses may need to increase their prices to cover the additional costs they will incur as a result of the impact of the increased VAT rate on their inputs. Indirect expenses to deal with these changes can impact cash flow and budgets that have already been set for the year ahead and will need to be carefully evaluated by businesses as well.
Indirect Tax Sugar Tax – Erasmus Theron
- The Health Promotion Levy (HPL) will be levied at a rate of 2,1c/gram of the sugar content that exceeds 4g/100ml.
- Sugary beverages liable to the Health Promotion Levy include flavored water, soft drinks and syrups/concentrates for making such beverages.
- Date of implementation: 1 April 2018.
Health Promotion Levy
With reference to the Summary of the national budget for Indirect Taxes it is estimated that this new levy will bring in R1.9 billion, when it becomes effective on 1 April 2018.
All sugary beverages, imported into, or manufactured in, South Africa, which are subject to the HPL are set out in Section A of Part 7 of Schedule No. 1 to the Customs and Excise Act No. 91 of 1964, and all levies collected in terms thereof will accrue to the National Revenue Fund for general government expenditure. It is noted, however, that a policy brief will be published on the uses of taxes to encourage healthy choices.
In terms of the current legislation, sugary beverages include beverages with both intrinsic and added sugars, including other sweetening matter. 100% fruit juices and most dairy products are excluded and do not attract the HPL.
Furthermore, as administered in other excise industries, the HPL (the new “sin tax”) will be collected on a duty-at-source (“DAS”) basis, and all manufacturers liable for payment of the HPL must be registered, and have their premises licensed, accordingly. In terms of the draft rules for the HPL, this includes all persons carrying on activities as manufacturers of sugary beverages with a sugar content exceeding 500kg per calendar year.
With 1 April 2018 fast approaching, a number of concerns are yet to be addressed, including registration/licensing requirements and issues relating to the movement of goods. To that end, the South African Revenue Service has indicated that it will present workshops to stakeholders during March 2018.