The Business School provides a distinctive approach to learning and development, tailored for both our clients and our people.

Transcription

1 The Business School provides a distinctive approach to learning and development, tailored for both our clients and our people.

2 Africa Desk organising the following Doing business in Africa seminars: - Zambia (March 2013) - Mozambique (August 2013) - Namibia / Botswana (January 2014) - Angola (April 2014) - Cross border debt South African tax issues - Next seminar planned for August / September 2014 Doing Business in Africa Cross-border debt South African Tax issues

3 Cor Kraamwinkel Lauren Lamberti (Prof) Osman Mollagee Associate Director South Africa +27 (0) Manager South Africa +27 (0) Partner South Africa +27 (0)

4 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 1

5 INBOUND LOANS (Foreign lender, SA borrower) OUTBOUND LOANS (SA lender, Foreign borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest VII. VIII. IX. Transfer pricing & Transfer pricing relief Blocked funds Exchange control IV. Interest withholding tax X. HQCs V. Exchange control VI. Loan Capitalisation XI. Domestic treasury companies 2

6 Section 1 Transfer pricing & thin capitalisation Arm s length terms & conditions? Foreign Lender Loan Connected persons Interest SA Borrower Disallowed deduction Deemed loan / deemed dividend? 3

7 Section 1 Transfer pricing & thin capitalisation Foreign Lender Bank (3 rd party) Loan Connected persons SA Borrower 4

8 Section 1 Transfer pricing & thin capitalisation Loan Foreign Lender Critical considerations Not so much? Connected persons What the SA borrower could have Safe harbours Debt:Equity SA Borrower Interest and would have Interest rates borrowed 5

9 Section 1 Transfer pricing & thin capitalisation Could borrower obtain the financing under current market conditions? Would borrower want to fund itself with the stated level of debt? Lender-oriented analysis of current market conditions Borrower-orientated analysis against comparable peers (profitability, leverage, coverage and cash flow) 6

10 Section 1 Transfer pricing & thin capitalisation SARS risk based audit approach (quantum of debt): Debt: EBITDA 3:1 7

11 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 8

12 Section 2 Interest re-characterisation Lender Deemed (tax-free) dividend received Loan Interest Borrower No deduction Dividends Tax liability 9

13 Section 2 Interest re-characterisation hybrid debt instrument (s8f) borrower can convert debt to equity payment conditional upon borrower s solvency no obligation to redeem within 30 years (connected persons) Lender Loan Interest Borrower hybrid interest (s8fa) not determined with reference to: specified interest rate time value of money rate raised when borrower s profits increase 10

14 INBOUND LOANS (Foreign lender, SA borrower) OUTBOUND LOANS (SA lender, Foreign borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III.Deduction-restriction on interest VII. VIII. IX. Transfer pricing & Transfer pricing relief Blocked funds Exchange control IV. Interest withholding tax X. HQCs V. Exchange control VI. Loan Capitalisation XI. Domestic treasury companies 11

15 Section 3 Deduction restriction on interest From 1-Jan-15 Loan Foreign Lender Connected persons Not subject to SA tax Interest SA Borrower Deduction subject to restriction formula 12

16 Section 3 Deduction restriction on interest Subject to s23m Subject to s23m NOT subject to s23m Unrelated Foreign Bank Foreign HoldCo Unrelated Foreign Bank Foreign HoldCo Unrelated Foreign Bank Foreign HoldCo Deposit 1 Guarantee Loan 1 Loan 2 Loan 2 SA Borrower Loan SA Borrower SA Borrower 13

17 Section 3 Deduction restriction on interest Annual interest deduction limitation: All Interest received PLUS: LESS: 40% of current-year adjusted taxable income (taxable EBITDA) Other interest incurred Limit could increase if repo-rate >10% Un-deducted excess carried forward 14

18 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 15

19 Section 4 Interest withholding tax What: 15% WHT From 1 Jan 2015 When: Foreign persons AND SA sourced Incurred by SA resident OR Funds used / applied in SA How: Withholding by payer Date of payment Due & payable Whichever earlier 16

20 Section 4 Interest withholding tax 17

21 Section 4 Interest withholding tax Claiming treaty relief 1 2 Declaration by recipient SARS directive 18

22 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 19

23 Section 5 Exchange control Requires approval (generally Authorised Dealer can approve) Pref shares: seen as loans Permitted interest rates: Foreign denominated loans: - Third party loans: base lending rate +2% - Shareholder: base lending rate Rand denominated - Third party: SA prime plus 3% - Shareholder: SA prime rate 20

24 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 21

25 Section 6 Loan capitalisation Reduction amount S19 and par12a Step 2 - Cash settlement of debt Foreign Shareholders SA Co Step 1 - Cash contribution in return for shares ForeignCo 22

26 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 23

27 Section 7 Transfer pricing - outbound Arm s length terms & conditions? SA Lender Deemed interest income Loan Connected persons Foreign Borrower 24

28 Section 7 Transfer pricing - outbound TP switched off if: SA resident provides to CFC: - financial assistance &/or - licencing of IP CFC has FBE CFC qualifies for high tax exemption Resident company (not HQC) >50% CFC (high taxed jurisdiction) Financial assistance / use of IP 25

29 Section 7 Transfer pricing - outbound TP switched off if: > 10% equity shares & voting rights Long term: > 30 years Redemption conditional upon MV of assets > liabilities Resident company (or group co) >10% Foreign company Long-term Financial assistance 26

30 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 27

31 Section 8 Blocked foreign funds SA tax deduction Amounts can t be physically remitted to SA Year 1 Other income R 2,000 Foreign income R 100 Blocked funds Expenses -R 1,200 s9a deduction allowed -R 100 s9a deduction Taxable income R 800 Effect: Deferral of tax liability Year 2 Other income R 2,000 Foreign income R 100 Blocked funds now remittable Expenses -R 1,200 s9a deduction allowed Nil Taxable income R

32 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 29

33 Section 9 Exchange control Loans require approval of bank Outbound loans need approval similar to general investment to buy shares Set-off not allowed (e.g. against other intra-group debt) Cash must flow 30

34 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 31

35 Section 10 Headquarter companies

36 Section 10 Headquarter companies Foreign Shareholders No WHT tax on SA interest Interest flow Interest flow SA HQ-Co Full access to SA s DTA network (Africa /Foreign) 33

37 Section 10 Headquarter companies Interest income remain fully taxable Foreign Shareholders No Transfer Pricing on backto-back interest SA HQ-Co Interest expense ring-fenced No Transfer Pricing on loans to qualifying investments (Africa /Foreign) 34

38 Section 10 Headquarter companies Foreign Shareholders SA HQ-Co Can operate non-zar functional currency for SA tax purposes (Africa /Foreign) 35

39 INBOUND LOANS (Foreign lender, SA borrower) I. Transfer pricing & Thin capitalisation II. Interest re-characterisation III. Deduction-restriction on interest IV. Interest withholding tax V. Exchange control VI. Loan Capitalisation OUTBOUND LOANS (SA lender, Foreign borrower) VII. Transfer pricing & Transfer pricing relief VIII. Blocked funds IX. Exchange control X. HQCs XI. Domestic treasury companies 36

40 Section 11 Domestic treasury companies SA Group Treasury Co Can operate non-zar functional currency for SA tax purposes (South Africa /Foreign) 37

41 The information contained in this publication by is provided for discussion purposes only and is intended to provide the reader or his/her entity with general information of interest. The information is supplied on an as is basis and has not been compiled to meet the reader s or his/her entity s individual requirements. It is the reader s responsibility to satisfy him or her that the content meets the individual or his/ her entity s requirements. The information should not be regarded as professional or legal advice or the official opinion of. No action should be taken on the strength of the information without obtaining professional advice. Although take all reasonable steps to ensure the quality and accuracy of the information, accuracy is not guaranteed., shall not be liable for any damage, loss or liability of any nature incurred directly or indirectly by whomever and resulting from any cause in connection with the information contained herein. Inc. [Registration number 1998/012055/21]( ). All rights reserved. refers to the South African member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.

42 Cor Kraamwinkel Lauren Lamberti (Prof) Osman Mollagee Associate Director South Africa +27 (0) Manager South Africa +27 (0) Partner South Africa +27 (0)

43 Norman Mekgoe Ibikunle Olatunji Jelle Keijmel Partner South Africa +27 (0) Senior Manager South Africa +27 (0) za.linkedin.com/in/ibikunleolatunji Senior Manager South Africa +27 (0) Trevor Lukanga Senior Consultant South Africa +27 (0) Arthi Muthusamy Senior Consultant South Africa +27 (0)

44 In Africa Member firms in 32 countries with over 8,000 professional staff. We have the largest footprint of professional services on the African continent. All our African firms are locallyowned. Provide a range of professional business advisory services to the public and private sectors throughout the continent. Committed to the development and prosperity of the African people and economies. Doing Business in Africa Cross-border debt South African Tax issues

45 One-stop service Proactively inform relevant parties on new developments Because of helicopter view, identification of other cross-country alternatives Quick responses on general and specific questions Thought leadership through Afritax newsletter, One page tax summaries per African country, country seminars, etc. Doing Business in Africa Cross-border debt South African Tax issues