DRAFT 2013 TAXATION LAWS AMENDMENT BILL (TLAB) and TAX ADMINISTRATION LAWS AMENDMENT BILL (TALAB)

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1 DRAFT 2013 TAXATION LAWS AMENDMENT BILL (TLAB) and TAX ADMINISTRATION LAWS AMENDMENT BILL (TALAB) Standing Committee on Finance Presenters: National Treasury & SARS 24 July 2013

2 Officials National Treasury Ismail Momoniat Cecil Morden Beatrie Gouws Kgaugelo Bokaba Charles Makola SARS Kosie Louw Nathi Nxele Johan de la Rey 2

3 Background 3

4 Introduction and process In the Budget Review, 2013 the Minister of Finance announced certain tax related proposals, to be contained in the following pieces of legislation: Name of legislation Taxation Laws Amendment Bill Tax Administration Laws Amendment Bill Rates and Monetary Amounts and Amendment of Revenue Laws Bill Employment Tax Incentive Bill Waste Water Discharge Charge Bill The Merchant Shipping (International Oil Pollution Fund) Contribution & Administration Bills Gambling Tax Bill Carbon Tax Bill Nature of the legislation Money Bill published Ordinary Bill published Money Bill tabled Money Bill to be published Money Bill to be published Money Bill to be published Money Bill next year Money Bill next year 4

5 Tax Review Committee President announced tax review committee in State of Nation speech a review on tax policies, to be announced by Min of Finance Minister of Finance announced in the 2013 Budget the broad objectives, and appointment of chair Judge Dennis Davis MoF appointed further seven members on 17 July 2013, including and the Terms of Reference (circulated) Mandate to assess our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability, amongst other things Examine overall tax base and tax burden, inc appropriate mix, and sustainability of revenue for current and future priorities Impact on promotion of small and medium enterprises Review of corporate tax system, inc current mining regime and various elements of financial sector 5

6 Key issues in draft 2013 TLAB 1. Does not include rates and threshold announcements, as there are covered by Rates and Monetary Amounts Bill 2. A beneficial tax regime for companies that locate in Special Economic Zones approved by the Minister of Finance. 3. Proposed incentives to revitalise the maritime sector in South Africa through implementation of an attractive tax regime (in addition to issues in Merchant Bill) 4. Protecting the tax base from base erosion and profit-shifting through excessive interest deduction and the use of artificial debt through an objective set of rules and limitation rules. 5. Taxing dividends received for services rendered under normal income tax rules (e.g. no Dividends Tax). The company paying the dividend will, subject to certain conditions, be entitled to an income tax deduction. 6

7 Process for 2013 TLAB and TALAB Published 2013 TLAB and TALAB on 4 July 2013 Invited public comments by 5 August 2013 Informal presentation to SCOF and hearings Response doc on submissions end of August Tabling of Bill in late Sept or early Oct 7

8 Key issues on the draft Tlab, continued 6. Uniform system of tax for non-property collective investment schemes and hedge funds 7. As from 1 March 2015, most individuals will be able to qualify for a higher deduction in respect contributions made to South African retirement funds. 8. Proposals to in respect of the annuitisation of provident funds, whilst protecting vested rights of current members. 9. Proposals to ensure that employers will in future be able to assist their low-income employees to acquire houses at below market value without fringe benefit tax being payable by the employee. 10. Requiring foreign e-commerce suppliers to register for VAT, in order to ensure that they compete on equal footing with local e-commerce suppliers. REFER TO EXPLANATORY MEMO WITH TLAB FOR MORE INFO 8

9 Content of TLAB 1. Individuals Retirement savings - contributions Defined benefits valuation Provident fund annuity alignment Bursaries employee relatives Insurance policy alignment Donations to qualified Public Benefit Activities Employer provided low cost housing Dividend character overlap Share schemes 2. Business taxes Base erosion Debt vs. Equity / Shares Limitation of interest deductions Hybrid instruments Deferral of incurred expenditure Special Economic Zones Research & Development Pipelines Cross issue of shares Dividends Biodiversity Certified Emission Reduction Credits 9

10 Content of TLAB 3. Financial sector Investment policies as short-term insurance policies Collective Investment Schemes 4. International Incentive for International Shipping Transport Exist charge interest in immovable property Currency rules Corporate migration share issues CFC Ring fencing of net foreign trade losses 5. Indirect taxes Simplification of VAT registration Digital economy E-commerce foreign suppliers required to register for VAT (also linked to base erosion debate) Other VAT amendment Mineral and Petroleum Royalty regime refinements 10

11 PIT & Savings 11

12 Retirement savings - harmonising contribution incentives (Sections 11(k) & 11(l), para 2(l) of the 7 th Schedule) The current system is too complex resulting in increased costs and administrative burden. The regime also allows some individuals and employers to excessively benefit from the incentive. Govt launched Retirement Reform proposals in 2012 and 2013 Budget, including recent paper on costs. Deep process of consultations with key stakeholders, inc unions, and constituencies in Nedlac First step towards implementing retirement reforms on harmonisation of tax treatment of contributions to, and benefits from, retirement funds Need to reduce complexity of the current system Need to ensure greater equity. 12

13 Retirement savings - contribution incentives (Sections 11(k) & 11(l), para 2(l) of the 7th Schedule) Source Contribution type base % cap Monetary cap Employer taxpayer Employer contribution = fringe benefit = deemed employee contribution Retirement fund Unlimited Unlimited All retirement funds All individual taxpayers The greater of remuneration or taxable income (excl. retirement annuity or lump sum income). 27.5% Maximum of R All retirement funds Rollover of non-deductible contributions & any amount that remains are not taxable upon exit. Contributions include amounts paid towards risk benefits & administration costs. 13

14 Valuation of fringe benefit for DB purposes (Definitions of DC component of a fund", DB component of a fund", "retirement-funding income" in para 1 of the 7 th Schedule & para 12D of the 7 th Schedule) Going forward, any contributions made by a employer to an approved SA retirement fund will be taxable as a fringe benefit in the hands of the employee. With a defined contribution fund (DC), the value of the employer contribution reflects the value of the fringe benefit for the employee. With a defined benefit fund (DB), the value is harder to calculate due to an inherent element of cross-subsidisation across members where the value of actual contributions does not match up with the members benefits. Propose that the value of the fringe benefit with a DB fund be determined through the application of a formula. The formula approximates the increase in value of the annuity and lump sum benefit of the member as a result of one additional year of service, based on the value that the member will be entitled to as a retirement benefit. 14

15 Provident fund post-retirement annuity alignment (The definitions of "pension fund", "provident fund", "retirement annuity fund", "pension preservation fund", & "provident preservation fund" in section 1, and para 6(1)(a) of the 2 nd Schedule) Currently members of provident funds cannot deduct their own contributions from income for tax purposes and are not required to annuitise at retirement, which means members often take entire retirement amount as cash lump sum & many spend it unwisely. Reasons for changes are: - Provident funds to be aligned to other retirement funds so that provident fund members enjoy the same benefits and protection; and - Members are reluctant to annuitise since they lose old age grant if annuity larger than the grant (problem of means-test). 15

16 Provident fund post-retirement annuity alignment (The definitions of "pension fund", "provident fund", "retirement annuity fund", "pension preservation fund", & "provident preservation fund" in section 1, and para 6(1)(a) of the 2 nd Schedule) Propose to: Require provident fund members to annuitise upon retirement. Protect vested rights of existing members -above 55 years (remaining in that fund) by not requiring them to annuitise any retirement savings in that provident fund; and -by not requiring annuitisation in respect of any accumulated savings as at 1 March 2015 & any growth thereon (irrespective of whether member remains in the fund). Raise the de minimus requirement to R (currently R75 000). Govt considering the phasing out of the means-test for the old age grant. 16

17 Bursaries or scholarships to employee relatives (Section 10(1)(q)) Any bona fide bursary or scholarship granted by an employer to an employee or relative of an employee is exempt from income tax subject to certain conditions. Reasons for change are to keep pace with inflation and to recognise the difference in cost between tertiary and basic education requirements. Propose that if a bursary is granted to a relative of an employee: - The employees remuneration may not exceed R (currently R ) during the year of assessment; and - The amount of the bursary or scholarship granted may not exceed R (currently R10 000) in the case of tertiary education, and R in the case of basic education. 17

18 Alignment of the tax treatment of individual based insurance policies (Sections 10(1)(gG), 10(1)(gL) 23(r) & para 12C of the 7 th Schedule) Two types of personal disability insurance cover currently provided: - Income protection (covers actual loss of future income) contributions are tax deductible and pay-outs are taxed. - Capital protection (covers the loss of income-earning capacity, e.g. loss of limb) contributions are not tax deductible and tax-free on pay-outs. The reason for change is that is more equitable and provide for greater certainty if all personal insurance cover be treated equally for income tax purposes. Propose to that in the case of income protection policies there be no deduction for premiums / contributions, and that pay-outs be free from tax for all personal insurance cover. 18

19 Donations to qualified Public Benefit Activities - Rollover treatment for deductible donations (Section 18A(1)) Government provides incentives to encourage donations by persons to certain organisations (e.g. public benefit organisations). Deductible donations are limited to 10% of the taxable income per donor per year of assessment, but any excess donation is permanently lost. The reason for change is that it has become necessary to cater for larger donations. Propose that any excess donations be allowed as a deduction in the subsequent years of assessment (but still subject to the 10% rule in every year). 19

20 Employer provided accommodation low-cost housing (Definition of remuneration factor & para 5 of the 7 th Schedule) There is tax payable on the fringe benefit arising if an employee acquires an asset from an employer at less than the market value. The employee is taxed on the difference between the market value and the consideration paid by the employee. When employers assist their employees with housing (e.g. mining), employers often sell such housing to their employees at less than market value (at cost or below). The fringe tax payable is a barrier to employerprovided housing due to lack of affordability by the employees. Propose that low-income employees (up to R remuneration) not be subject to fringe benefit tax on houses provided by their employers costing up to R , irrespective of how much the employee pays for the house. 20

21 Removal of dividend character overlap (Para (k) of the definition of gross income in section 1 and section 10(1)(k)(i)) Various provisions in the definition of gross income pertain to circumstances where dividend income is received: Some are specific (e.g. dividends for service income) with one generic provision. The exemption from income tax and the application of the dividends tax at 15% is linked to the generic provision. The reason for change is that any confusion that as to which provision should apply where dividends are received to be eliminated so that there is no potential overlap. Propose that a ranking rule be introduced to avoid any potential overlap and to clarify whether dividends received should be taxed as income or as dividends, and therefore subject to the 15% Dividends Tax. 21

22 Share schemes income recognition (Sections 10(1)(k)(dd) & 11(t)) Shares give rise to dividend income (15%) or if disposed of is taxed at a lower rate (CGT) in the hands of an individual (if considered a capital asset). Anti-avoidance rules deal with situations where high-income earners use equity shares (and dividends) as a form of a disguised salary: - Ordinary revenue is triggered when restricted equity instruments are disposed of by employees (or fully vest for their benefit); - Ordinarily dividends are taxed at 15% under Dividends Tax. However, dividends from restricted employee share schemes are taxable as ordinary revenue unless the dividend falls into one of three categories of exceptions. 22

23 Share schemes income recognition (Sections 10(1)(k)(dd) & 11(t)) The reason for change is the focus of the anti-avoidance measure (equity versus non-equity shares) is too narrow. E.g. certain share schemes hold pure equity shares, where the sole intent is to generate dividends for employees without the employees ever obtaining direct control of the shares (disguising salary as dividends). Propose that dividends from (restricted and unrestricted) employee shares and share schemes essentially operate as salary regardless of whether the underlying shares have equity or non-equity features: - The dividend will be included and taxed as ordinary revenue in the hands of the recipient unless the equity instrument has vested; and - The company declaring the dividend will be entitled to an income tax deduction equal to the amount of the inclusion. 23

24 Business Taxes 1. Anti-Avoidance Proposals Measure to prevent base erosion and profits shifting Hybrid Debt Instruments Acquisition debt interest limitation Connected persons debt limitations Deferral of deductions on expenditure between connected person Removal of exemption for dividends applied against deductible financial instruments 2. General Ancillary components to pipelines Tenant construction or improvements on leased land 3. Incentives Special Economic Zones (SEZs) Research & Development tax incentive Oil and gas incentive 4.Financial Institutions and Products Investment policies disguised as short-term insurance policies Simplification for collective investment schemes in non-property investments Deemed ordinary treatment for disposal of participatory interests in a collective investment scheme Cross-issue of shares Deductible donations for land conservation Exemption for certified emissions reductions 24

25 Anti-avoidance Provisions 25

26 Debt versus Shares / Equity: Key commercial features Debt Fixed Claim on Cash Flows. High priority on cash flows/collateral often required. No management control. Fixed Maturity. Shares / Equity Variable claim on cash flows. Low priority on cash flows/no Collateral required. Management control. Infinite/extended life. 26

27 Debt versus Shares: Current General Tax Rules Debt Interest income received by creditor subject to tax at ordinary rates. Interest expense deductible if incurred in the production of income. Repayment of capital amount of debt instrument not taxable nor deductible. Equity/Shares Dividends subject to withholding tax at 15 per cent (under Dividends Tax) Cash dividends: liability in hands of shareholder (subject to certain exemptions, for example, dividends paid to resident companies) In specie dividends: liability in the hands of the payor company (subject to certain exemptions, for example, dividends paid to resident companies) Dividend not deductible by payor Contributed Tax Capital not deductible Return of capital reduces base cost of shares Gain on disposal of shares generally subject to CGT 27

28 Hybrid Debt Instruments Section 8F & 8FA Background The tax law follows the form of the instrument in determining debt vs. equity nature of instrument Encourages some taxpayers to choose a label with consequential benefits (i.e. tax deductions in respect of interest payments on debt) Current anti-avoidance rule merely target instruments with short-term (i.e. 3 year) conversion features and is therefore too narrow 28

29 Proposal Two-fold regime: Rules focusing on the nature of the instrument itself (the corpus) and yield on instrument (interest) Both rules recharacterises the yield as dividends in specie (without recharacterising instrument (i.e. corpus) Recharacterisation on rules focusing on instrument (corpus) apply if: The debt has features indicating that redemption is unlikely within a reasonable period (i.e. 30 years from date of issue); The debt has features requiring a conversion into shares (at the behest of the debtor) The redemption of the debt is conditional upon the solvency of the issuer Recharacterisation on rules focusing on yield (interest) apply if: not determined with reference to a specified rate of interest or the time value of money the yield is conditional on solvency Impact of proposal: no inclusion in income of payee and no deduction for payor 29

30 Exclusions from application of proposal Small business corporations (section 12E) Tier I and II capital: issued by banks (or controlling companies in relation to a bank) or issued to connected persons in relation to a bank to the extent that the debt does not exceed 5 per cent of overall Tier I & II capital, respectively, issued by that bank Any class of instruments issued by Short and Long-Term insurers the redemption of which must be subject to approval by the Registrar (determined in terms of the FSB Act) Issued to connected persons in relation to the above-mentioned insurer if it does not exceed 5 per cent i.r.o of that class of instruments Instruments held by pension or provident fund if the fund Holds all the shares in the issuing company and The shares and the instrument were acquired before

31 Base Erosion and Profit Shifting (BEPS) Arrangements that achieve no or low taxation by shifting profit from one entity or jurisdiction to another. Types addressed in current TLAB 2013: Hybrid mismatch arrangements: Generating deductions without matching income inclusion Impact: reduction of overall tax paid by parties involved Excessive interest deductions Concern with lending with related entity that benefits from low tax regime Creation of excessive interest deductions with no corresponding interest income inclusion Impact: interest deducted against taxable profits from operating companies while income is taxed at lower rate or not at all Use of debt to finance exempt income Claiming a deduction of interest expense while exempting related income G20 Finance Ministers call on the OECD to develop action plan to address BEPS OECD published report on BEPS (Addressing Base Erosion and Profits Shifting; OECD, 2013) SA actively participates in the international debate. The issue of BEPS will also be considered by the recently appointed Tax Review Committee. 31

32 Base erosion and profit shifting (BEPS) OECD Report Key pressure areas: (i) Hybrid mismatch arrangements and arbitrage, (ii) Digital economy, (iii) Related party debt-financing, (iv) Transfer pricing, (v) Effectiveness of anti-avoidance measures, (vi) Availability of preferential regimes for certain activities. Highlights the need for a comprehensive approach (interaction between the pressure areas) 32

33 Acquisition debt and connected person debt interest limitations Sections 12N and 12P Background Acquisition Debt Business can be acquired by either purchase of shares or assets Interest on debt to acquire assets deductible if: Linked to tax-free reorganisation transactions (sections 45 and 47) or Used to acquire controlling share interest (section 24O) Deductions subject to discretionary limitation (section 23K) Connected person debt Interest expense is generally deductible if incurred in the production of income. Reason for change Acquisition debt Excessive debt for funding acquisitions poses a significant risk (taxable profits shifted through interest deductions) Discretionary limitation was intended to be temporary and as information gathering mechanism Connected person debt Debt can be used as base erosion tool: Mismatch created if interest paid to exempt or foreign persons (i.e. deduction/exemption) Mismatch enables taxpayers to over-leverage because of tax benefit of interest deduction 33

34 Proposal Aggregate deductions for interest on acquisition debt and connected person debt (in a controlling relationship) will be limited to: Interest income, plus 40 per cent of adjusted taxable income In determining adjusted taxable income: interest received/accrued, currency gains/losses and CFC net income are excluded; and Interest incurred, capital allowances and additional 75 per cent of rental income is included Interest expense in excess of the limitation will be carried forward for a period of: 6 years for acquisition debt; and 10 years for connected person debt 34

35 Deferral of incurred expenditure between taxable payor and exempt payee Section 23M Background Tax system largely operates on a receipt or accrual basis (for inclusion) and payment or incurral (for deductions) If expenditure relates to long term benefit the deduction is spread over period of benefit Reason for change Receipt/accrual and payment/incurral paradigm largely balanced and ensures overall neutrality for the tax system Neutrality is lost when a payment is made to a tax exempt person Cross-border payments also problematic: foreign payees only subject to withholding taxes on actual payment or when amount becomes payable (as opposed to incurral being the trigger) 35

36 Proposal Deduction of expenditure subject to temporary suspension if: a controlling relationship exists between the payor and payee and payee is exempt the exempt payee (i.e. from normal tax and withholding taxes) Expenditure will be deemed to have been incurred when the expense is actually paid Impact: deduction only allowed on actual payment 36

37 Removal of exemption for dividends applied against deductible financial instrument Section 10(1)(k)(i)(hh) Background Dividends paid by resident companies generally exempt from income tax but subject to Dividends Tax at 15 per cent (subject to certain exemptions) Anti-avoidance provisions: intended at denying exemption where there is: artificial shift of exempt dividend income or a mismatch For example, no exempt from income tax for dividends from share lending arrangements (i.e. manufactured dividends) Reasons for change Current rules do not cover shares held as an offset against the issue of derivatives (e.g. contracts for differences, total return swaps etc.) Company receives exempt dividends which are applied to offset deductible payments i.r.o. a share derivative (Net result is mismatch: receipt or accrual of exempt dividend with dividend applied to cover a deductible payment i.ro. share derivative) Proposal No exemption if dividend is used as an offset against a deductible payments (i.e. where company receiving or accruing dividend incurs obligation to pay dividends where the obligations is determined with reference to dividends received or accrued) 37

38 General 38

39 Ancillary Components to Pipelines Section 12D Background Special depreciation allowances exist for pipelines used for transportation of natural oil, water used for electricity generation and cables for transmission of electricity or electronic communication These allowances introduced to encourage capital investments in energy generation and electronic communications sectors 10 per cent annual depreciation for assets used i.r.o. natural oils and 5 per cent for other assets Reasons for change Pipeline networks include ancillary communication cables (optical fibre) used for transmission of electronic communication relating to pipeline operations Ancillary communication and other related equipment not eligible for depreciation allowance Proposal Depreciation allowance for pipelines should be extended to include ancillary equipment (e.g. communication cables) forming part of such pipelines and transmission lines 39

40 Tenant construction and improvement on leased land Section 12N Background To be eligible for depreciation allowances (especially in the case of immovable property), the taxpayer must generally be the owner of the assets, or have undertaken an improvement pursuant to an obligation incurred under an agreement with the land owner Reason for change No depreciation allowance for tenants who voluntarily effect improvements to make place of business commercially suitable Roman Dutch-Law principle of ownership by accession: permanent improvements/attachments attaches to land and become property of the owner Proposal Provision extended to provide depreciation allowances voluntarily improvement costs incurred by a tenant to leased land or buildings 40

41 Cross-Issue of Shares Sections 24B and 40CA Background Company that issues shares in exchange for the issue of another companys shares is deemed not to have incurred expenditure i.r.o. the share acquisitions (i.e. both companies have zero base cost) However, if company issues shares as consideration for assets the company is treated as having incurred expenditure equal to the market value of the share Reasons for change Nil base cost rule overly broad and has adverse impact on BEE transactions Case Law [C:SARS v Labat Africa (669/10) [2011] ZASCA 157] Removes necessity of having non-expenditure rule within the legislation (rule now exists via judicial precedence) Proposal Zero base cost rule will be eliminated i.r.o. commercially driven transactions involving the issue of shares for assets Companies issuing shares for assets will obtain market value base cost in the assets (if outside tax free reorganisation rules) Labat decision applies in all other contexts 41

42 Incentives 42

43 Deductible Donations of Appreciated Immovable Property Background General dispensation for donations Donations to certain organisations (or Government/certain quasi-government institutions) deductible against donors income Property donations: donation limited to the lower of cost or fair market value of asset (and no CGT on the difference between cost/ market value) Environmental conservation participants: Government created mechanisms to promote biodiversity conservation including fiscal incentives to promote land donations Land declared as national park/reserve with endorsement on title deed for at 99 years lower of cost/fair market value treated as deductible donation Value of deductible donation spread over 10 years Reasons for change Failure to recognise appreciation of value in determining deduction eliminates tax benefit (i.e. on appreciated value) and discourage donations 43

44 Proposal For 99 years endorsements for land conservation, donations of immovable property will be based on lower of market value municipal value (rather than cost) Municipal value limit intended to prevent excessive deductions caused by artificial valuations 44

45 Exemption of certified emission reductions Section 12K Background Act provides exemption for income from sale of certified emission reductions (CERs) Reasons for change the current tax incentive is limited to CERs obtained from CDM projects registered before the 31 December 2012, thus those obtained from projects registered after such date will not qualify for the incentive Proposal Sunset clause During the COP18 meeting held in December 2012, the second commitment period of the Kyoto Protocol which commenced at the beginning of 2013 and ends on 31 December 2020 was adopted It is proposed that the exemption be extended to 31 December 2020 to align with the renewed Kyoko Protocol commitment 45

46 Tax incentives for Special Economic Zones Section12Q Background DTI has identified a lack of targeted tax incentives as one of the hindering factors to the success of Industrial Development Zones Proposal Incentive to support of the DTIs broader initiative to improve governance, streamline procedures and provide more focused support for industry Companies operating within Special Economic Zones (SEZs) (approved by the Minister of Finance after consultation with the Minister of Trade and Industry) will be eligible for a favourable tax dispensation: All businesses operating within approved SEZs will be eligible for accelerated depreciation allowances on capital structures and an employment incentive. Certain companies (carrying on qualifying activities - to be specified by regulations within an approved SEZ to be specified by regulations) will be subject to a reduced corporate tax rate of 15 per cent All SEZs will qualify for VAT and customs relief similar to that for the current IDZs. 46

47 Refinement of the R&D regime Section 12D Background The R&D tax regime provides substantial tax incentives aimed at ensuring that local R&D is globally competitive Under this regime, expenses incurred for purposes of conducting R&D are 100 per cent deductible An additional 50 per cent deduction may be claimed if the R&D is approved by the Minister of Science and Technology Reason for change The adjudication committee has uncovered that the incentives can possibly be claimed in respect of activities that were never intended to fall within the ambit of the regime The language in the provisions also gives rise to uncertainties interpretation 47

48 Proposal Provisions will be streamlined in order to facilitate the adjudication process, particularly for projects in the pharmaceutical (generic medicines and clinical trials) and information and communication technology (ICT) related sectors. This will have he effect that some applications will be denied. 48

49 Oil and Gas Incentive Tenth Schedule to Income Tax Act Background Tenth Schedule provides incentives for oil and gas exploration and production and Offer stability against future tax changes in relation to oil and gas exploration and production Reason for change Recent experience now indicates that the Tenth Schedule is giving rise to certain anomalies that distorts commercial practices Proposal Dividends Tax rate reduced to zero for all dividends paid out of oil and gas income (to align the dividends tax rate for the holders of the newer rights with those of the former OP26 agreements) ONLY OFFSHORE Replace the definition of the production phase with a definition that explicitly includes the development phase Limit cross border withholding in respect of interest to zero, where interest is paid by the oil and gas company to another within the same international group 49

50 Financial institutions and products 50

51 REFINEMENT TO INVESTMENT POLICIES DISGUISED AS SHORT- TERM INSURANCE POLICIES (section 23 L) Background Pure risk insurance premiums are deductible whilst investment contributions are not. At issue is investment policies disguised as risk insurance 2012 TLAB introduced rules to curb deduction for investment policies Investment policies defined with reference to features relevant to the insurer [in line with IFRS 4] Reasons for change Reliance on IFRS misplaced in that IFRS focuses on Insurer whilst tax focuses on policyholder As a result, current tax rules overly inclusive whilst missing some targeted products Proposed amendment: Refocus the anti avoidance provision to features in policyholders hands [i.e. is it an accounting asset or expense for policyholder?] 51

52 SIMPLIFICATION OF TAX REGIME FOR COLLECTIVE INVESTMENT SCHEMES IN NON-PROPERTY INVESTMENTS (sections 10(1)(DA) and 25BA) Background Non property CIS s taxable on a semi flow through basis. i.e. income exempt at entity level if distributed within 12 months; No CGT at entity level; Distributed capital gains exempt CGT only imposed on unit holder level when participant disposes interest. Reasons for change: Capital/revenue distinction not made at entity level [most entities treating their disposals as capital based on participant s level intention] Theoretically, distinction is based purely on entity without regard to participant. Proposal: [Provide a single layer of tax for CISs] Total exemption at entity level [both income tax and CGT] and Participant taxable on distribution as revenue [taxable at IT rates] Preserve original character for scheme repurchases and distribution of participatory interest [and dividends distributed within 12 months] 52

53 DEEMED ORDINARY TREATMENT IN THE CASE OF CERTAIN DISPOSALS OF PARTICIPATORY INTEREST IN COLLECTIVE INVESTMENT SCHEME (sections 1 (definitions) and 9CA) Background NT and FSB seeks to regularise Hedge Funds by moving them into Collective Investment Schemes Act framework Proposed two types of Funds: Retail Hedge Fund [participation by general public] and Restricted Hedge Fund [limited to high end users] Reasons for change Hedge funds are generally engaged in short term derivative strategies and should only be in the ordinary revenue framework of tax Without the changes, the new CIS dispensation would act as character converter for Hedge Funds participants. Proposal Disposal of participation in restricted funds always treated as revenue Disposal of participation in retail fund is capital if held > 3years [always revenue if held for less than 3 years] 53

54 International Tax INTERNATIONAL TAXATION 54

55 INTERNATIONAL SHIPPING TRANSPORT ENTITIES INCENTIVE [Clauses 24(1)(a), (b) and (c); 28(1)(t); 37(1)(a)(g) and(c); 46; and 47] Current position: International shipping transport conducted by SA companies are subject to tax at 28 percent. Net income of foreign shipping controlled foreign companies are exempt if the shipping is conducted outside SA Reason for change: International trend is reduced taxation either through a tonnage tax or a total exemption for shipping activities In view of these trends, the SA 28 percent tax is uncompetitive SA effort to revive shipping industry Proposed change: New regime to exempt international shipping transport companies [Exemption include: Income Tax, Dividends Tax, CGT, and Withholding Tax on Interest] 55

56 EXIT CHARGE ON INTERESTS IN IMMOVABLE PROPERTY Clause 26 Mauritius, Luxembourg, etc. SOUTH AFRICA 100% SA PROPCO 100% 1. Emigrate Current position: Emigrating resident exempt from tax Assumption that immovable property and indirect interest therein remain within SA taxing jurisdiction after becoming nonresident Reasons for change: Through narrow interpretation of DTAs and domestic law, emigrants could possibly permanently avoiding tax on indirect interest in property Equity between normal shares and property shares Immovable property Proposal Immediate exit charge on property shares Bumped up tax cost 56

57 CURRENCY RULES FOR TREASURY MANAGEMENT COMPANIES [Clauses 7(1)(o); 75(1)(b); 81 and 147(1)(h), (i), (j) and (k)] Current position: 2013/4 Budget: Minister announced establishment of exchange control free domestic treasury management companies as part of Gateway to Africa Listed companies eligible for dispensation Reason for change: Align the tax rules to exchange control Without the corresponding tax changes, domestic treasury company would be taxable on currency gains and losses will make SA unattractive as treasury location Proposed amendments: Qualifying domestic treasury companies exempt from tax on currency gains and losses Exemption similar to headquarter company exemption 57

58 REFINEMENT OF PARTICIPATION EXEMPTION IN RESPECT OF FOREIGN DIVIDENDS DERIVED FROM NON-EQUITY SHARES [clause 30] Current position Foreign dividends and capital gains entitled to participation exemption if hold substantial holding in foreign company [ 10 percent equity shares and voting] Foreign dividends entitled to intra-cfc group exemption if the CFCs resident in same country Reasons for change Both the participation and same country exemptions intended for pure equity [not debt] holdings Current wording open to exempting dividends from shares with debt like features Proposed amendments: Express exclusion of dividends derived from shares with hybrid features from the exemption 58

59 SHARE ISSUES IN EXCHANGE FOR FOREIGN SHARES AS A MEANS OF CORPORATE MIGRATION [Clause 137(1)(f)] BEFORE: AFTER: SA Parent Foreign Parent SA Parent Foreign Parent 100% 100% Cross issue of shares SA group Foreign group SA group Foreign group Current position: Disposal of shares in SA group subject to tax However, cross issue of share is tax free Reasons for change: Transaction results in tax free indirect corporate migration Added benefit of participation exemption when SA resident companies dispose foreign shareholding Proposed amendments 59 Deny tax exemption fore issue of shares if in exchange for foreign shares

60 CONTROLLED FOREIGN COMPANIES AND THE WORKING CAPITAL EXEMPTION [Clause 24(1)(i)] Current position Resident is taxable on controlled foreign companies financial instrument income to extent it exceeds 5 percent of receipts and accruals [working capital exemption] Net income of treasury operations and captive CFC always taxable without regard to the 5 percent exemption because of mobile nature of income Reasons for change The calculation of working capital exemption seems to also apply to captives and treasury operations No policy reasons exist for exclusion of part of treasury and captive income Proposed amendments: Working capital exemption narrowed to expressly exclude treasury and captive insurance income 60

61 RING-FENCING OF NET FOREIGN TRADE LOSSES [Clause 59(1)(a)] Current position: Income tax architecture ring-fences domestic tax base against foreign losses i.e. foreign income taxable on a current basis, whilst foreign losses are ringfenced for set-off only against foreign income Reasons for change: Technical wording of ring-fencing provision appears to leave space for setting-off foreign losses against SA passive income Fore example: Foreign rental losses may be used against SA interest income. Proposed amendments: Ring fencing provision to expressly protect domestic base against any foreign losses [both active and passive] 61

62 UNIFORM CROSS-BORDER WITHHOLDING REGIME TO PREVENT BASE EROSION [Clause 93; 103; 104; and 105] Current position: No withholding tax on technical fees SA sourced services only taxable if the foreign entity has a local active business [permanent establishment] or is from a non-treaty country Reasons for change: Technical fees generate local deductions the same as interest and royalties Concerns that some foreign entities do not file returns, despite having permanent establishments in SA [thus escaping SA tax] Proposed amendments: Introduce a new withholding tax on fees for SA sourced services as a means to identify and collect tax from foreign entities with local permanent establishments New tax mainly apply to non treaty partners, with treaty partners merely identified if have permanent establishments or not 62

63 TRANSFER PRICING RELIEF FOR EQUITY LOANS [Clause 88] Current position: Transfer pricing rules applies to connected party outbound financial arrangements (e.g. loans), to ensure that the pricing is at arms length No transfer pricing for equity investments Reasons for change: SA resident often capitalises foreign subsidiaries with long term equity loans for reasons unrelated to tax Outbound equity loans posse little or no risk to SA tax base even if no interest is levied Promote SA as base for foreign expansion Proposed amendments: Transfer pricing relief extended to outbound loans that resemble equity. 63

64 REMOVAL OF SOURCE FOCUS FOR COPYRIGHT AUTHORS [Clauses 28(s) and 154(1)(b)] Current position: Revenue amounts received by authors of copyrights for the foreign assignment or licensing of the copyrights are exempt from tax Reason for change: Copyright blanket exemption is out of sync with the current world-wide taxation and does not take into account the provision of DTA s SA has primary taxing rights in respect of the foreign transfer of copyright by a resident, unless attributable to a foreign PE Royalties received for foreign licensing of copyrights are subject to a residual secondary taxing rights [subject to foreign tax credit] Proposed change: The copyright exemption for copyright authors should be deleted. 64

65 Indirect Taxes INDIRECT TAXES 65

66 Simplification of VAT Registration [1] (Section 23(1)(b); ss(3); s24(5a); s44(3)(e)) Background Compulsory registration may be triggered: (i) if a person makes > R1 m supplies in the preceding 12 months, or (ii) if a person reasonably expects to make supplies of R1 m in the next period of 12 months. In the main, voluntary registration is triggered if a person makes > R50K in a 12 month period (mostly applicable to small businesses) and if a person carries on an activity which is reasonably expected to generate taxable supplies of > R50K in any 12 month period. Reasons for change Compulsory and voluntary registration is beset with problems: (i) SARS has to predict future viability of a business in order to register a person as a vendor; (ii) backdating of VAT registration by SARS often leads to interest and penalties; (iii) law is unclear and inconsistency in application of law; (iv) monetary thresholds for voluntary registration hampers small businesses development 66

67 Simplification of VAT registration [2] Proposal Compulsory registration is streamlined Predictive element associated with the R1 m threshold is eliminated a person that will make supplies > R1 m in terms of a contractual obligation in writing will be allowed to register; Voluntary registration is streamlined 2 types of registration: traditional and fast track VAT registration Traditional registration no monetary thresholds applicable; municipalities, foreign donor funded projects will be allowed to register. For persons other than above seeking registration under the traditional approach, a R5 m expenditure requirement is necessary. Persons under this approach have unlimited access to refunds 67

68 Simplification of VAT registration [3] Fast-track VAT registration No monetary threshold applicable; Persons seeking registration will be allowed to register (easier to register for VAT); Persons under this approach will only be allowed refunds if taxable supplies of R100K is made in a 12 month period SARS can deregister a vendor if the vendor does not make R100K in a 24 month period 68

69 E-commerce VAT registration [1] (Sections 1; 15(2)(a)(vii) & 23(1A)) Background Currently foreign suppliers of e-commerce services to SA customers are not compelled to register for VAT: these foreign suppliers transact wholly over the internet and have no physical presence in SA; SA VAT Act lacks a place of supply rule to allocate taxing rights to SA; The above leads to an interpretative exercise to determine whether or not these foreign suppliers should be registered for VAT with no clear answers; Recipients of e-commerce services are required to self-assess the VAT on supplies received this VAT charge is known as the reverse charge 69

70 E-commerce VAT registration [2] Reasons for change Compliance with the self-assessment nature of the reverse-charge is low; Local suppliers of e-commerce are at an unfair advantage as local suppliers of e-commerce services charge 14% VAT on supplies made to SA customers; Foreign suppliers do not charge VAT on supplies to SA customers and thus enjoy a 14% advantage which allows them to slash their prices 70

71 E-commerce VAT registration [3] Proposal Place of supply rule for foreign e-commerce foreign suppliers added foreign suppliers compelled to register for VAT if: E-commerce services are supplied to (i) a SA resident customer, or (ii) if payment for the e-commerce services originates from a bank registered in SA (in terms of the Banks Act) Foreign suppliers are compelled to register irrespective of the aggregate value of supplies made in a 12 month period; Foreign suppliers allowed to register on the payments basis to streamline administration 71

72 Other VAT amendments [1] Goods imported for oil and gas production VAT relief is granted for mining goods imported to match the current Customs relief Supply of services for contingent consideration A rule to match that of goods is proposed Entertainment supplied on board a flight or ship All entertainment supplied in conjunction with a taxable transport service will be allowed as a deduction Imported goods abandoned, destroyed or damaged VAT relief is granted to match the current Customs relief 72

73 Other VAT amendments [2] Conversion of a share block scheme to sectional title The conversion in its entirety is turned off which means that there is no risk of any vendor claiming an input tax deduction for unit acquired pursuant to the conversion The supply of services by a home owners association The proposal puts sectional title body corporates and home owners associations on par for VAT purposes (i.e. an exemption is granted) Surrendering goods in terms of a credit agreement The surrendering of goods by a debtor is treated the same as the repossession of goods by a creditor for VAT purposes 73

74 Refinements to the Mineral & Petroleum Royalty Regime Objective: to remove any anomalies that have arisen, and to refine and strengthen the current legislation. Three draft amendments: Amending the reporting requirements to reduce the unnecessary compliance burden on taxpayers as they must report to both SARS and National Treasury. Reducing the compliance burden on small business corporations (SBCs) SBCs will no longer be required to register if their gross sales is below R10 million. Reviewing the schedules due to some companies incorrectly interpreting the legislation or the legislation not being sufficiently clear. E.g. a specified condition of 19-27MJ/kg for coal is reintroduced. 74