Introduction Tax Desk Book SOUTH AFRICA Bowman Gilfillan CONTACT INFORMATION: Wally Horak Aneria Bouwer Bowman Gilfillan Cape Town: SARB Building, 60 St Georges Mall, Cape Town Johannesburg: 165 West Street, Sandton 0214807800 / 0116699000 w.horak@bowman.co.za www.bowman.co.za 1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.) Taxes imposed in South Africa ( SA ) include direct tax such as income tax, donations tax, capital gains tax ( CGT ), Secondary Tax on Companies ( STC ) and indirect taxes such as Value Added Tax ( VAT ), securities transfer tax ( STT ), Transfer Duty, Estate Duty, Skills Development Levies ( SDL ), Unemployment Insurance Fund ( UIF ) Contributions and Customs and Excise Duties. Direct taxes: Income tax, Donations Tax, STC and CGT are imposed in terms of the Income Tax Act No 58 of 1962 ( the ITA ). Withholding taxes such as a withholding tax on royalties, and a withholding tax on the disposal of immovable property by nonresidents, are also imposed in terms of the ITA.
SA applies a residence based income tax system, in terms whereof SA residents are taxed on their worldwide income, and non-residents are subject to income tax on income from a SA source, or a deemed SA source. Income tax is imposed on the taxable income of a person, which includes a natural person, a company or CC, a trust, an insolvent estate and the estate of a deceased person, but not a partnership. Donations tax is imposed in respect of the gratuitous disposal (including certain deemed disposals) of any property by a SA resident. It is payable by the donor (and not by the recipient of the donation) at a flat rate of 20% on the value of any property donated, subject to certain exemptions. STC is imposed at a rate of 10% on the net amount of dividends declared by any resident company. It is a tax on a company declaring the dividend. The combined effect of the corporate income tax rate and STC is that companies which distribute all of their profits by way of dividends are effectively taxed at a rate of 34.545%. STC is due to be replaced by a withholding tax on dividends ( DWT ) during 2010. In contrast to STC, the new DWT is a tax on the shareholder, although it will be collected by the company declaring the dividend. CGT was introduced with effect from 1 October 2001. The net capital gain realised by a resident from the disposal (or deemed disposal) of a capital asset after such date is included in the taxable income of such person for that year of assessment. Nonresidents are subject to CGT on capital gains arising from the disposal of immovable property situated in SA held by that non-resident or any interest or right in immovable property situated in SA as well as in respect of the disposal by the non-resident of any asset which is attributable to a permanent establishment ( PE ) of that non-resident in SA. SA imposes a withholding tax of 12% on royalties payable to non-residents. Furthermore, a withholding tax is imposed on the disposal of immovable property by non-residents at the rate of 5% for individuals, 7.5% for companies and 10% for trusts. The latter tax is not a final tax. In addition, a Double Tax Agreement ( DTA ) may provide relief from such withholding taxes. Provision is also made for resident employers to withhold employees' tax INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS Calculation of Income/ Profit Taxes
2. How is the taxable base determined? The taxable base is determined by calculating the taxable income of a person, which consists of: Gross income (see below) Less exempt income = Income Less all permissible deductions or allowances Plus all amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as net capital gains; = Taxable income. Gross Income includes, in the case of a resident: the total amount; in cash or otherwise; received by or accrued to or in favour of such resident; during the year or period of assessment; excluding receipts and accruals of a capital nature; and including certain specified amounts, irrespective of whether they are of a capital or revenue nature. Gross Income includes, in the case of a non-resident: the total amount; in cash or otherwise; received by or accrued in favour of the non resident; from a source within or deemed to be within SA; during the fiscal year or period of assessment; excluding receipts and accruals of a capital nature; and including certain specified amounts irrespective of whether they are of a capital or revenue nature. Income is calculated by deducting from gross income any exempt income as defined. Gross income which is exempt under the terms of a DTA is not exempt income as defined. Taxable income means the aggregate of: income less all permissible deductions or allowances; plus all amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as net capital gains.
The ITA does not define when profits will be of a capital as opposed to a revenue nature. The guidelines developed by the courts must be applied to determine the characterisation. In view of the uncertainty as to the characterisation in the case of the sale of shares, a safe harbour provision was introduced under section 9C of the ITA. It provides that the gain from the sale of shares will be deemed to be of a capital nature if the seller held the shares for a period of at least three years. However, there are several conditions for and exclusions from the safe harbour rule. 3. What revenues are included? As appears from the definition of gross income as set out in question 8, a wide scope of revenues are included. The specified amounts referred to in the definition of gross income include: Annuities; Alimony or maintenance payments in terms of a divorce order; Amounts received by virtue of employment, including taxable fringe benefits and gains from the sale of equity instruments; Payments on termination of employment or loss of office; Restraint of trade payments; Retirement fund lump sums or withdrawal benefits; A premium or like consideration for the use or occupation or land or buildings, right of use of plant, machinery or intellectual property; Improvements to land in terms of a lease agreement; Recoupment of amounts previously allowed as a deduction, for example with respect to a capital allowance claimed as a deduction; Dividends; and Certain subsidies. Dividends declared by a resident company generally are exempt from income tax in the hands of the shareholders subject to certain exceptions, e.g. if the dividends were re-characterised as interest under so-called hybrid equity instruments. Foreign dividends are subject to tax unless they qualify for an exemption, for example where the shareholder holds at least 20% of the ordinary shares and voting rights in the foreign company or where the profits from which the foreign dividends were distributed, had already been taxed in SA. In general, interest income is taxed on a yield to maturity basis, subject to various conditions and exceptions.
Specific tax regimes apply to certain industries, such as: Gold mining companies are taxed according to a formula; The taxable income of oil and gas companies is determined in terms of a separate schedule to the ITA; Farming operations, including game farming, are taxed under specific provisions of the ITA; Specific rules may include an amount equal to a proportionate amount of the income of a controlled foreign company ( CFC ) in the income of a resident shareholder (also refer to question 43); Deeming rules may include certain payments in remuneration as defined for employees, labour brokers and personal service providers; and Micro businesses with a turnover of up to R1 million may elect to be taxed on their taxable turnover. 4. What deductions are allowed? Deductions are allowed either in terms of the so-called general deductions formula contained in section 11(a) of the ITA read with section 23(g) thereof, or in terms of specific sections dealing with particular deductions. The general deductions formula provides for a taxpayer to claim as a deduction against income: Expenditure or losses; Actually incurred during the year of assessment; In the production of income; To the extent that such moneys were laid out or expended for the purposes of trade; and Provided such expenditure and losses are not of a capital nature. Over the years, a substantial body of case law regarding the interpretation of the above has developed. In addition to the general deductions formula, provision is made for a number of specific deductions in the ITA, for example: Depreciation allowances with respect to capital assets are generally determined by SARS depending on the type of asset being depreciated; There is a special depreciation allowance for new or used plant and machinery brought into use for the first time by a taxpayer, and used in a process of manufacture. The write-off period is four or five years depending on the nature of the asset; 100% of the cost of manufacturing plant and machinery owned by or acquired and brought into use by a Small Business Corporation ( SBC ) for the first time after 1 April 2001 may be deducted if it is
used directly in the process of manufacture and for the purpose of the SBC s trade. Other qualifying assets acquired by a SBC after 1 April 2005 enjoy a three-year write-off period; There are special allowances relating to, among other areas, mining, gas pipe lines, electricity transmission lines and railway lines, renewable energy and to investors in qualifying venture capital companies; Taxpayers investing in areas which are regarded as urban development zones are entitled to special depreciation allowances for the construction or refurbishment of buildings; A depreciation allowance has recently been introduced in respect of buildings used for commercial purposes, with a 20-year write-off period; and Taxpayers can deduct 150% of their research and development expenditure, if the expenses were directly incurred in scientific and technological research and development activities in SA. Taxpayers may also depreciate the cost of buildings, machinery or plant, utensils and articles used for the purpose of such research and development over three years. 5. What are the major expenses that are not deductible? In terms of the general deductions formula, an expense or loss will not be deductible if it does meet the qualifying criteria as set out in question 10. For example, an expense will not be deductible if: It was not incurred in the production of income; To the extent that such moneys were not laid out or expended for the purposes of trade; or If such expenditure and losses are of a capital nature. Provision is further made for deductions to be non-deductible under specific circumstances, for example: Under certain circumstances payments of royalties or premiums for the use of intellectual property may not be tax deductible to the SA resident if the payment were made to a non-resident. In particular, if the intellectual property had been developed or previously owned by the SA resident, no deduction will be granted. Furthermore, a premium paid to a non-resident for the use of intellectual property will not be deductible unless the non-resident used such intellectual property in a PE in SA; and Interest expense payable to a non-resident lender may potentially be non-deductible in terms of the thin capitalization rules (see question 43).
6. What are the applicable federal rates? SA is a republic, consisting of nine provinces. The taxes as discussed herein are all imposed on a national level and there is no combination of national and/or provincial taxes. Until a few years ago, regional service council levies were imposed to finance the operations of the regional service councils which were responsible for regional infrastructure and regional administration, but these levies were abolished with effect from 1 July 2006. The only local taxes, charges or similar levies currently applicable, are rates and taxes on immovable property, imposed by local municipalities. The corporate rate of income tax (for companies and CCs) is 28% of the taxable income. In addition, STC is imposed at a rate of 10% on the net amount of dividends declared by any resident company. The combination of income tax and STC increases the effective tax rate of a resident company which distributes all of its profits by way of dividends, to 34.545%. A non-resident company is taxed at 33%, but there is no tax on the repatriation of branch profits, nor is STC imposed on dividends distributed by the non-resident company. A trust is subject to income tax at a rate of 40%. Individuals pay tax at progressive tax rates depending on their taxable income. A year of assessment for individuals ends on the last day of February each year. For the 2010 tax year, ending on 28 February 2010, the maximum income tax rate is 40% of the taxable income where income exceeds R525,000 per annum. Specific rates are also applied in terms of special dispensations, for example: A SBC is subject to income tax at progressive tax rates. Annual income of between R1 and R46,000 is subject to income tax at 0%, annual income of between R46,001 and R300,000 is subject to income tax at a rate of 10%, while the income in excess of R300,000 is subject to income tax at a rate of 28%. Only businesses generating no more than R14 million turnover during the year of assessment could qualify as SBCs. A new Turnover Tax system for micro businesses with a turnover of up to R1 million has been introduced with effect from 1 March 2009. Turnover Tax is calculated by applying a tax rate determined at a sliding scale, to taxable turnover as determined in terms of the Sixth Schedule to the ITA. Certain businesses are excluded from the Turnover Tax system.
7. What are the applicable state and/ or other local rates? Not applicable refer to previous question. 8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc? Residents are subject to CGT with respect to the disposal of their world wide capital assets, while non-residents are subject to CGT only in respect of the disposal of SA immovable property (including shares in certain companies owning immovable property), and assets attributable to a PE of the non-resident in SA, unless an applicable DTA provides otherwise. The taxable capital gain realised from the disposal of a capital asset after 1 October 2001 is included in the taxable income of such person for that year of assessment: The capital gain in respect of the disposal of an asset during that year is calculated as the difference between the proceeds (or deemed proceeds) and the base cost of the asset, while the capital loss is the amount by which the base cost of the asset exceeds the proceeds received or accrued; The aggregate capital gain is the amount by which the sum of the person s capital gains for the year exceeds the person s capital losses for that year; and The net capital gain is calculated after the deduction of the assessed capital loss for the previous year of assessment as well as any disregarded losses for the current year. A taxpayer s taxable capital gain is calculated as a percentage of the person s net capital gain for the year of assessment. As a result, the capital gains of individuals and companies are subject to the following effective rates: 14% for companies and CCs; 16.5% for non-resident companies; 10% (maximum rate) for individuals; and 20% for trusts. In general, SA tax legislation does not recognise group taxation. However, provided that certain requirements are complied with, rollover tax relief is made available to group companies in respect of certain inter-group restructuring transactions, namely: Asset for share transactions; Amalgamation transactions; Intra-group transactions;
Unbundling transactions; and Transactions relating to liquidation, winding-up and deregistration. For purposes of rollover tax relief, the definition of a group of companies is limited and non-resident companies and public benefit organisations do not form part of a group of companies as defined. These sections provide for the deferral (and not exemption) of income tax and CGT consequences of qualifying transactions, and are subject to detailed conditions and rules regarding qualifying criteria, trigger events (such as de-grouping within a certain time period), etc. 9. How are operating losses handled? Assessed tax losses of a taxpayer may be carried forward to the succeeding tax year and may increase an existing assessed loss or be set off against taxable income. Losses may be carried forward indefinitely, provided the company continues to trade. A taxpayer may not set off an assessed loss incurred in carrying on a trade outside SA against any amount derived from carrying on trade in SA. It is thus important to distinguish whether a person has merely expanded his local trade abroad or whether a separate trade is being carried on outside SA. Compromises or concessions reached with creditors have the effect of reducing the assessed loss in certain circumstances. A specific ant-tax avoidance provision in the ITA also counters the trading in assessed losses. The ITA also provides for the ringfencing of assessed losses from secondary trades, with the consequence that losses from these secondary trades may not be set off against any income that a taxpayer generates, other than the income from such secondary trades. These activities include: any sport practised by that person or any relative; any dealing in collectibles by that person or any relative; animal showing by that person or any relative; farming or animal breeding, unless that person carries on farming, animal breeding or activities of a similar nature on a full-time basis; any form of performing or creative arts practised by that person or any relative; or any form of gambling or betting practised by that person or any relative. There are also limitations on the utilisation of losses created by transactions taking place between connected persons.
10. How are capital losses handled? An assessed capital loss is calculated in the following manner: o The capital loss in respect of the disposal of an asset during that year, is the amount by which the base cost of the asset exceeds the proceeds received or accrued; o The aggregate cap Territorial Rules 11. What are the residence rules? The definition of a resident includes the following persons: any natural person who is ordinarily resident in SA; any natural person who is not ordinarily resident, if that person is physically present in SA for a prescribed period. This is known as the physical presence test, in terms whereof a person will become tax resident from the beginning of a year of assessment, if such person was physically present in SA: for a period exceeding 91 days during the relevant tax year; for more than 91 days during each of the five preceding years of assessment; and for a total of 915 days during those five preceding years of assessment; and any juristic person, incorporated, established or formed in SA or having its place of effective management in SA. The definition is subject thereto that a person will not be regarded as a resident, if such person is deemed to be exclusively a resident of another state, in terms of a DTA between SA and such other state. 12. Is worldwide income taxed? For residents, the answer is in principle yes, while for non-residents it is no. All resident companies are taxed on gross income, irrespective of where in the world that income is earned. Resident companies are entitled to foreign tax credits for taxes paid or payable offshore, subject to several restrictions. A DTA may provide alternative relief which may be wider in its scope.
Non-resident companies are taxed on income derived from SA sources or sources deemed to be located in SA as well as on capital gains in respect of SA immovable property or rights in immovable property and assets which are attributable to the PE of that company, unless a DTA exists which provides otherwise. Foreign companies carrying on business in SA through a branch may be required to register as external companies in terms of the Companies Act. It will be required to register as a taxpayer and to submit tax returns if it derives income from a SA source, unless a DTA provides for an exemption, eg if the foreign company does not carry on business via a PE in SA. A branch (or PE) of a foreign company is subject to tax at a rate of 33%. There are no withholding taxes on the remittance of branch profits and no STC (or dividend withholding tax) arises. The taxable income of a branch or PE is determined on the basis that income from a SA source will be reduced by any corresponding deductible expenses. However, where a DTA is applicable, the taxable income must generally be determined as if the PE was a separate and distinct person dealing at arm s length with the head office. In practice, SARS applies the transfer pricing guidelines to determine the attribution of profits to a PE. A subsidiary company incorporated by a non-resident in SA is treated as a separate legal entity and will be subject to the same tax provisions as other companies incorporated in SA. In addition, the ITA contains CFC rules, which may function to attribute an amount equal to the net income of the CFCs to the SA resident shareholders. Several exemptions are available, essentially in respect of a substantial business presence of the CFC offshore. The ITA contains several complex provisions dealing with the taxation of currency gains and losses. 13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others? Section 6quat of the ITA provides for a rebate against SA tax for any foreign tax paid in respect of foreign sourced income included in SA taxable income, or for a deduction of foreign taxes to determine taxable income derived by a resident from carrying on any trade. The section contains detailed provisions regarding the application of the rebate or the deduction. As a general rule, a resident will be entitled to a rebate against SA tax, if the following amounts are included in the taxable income of such resident:
Income or a taxable capital gain received or accrued from a foreign source, which is not be deemed to be from a SA source; A proportional amount of the income of a CFC, included in the income of the resident in terms of the CFC rules; or A foreign dividend. The rebate granted will be for an amount equal to the sum of any taxes on income proved to be payable to any sphere of government of any foreign country without any right of recovery. The rebate shall not exceed an amount which bears to the total normal tax payable the same ratio as the total taxable income from all foreign countries bears to the total taxable income. If the sum of foreign taxes exceeds the rebate, the excess may be carried forward to the next tax year and is deemed to be tax paid to a foreign government during that year. The excess may be carried forward for seven years. The provisions of section 6quat dealing with the deduction, provides for a resident taxpayer to deduct taxes on income proved to be payable by that resident to any sphere of government, without any right of recovery by any person. This deduction is allowed in determining the taxable income derived by a resident from carrying on any trade, but the deduction is limited to the total taxable income attributable to the income which is subject to the foreign tax. This section does not apply in addition to any relief under a DTA but it may apply as a substitute for DTA relief. The taxpayer is entitled to elect whether the relief in terms of legislation or in terms of the DTA should apply. Withholding Taxes 14. What are the rates on dividends for withholding taxes? At the time of writing hereof, SA does not impose a withholding tax on dividends, but a company is subject to STC at a rate of 10% on the declaration of dividends. It is anticipated that the new DWT, also at a rate of 10%, will be introduced during the latter half of 2010 and that STC will be abolished simultaneously. STC is a tax on the company declaring the dividend. In contrast, the new DWT will be a tax on the shareholder, although it will be collected by the company declaring the dividend as a withholding tax. The basic legislative framework for the introduction of the dividend tax was enacted during 2008, but certain of the provisions may still be refined prior to the commencement of the new regime. It is anticipated that further legislative amendments will deal with inter alia specific anti-avoidance concerns and with foreign dividends.
The tax will be imposed at a rate of 10% on dividends paid by a company to an individual, a trust or a non-resident. A resident company will be exempt from the tax. Unlike STC, the DWT rate may be reduced in terms of the provisions of a DTA, if applicable. A number of DTAs provided for the reduction of tax on dividends to 0%. SARS has indicated that it will be renegotiating the relevant articles of these DTAs prior to the commencement of the new regime. It is anticipated that all of the renegotiated DTAs will provide for a reduction to 5%, typically if the foreign company holds at least 10% of the capital of the resident company. Provision is made for transitional credits, so that tax paid under the STC regime could be used to offset the dividend tax. 15. What are the rates on royalties for withholding taxes? Payments to a non-resident for the use of intellectual property, e.g. for the use of a patent, design, trade mark or copyright, are subject to a withholding tax imposed at a rate of 12% unless an exemption applied under a DTA.. Furthermore, payments for the imparting of knowledge and any connected services are also subject to the withholding tax. The latter provision has been interpreted to include the supply of know-how as opposed to show-how, except to the extent that the show-how could be connected services to the supply of the know-how. Should a DTA exemption apply, the licencee must apply to SARS for confirmation that no tax needs to be withheld. The withholding tax is a final tax and the nonresident is not required to render a tax return. The ITA also contains several restrictions on the deduction of payments to a nonresident for the use of intellectual property. 16. What are the rates on interest for withholding taxes? SA does not impose a withholding tax on interest. However, a non-resident may be subject to SA income tax on interest if the interest income is (deemed to be) from a SA source. Interest income is deemed to be sourced in SA if the debtor used the funds in SA. If the place of use is unclear, the residence of the debtor is deemed to be the source of the interest income. Nevertheless, interest earned by a non-resident from a source in SA is exempt from tax provided the foreign lender does not carry on business via a PE in SA or, in the
case of a natural person, he/she did not spend more than 183 days in the fiscal year in SA. Further relief may be available under a DTA if the non-resident does not qualify for the domestic law exemption. 17. What are the rates of withholding tax on profits realized by a foreign corporation? SA does not impose a withholding tax on profits realized by a foreign corporation. However, a branch is subject to a higher corporate tax rate (33%) than a resident company. The rate of 33% is lower than the effective rate of (34.545% - the combination of corporate rate and STC rate) applicable to a domestic company, but once the DWT has been introduced, the effective rate in those instances where a local company declares dividends to a foreign shareholder, and the DWT rate is reduced to 5% in terms of a DTA, will be 31.6%, i.e. lower than the branch rate of 33%. 18. Please list any other rates on withholding taxes that we should be aware of. Taxation of foreign entertainers and sportspersons Amounts paid to foreign entertainers and sportspersons for "specified activities" in SA are subject to income tax at a flat rate of 15%. Specified activities include any personal activity exercised in SA by a person as an entertainer or sportsperson. Any resident who is liable to pay such amounts to a foreign entertainer or sportsperson is obliged to withhold the tax and pay it over to SARS, failure of which could result in the personal liability of the resident. There is also an obligation on any resident who is primarily responsible for founding, organizing or facilitating a specified activity in SA to notify SARS of such activities. Employees tax withholding with respect to non-resident service providers SA does not impose a specific withholding tax on service fees to non-residents. However payments to a non-resident service provider may be subject to employees tax. Where the non-resident service provider is a company, the rate of withholding is 33%. In the case of a labour broker, the withholding obligation will not apply if the labour broker receives a labour broker exemption certificate. However, it is generally impossible for foreign labour brokers to comply with the requirements for the exemption.
Resident independent contractors are not regarded as employees for employees tax purposes if they carry on their trade independently, but this exclusion does not apply to non-residents. Accordingly, payments to foreign service providers could be subject to an employees' tax withholding obligation, unless a DTA provided an exemption. Sale of immovable property by a non-resident: If a resident acquires immovable property or shares in an immovable property company from a non-resident, the purchaser (or his agent) must withhold tax from the payment and pay such tax to SARS. The withholding tax rate in respect of a foreign company is 7.5%. The withholding tax is not a final tax and the non-resident remains liable to render a tax return. The withholding tax will be a credit against its final tax liability or a refund will be granted if no tax was due. The seller may apply to the Commissioner of the SARS ( the Commissioner ) for a directive that no tax, or a reduced amount of tax, be withheld by the purchaser. Mining royalty The recently promulgated Minerals and Petroleum Resources Royalty Act ( MPRRA ) will impose a royalty on the transfer of mineral resources. Different rates will apply to refined and unrefined minerals, with a maximum rate of 5% applying to refined minerals, and a maximum rate of 7% to unrefined minerals. The royalty is payable by the extractor of the mineral resource as a percentage of gross sales in respect of that mineral resource. Although the MPRRA will come into operation on 1 November 2009, mining royalties will only become payable with effect from 1 March 2010. Tax Returns and Compliance 19. What is the taxable reporting period? The taxable reporting period with respect to income tax is a year of assessment (also referred to as e.g. a tax year, a fiscal year, etc.). Income tax returns must be filed on an annual basis, after the end of a year of assessment. Resident companies and nonresident companies which have earned income from SA sources are required to file income tax returns. For individuals, a year of assessment ends on the last day of February each year. For companies, the year of assessment of the company is the same as its financial yearend.
STC payable by resident companies declaring a dividend, is payable after the end of a dividend cycle. A dividend cycle begins immediately after the end of the previous dividend cycle, and ends on the day on which a dividend accrues to a shareholder. All resident employers are required to withhold employees tax and to submit returns on a monthly basis. These returns deal with employees tax, UIF contributions and SDL. An employer must also file a so-called EMP 501 reconciliation on an annual basis. The relevant reporting period for registered VAT vendors is referred to as a VAT period. The VAT period is determined based on the activities and turnover of the vendor, and varies between 1 and 12 months. 20. What are the due dates for the filing of tax returns? Tax returns for companies must normally be submitted within twelve months after the company s year-end. Before they become due SARS will mail the relevant returns with the details of the company to be completed and submitted by the due date, or the taxpayer may register to complete the returns online. Returns must be filed by the taxpayer even if they reflect a nil amount due. Provisional taxpayers must file provisional tax returns during the tax year. All companies, and certain individuals, constitute provisional taxpayers. Provisional tax is not a separate tax, but is a system in terms whereof certain taxpayers are required to make advanced tax payments in respect of normal tax payable for the year. It forms part of the normal income tax payable by these taxpayers and requires them to make payments of their tax during the year of assessment, in accordance with estimates of their liability. The first provisional tax payment must be made six months after the beginning of a year of assessment and again at the end of that year of assessment. A company may make a voluntary third provisional tax payment, known as a top-up payment within seven months after the year-end if that year-end is February, or within six months of another approved year-end. Resident companies are also required to pay STC on the net amount of dividends declared and to file a STC return by the end of the month following the month during which the dividend was declared. Returns reflecting the employees tax, UIF contributions and SDL, must be submitted on a monthly basis, by no later than the 7th day of the month following the month during which remuneration accrued to an employee. An annual return, the EMP 501 reconciliation, must be filed within a specified period of time after the end of February each year. For example, the deadline for submission of payroll records for the 2009 year, was 30 May 2009.
Registered VAT vendors are required to submit VAT returns within 25 days after the end of a VAT period. 21. What are the key compliance requirements? As a general rule, all persons who incur a liability for SA income tax must register as taxpayers and file tax returns. Tax returns must be filed at the SARS office where the taxpayer is registered. This is the case for both residents and non-residents. There is also an option to complete and file tax returns electronically. After the tax returns are filed, SARS will calculate the tax liability of the taxpayer. Taxes paid to SARS during the year of assessment, including employees tax (in the case of an individual, a labour broker or a personal service provider), and/or provisional tax, will be set off against the tax liability of the taxpayer. SARS will then send an assessment to the taxpayer, which will indicate the tax payable (if applicable) and the date on which taxes should be paid. Should the tax paid during the year exceed the taxpayer s tax liability, the excess will be paid to the taxpayer as a refund. Failure to pay taxes timeously may result in the imposition of penalties and interest. 22. Are there any other requirements that we should be aware of regarding tax returns and compliance? It is important to ensure that full disclosure of all relevant information is made in tax returns. In terms of section 79 of the ITA, SARS may issue additional assessments in specific circumstances, e.g. if it is satisfied that any amount which was subject to tax and should have been assessed to tax under the ITA, has not been assessed. This is subject thereto that additional assessments may not be issued more than 3 years after the date of the initial assessment except in specific circumstances, for example should there have been fraud, misrepresentation or non-disclosure of material facts. Specific provision is made for objection and appeal against tax assessments. It is important that taxpayers take note of the relevant time periods for objection and appeal, to ensure that any objection against an assessment follows the correct procedure and is made within the stipulated time periods. Should an objection be rejected by SARS, the taxpayer may elect to pursue the matter further by either referring the matter to alternative dispute resolution and/or to court. A taxpayer may also, within the stipulated time periods, request reasons for an assessment.
INDIRECT TAXES 23. Are there any indirect taxes in your jurisdiction? In terms of the Value Added Tax Act No 89 of 1991 ( the VAT Act ), VAT is payable on the supply of goods and/or rendering of services by a registered VAT vendor, or on goods and certain services imported into SA. Any person who carries on any enterprise in SA, and has taxable supplies that exceeds R 1 million per annum is obliged to register as VAT vendor. There are certain exemptions from VAT, and certain transactions are subject to VAT at 0% (referred to as zero-rating ). Transfer duty is payable on the acquisition of immovable property at the following rates: 8% in respect of corporate entities and trusts (save for special trusts); and in respect of individuals, 5% on the value of property from R500,001 to R1,000,000 and where the value of property exceeds R1,000,000, 8% of that value plus R25,000. Where VAT is payable, the transaction is exempt from transfer duty. The transfer of shares in a company or interest in a trust which owns residential property, attracts transfer duty, subject to certain exceptions. Estate Duty is a tax on the transfer of wealth, leviable on death. The duty is levied at the rate of 20% on the worldwide estates of deceased persons in respect of all property owned by residents and SA property owned by non-residents. Excise duties are imposed on the local production of a number of commodities, including alcoholic beverages, motor vehicles, and jewellery. Customs duties are payable in respect of imported goods at varying rates. The Stamp Duties Act has been repealed with effect from 1 April 2009. However, stamp duty remains payable on leases of fixed property executed before 1 April 2009, at a fixed rate of 0.5% on the quantifiable amount of the lease. Also refer to question 34 below which deals with STT and to questions 35 to 39 regarding SDL and UIF. 24. How does it operate? Is it a VAT or a sales tax? VAT is levied on the supply of all goods and services by a registered VAT vendor at each stage within the production and distribution chain. Vendors collect output tax from their customers and are able to claim credits for input tax paid by them, with the
effect that the tax burden is on the final consumer. VAT is also payable on the importation of goods and certain services to SA. VAT is levied at a rate of 14%, subject thereto that some supplies are exempt from VAT, and others (such as the export of goods from SA) are zero-rated, which means that they are liable for VAT but at a rate of 0% (zero per cent). A vendor is defined as any person who is or is required to be registered under this Act. In terms of section 23 of the VAT Act, any person who carries on an enterprise becomes liable to register for VAT if the total value of its taxable supplies during a 12 month period will exceed R 1 million. Taxpayers may voluntarily register as VAT vendors if their taxable supplies exceeded R20,000 in the previous 12-month period. An enterprise is defined as, inter alia, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing or professional concern or any other concern of a continuing nature or in the form of an association or club. A branch of a foreign company may, under certain circumstances, be treated as a separate vendor, which implies that transactions with the head office may be subject to VAT. Supplies by the branch to the head office may qualify as zero rated supplies. In order to constitute an enterprise, the enterprise or activity must be carried on continuously or regularly. The terms 'continuously' and 'regularly' are not defined in the VAT Act, but would imply that the activity is carried on all the time, without interruptions and on a regular basis. With respect to the requirement that the activities must be carried on in SA, a person would generally require a physical presence in SA, or would have to provide goods or services in SA, whether personally or through an agent, to be regarded as carrying on an activity in SA. VAT vendors are required to file regular VAT returns to pay the VAT collected with respect to the supply of goods and services. 25. How is the taxable base determined? Supply of goods and services by a VAT vendor
The VAT payable by a vendor is calculated as the difference between so-called output VAT and input VAT : Input VAT is the VAT payable by a vendor on the importation of goods or services by a vendor or on the supply of goods or services by another VAT vendor; Output VAT is the VAT payable on the supply by a vendor of goods or services supplied by him in the course or furtherance of any enterprise carried on by him. The VAT Act contains detailed rules regarding the calculation of VAT payable, and more specifically regarding the requirements for the deduction of input VAT. In particular, a deduction of input VAT on goods and/or services may only be claimed to the extent that such goods and/or services were acquired by the vendor in the course of making taxable supplies. A taxable supply is defined as any supply of goods or services by a vendor in the course or furtherance of his enterprise, which is chargeable with VAT, including VAT chargeable at the rate of 0%. It does not include exempt supplies. This means that a vendor may claim input VAT on goods and/or services acquired for the purpose of making zero-rated supplies, but not for making exempt supplies. A vendor must, as a general rule, account for VAT payable on an invoice basis, subject thereto that a specified group of vendors, such as public authorities or municipalities) may, on application to the Commissioner, account for VAT on a payment basis. The VAT payable by a vendor must be calculated with respect to each tax period during which he has carried in on enterprise, subject thereto that the Minister of Finance may prescribe a different method by regulation. Imported goods and services The VAT on imported goods or services is payable by the importer of the goods and by the recipient of the imported services respectively. The definition of imported services in the VAT Act does not include the importation of services to the extent that such services are utilized or consumed in SA for the purpose of making taxable supplies, i.e. imported services are only subject to VAT where the importer is not a vendor, or where the import is not for the purpose of making taxable supplies. 26. What are the applicable rates? VAT is levied at a rate of 14% (fourteen percent) on goods and services supplied by registered VAT vendors. Some supplies are zero-rated, which means that they are liable for VAT, but at a rate of 0% (zero percent).
Section 11 of the VAT Act stipulates a number of supplies which are subject to zerorating, including for example, the sale of a business as a going concern, the export of goods or services, the supply of certain basic foodstuffs, international transport, etc. 27. Are there any exemptions? The VAT Act lists a number of supplies which are exempt from VAT. As referred to in question 31, input VAT may not be claimed as a deduction in respect of goods and/or services acquired for the purpose of making exempt supplies. Exempt supplies include, for example, the supply of: financial services; residential accommodation, but excluding the supply of commercial accommodation; services by a body corporate to its members; and educational services. The supply of financial services includes, for example: the exchange of currency; transactions relating to cheques or letters of credit, debt securities, participatory securities; the provision of credit; the provision of a long-term insurance policy; and the buying or selling of any derivative or the granting of an option. This is subject thereto that the activities contemplated in the first 3 bullet points above (i.e. the exchange of currency, transactions relating to cheques, debt securities and participatory securities, and the provision of credit) will not be deemed to be financial services, to the extent that the consideration payable in respect thereof is a fee, commission, etc. 28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction? Until recently, two sets of taxes were imposed with respect to the transfer of securities: Stamp duty was levied on the transfer of listed securities, and UST was imposed with respect to the transfer of unlisted securities. STT was introduced with effect from 1 July 2009 to replace stamp duty and UST on the transfer of listed and unlisted securities. STT is payable on the transfer of any security at a rate of 0.25% on the greater of the market value or consideration payable.
Transfer is defined widely to include the sale, assignment, cession or any disposal or cancellation of a security, but excluding any event that does not result in a change of beneficial ownership, any issue of a security, or the redemption or cancellation of a security in the context of the liquidation or deregistration of the company that issued the security. The Stamp Duties Act has been repealed with effect from 1 April 2009. However, stamp duty remains payable on leases of fixed property executed before 1 April 2009, at a fixed rate of 0.5% on the quantifiable amount of the lease. PARAFISCAL CONTRIBUTIONS 29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)? There are no parafiscal contributions relating to science and/or technology. SA also does not currently have a social security system, but it does operate a compulsory system of unemployment insurance. In addition, employers are required to pay levies which are intended to contribute to skills development. 30. How do they operate? Unemployment Insurance Employers and employees are each required to make a contribution to the UIF to provide an income to employees in a number of instances such as unemployment or absence from work due to illness or while the employee is on unpaid maternity leave. Some benefits may also be provided to the dependents of a deceased contributor. Contributors may qualify for the following types or benefits: Unemployment benefits; Illness benefits; Maternity benefits; Adoption benefits; and Dependants benefits. Every employer who pays remuneration to an employee is required to contribute to the UIF. Contributions are made by both the employer and the employee. The employer is required to withhold the employee contribution from the remuneration payable to the employee and to pay over such contribution together with the employer
contribution, to SARS or to the Unemployment Insurance Commissioner (whichever applicable) on a monthly basis. Skills Development Employers are obliged to pay a levy, known as a SDL, which has as purpose to fund education and training as envisaged in the Skills Development Act. The collection and payment of levies are administered by the Commissioner. Every employer who pays or is liable to pay remuneration to employees, subject to the exemptions as set out below, is required to pay the levy. 31. How is the taxable base determined? Both the UIF contribution as well as the SDL levy is calculated using the definition of remuneration as defined in the Fourth Schedule to the ITA as basis. However, the UIF contribution is calculated as a percentage of the remuneration payable to the specific employee, while the SDL is calculated as a percentage of the gross payroll of the employer. The UIF contribution is calculated based on the remuneration paid to a specific employee. Certain amounts are specifically excluded, such as amounts payable by way of commission, restraint of trade payments, lump sums from any pension, provident or retirement annuity fund, etc. For purposes of calculating the contribution payable by the employee and the employer, the remuneration is capped at a threshold which currently is R12,478 per month. The leviable amount with respect to SDL consists of the total amount of remuneration paid or payable by an employer to its employees as determined for purposes of employees tax, irrespective of whether or not the employer is obliged to withhold employees tax from such remuneration. Remuneration for purposes of SDL means remuneration as defined in the Fourth Schedule to the ITA, but excluding certain amounts, such as: Amounts payable to a labour broker who has been issued with a labour broker exemption certificate; A pension or retiring allowance; and Lump sum pension, provident or retirement annuity fund payments. 32. What are the applicable rates?
UIF contributions are payable by an employer and an employee. Each contribution is calculated as 1% of the employee s remuneration as defined, subject to the thresholds referred to in the previous question. As a result of the current threshold of R12,478 per month, the maximum contribution by each of an employer and employee currently is R124.78. SDL is payable by employers at a rate of 1% of the gross payroll. 33. Are there any exemptions? UIF contributions are not payable in a number of instances, for example with respect to: employees who are employed by an employer for less than 24 hours per month; expatriate employees who are obliged to return to their home country at the end of their contract; and certain employees in the national and provincial spheres of the SA government. A number of employers are exempted from paying SDL, for example: A public service employer in the national or provincial sphere of the SA government; A Public Benefit Organisation which is exempt from income tax in terms of the ITA; A municipality which has been issued with a certificate of exemption by the Minister of Labour; and Any employer whose payroll does not exceed R500,000 per annum. INHERITANCE AND GIFT TAXES 34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.? Yes 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base. Estate duty is imposed on the death of a taxpayer, while donations tax becomes payable by a donor in respect of gratuitous disposal of property. Estate Duty