South Africa Minister of Finance, Pravin Gordhan, delivered his annual budget speech on 22 February, announcing several significant changes to multinational enterprise taxation.
The most important amendment announced is that South Africa withholding tax on dividends will be increased from 15% to 20%.
This rate can be reduced to the extent that a taxpayer makes use of a tax treaty, depending on the wording of a specific treaty. Generally, South Africa tax treaties reduce the withholding tax rate to 10% if one holds at least 25% of the share capital of the company paying the dividends, whereas in all other cases the treaty rate would be 15%.
Other significant amendments include an increase in the marginal income tax rate for individuals earning above R1,5 million per annum to 45%.
The budget would also modify the exemption for a natural person that works more than 183 days outside South Africa. In such circumstances, the tax exemption would only apply if the individual can show that he was taxed on the services in the country where the services were performed.
Return of share capital
Amendments were also announced in the budget providing that return of contributed tax capital will become taxable in South Africa in some cases.
According to the budget documents, National Treasury has become aware of transactions where foreign shareholders increase the share capital of a company to take advantage of rules that allow tax free return of share capital as opposed to a taxable dividend or other South African taxation upon a distribution.
This type of practice involves the imposition of a new South African holding company between the foreign shareholder and the South African investment. The new holding company will acquire the share investments held by the non-resident shareholder and will settle the purchase consideration through the issue of shares in itself.
The effect of this type of structure is that the new holding company will receive dividends from the South African operations in circumstances where it will not in itself declare dividends to the foreign shareholder. Rather, it will return the share capital that was introduced through means of the introduction of the new holding company.
Amendments have been announced such that the return of the contributed tax capital will become taxable in South Africa.
BEPS, cloud computing
South Africa has made significant progress implementing of the action steps pertaining to the OECD/G20 base erosion profit shifting plan (BEPS).
South Africa has already introduced a number of measures to address BEPS practices considered prejudicial to the South African system, and confirmed this commitment in the budget announcement.
Consistent with action point 1, pertaining to the digital economy, foreign businesses supplying digital services already must register as vendors in South Africa.
In the budget, the Minister of Finance specifically announced that cloud based services and services provided using online applications will also be subject to VAT.
In relation to action point 2 (hybrid mismatches), South African law already has measures to limit double deductions, income inclusions where there is no corresponding deduction, and deductions with no inclusions.
In relation to action point 3, South Africa’s controlled foreign company rules have been internationally acknowledged as being well-designed and were recommended as one of the three options for countries to implement.
South Africa continues to have significant concerns around interest deductibility. The four primary areas of concern are hybrid debt, connected person debt, transfer pricing and acquisition debt.
In relation to tax treaty abuse, South Africa is among more than one hundred countries that have reached consensus on the multilateral instrument to incorporate tax treaty related BEPS measures into the existing network of treaties.
In relation to treaty shopping, it was indicated in the budget that the benefits of a tax treaty will be denied if it is reasonable to conclude that obtaining the tax benefit was one of the principal purposes of entering into an arrangement or transaction.
Regulations were gazetted in December 2016 requiring the first country-by-country reports to be filed from 31 December for MNEs with fiscal years starting on or after 1 January 2016.
Ironically, the one BEPS area South Africa has not committed to is mandatory mutual agreement procedure arbitration. This is consistent with the position of a number of developing countries.