By Virusha Subban, Jana Botha, & Prenisha Govender, Baker McKenzie, Johannesburg
South African Finance Minister Tito Mboweni delivered his National Budget Speech on 26 February, focusing on economic growth, education, health, social development, small businesses, and job creation.
Minister Mboweni appears to have gone out of his way to implement measures to avoid a slowdown of economic growth and included several proposals of interest to multinational organisations in various sectors.
Minister Mboweni said that South Africa’s corporate income tax rate will remain unchanged at 28% for now. The government intends to restructure the corporate income tax over the medium term, though, by broadening the tax base through minimizing tax incentives and introducing limitations to interest deductions and assessed losses carried forward.
Interest expense deduction, training allowance, urban development
The South Africa 2020 budget proposes to limit interest expense deductions to 30% of earnings for years of assessment commencing on or after 1 January 2021. Consultation for the design of the limitation will commence shortly and a discussion document is expected to be made available on National Treasury’s website on 17 April.
In further news, section 12I (industrial policy projects) of the Income Tax Act, which provides for the deduction of additional investment and training allowances from the income of a company carrying on an “industrial policy project,” will not be renewed beyond 31 March.
Further, the urban development zone incentive will be extended for a year while being reassessed. A sunset date of 28 February 2022 is proposed for incentives relating to airport and port assets, rolling stock and loans for residential units. The government intends to review all other incentives to determine whether they should be extended.
Loss carryforwards, foreign remuneration exemption
The South Africa 2020 budget further proposes that assessable losses carried forward be limited to 80% of taxable income for years of assessment commencing on or after 1 January 2021. Companies would, therefore, have to pay tax on at least 20% of taxable income.
In a move that will affect multinationals employing South Africans in other countries, South Africa’s foreign remuneration exemption which becomes effective on 1 March and has initially been set at ZAR1 million (approx., USD 65 140) will now be capped at ZAR1.25 million (approx., USD 81 425).
The Minister said that the government wants to encourage South Africans working abroad to maintain their ties with South Africa; the concept of financial emigration will, therefore, be phased out by 1 March 2021.
VAT
In terms of value added tax, contrary to speculation and expectations, the VAT rate was not increased and remains at 15%.
The South Africa 2020 budget announces that the definition of “telecommunication services” for purposes of the electronic services regulations would be updated to eliminate the unintended non-taxation of certain services under the electronic services regime. Further, intermediaries who are required to collect and account for VAT on behalf of non-resident suppliers of electronic services will now be able to apply to the South African Revenue Service (SARS) to account for the VAT on the payments rather than the invoice basis.
With regard to the VAT treatment of transactions under the corporate reorganization rules, the provisions of section 8(25) of the VAT Act, which allow for the transfer of a business as a going concern if transferred under the corporate reorganization rules, will be reviewed to eliminate unintended limitations where the corporate reorganisation rules do not apply in respect of the transfer of certain assets.
South Africa indirect taxes
Tax changes on indirect tax include a carbon tax rate increase of 5.6 percent for 2020 from ZAR120 (approx., USD 7.82) per tonne of carbon dioxide equivalent to ZAR127 (approx., USD 8.27) per tonne of carbon dioxide equivalent.
Further, in terms of export tax on ferrous metals exports, the government will consult with affected industries on the introduction of export taxes on scrap metal, which could replace the current price preference system.
Proposed export taxes will apply to ferrous metals at the rate of ZAR1 000 (approx., USD 65. 14) per tonne, aluminium at ZAR3 000 (approx., USD 195.42) per tonne, red metals at ZAR8 426 (approx., USD 548.87) per tonne, and other waste and scrap metals at ZAR1 000 per tonne. Consultation will begin immediately, to be concluded by the end of May, for consideration in the annual tax bills.
It was also announced in the South Africa budget speech that there will be a noteworthy exchange control relaxation that will be phased in over 12 months (to be implemented by 1 March 2021), more for individuals than corporates.
The intention appears to be to change the current system whereby no capital outflows are allowed unless expressly permitted, to a system whereby cross-border transactions will be permitted unless specifically prohibited.
Other proposals
Other noteworthy proposals included in the budget speech were that the government has now allocated ZAR230 billion (approx., USD 14.982 billon) over the next 10 years to achieve the restructuring of the electricity sector in South Africa to ensure a stable electricity supply.
Finance Minister Mboweni stated that it would soon be possible for municipalities who are in financially good standing to purchase electricity from independent power producers. Energy sector challenges in South Africa have affected businesses and slowed investment in recent years, and a solution to the energy crisis is urgent.
Diesel refund, tariff determinations
The South African Revenue Service (SARS) recently published draft diesel refund rules and notes to the Customs and Excise Act for public comment. The draft presents a provisional outline for the review of the diesel refund administration to facilitate further industry engagements during 2020.
Minister Mboweni explained that the reform proposals and legislative framework will be refined further, based on the outcome of the engagements.
Further, the Tax Administration Act provides that SARS may withhold a refund until such time that the refund is verified, inspected or audited. It was proposed in the South Africa budget speech that this provision be extended to include criminal investigations, which will, by implication, extend the period for which no refunds are given by SARS.
In line with the World Customs Organisation’s stance on knowledge sharing by customs authorities to enhance compliance with customs and excise legislation, it was announced that the Customs and Excise Act be amended to provide for the publication of tariff determinations and rules prescribing the circumstances in which such publication may take place, the kind of information that may be published and the manner of publication. This will be a first for South Africa.
Change of residence, participation exemption
There was also a proposal to amend the anti-avoidance provision regarding change of residence. When a company ceases to be a resident, there is a deemed disposal of its assets that triggers capital gains tax. Despite these rules, residents that hold shares in the company could subsequently dispose of the shares and qualify for a participation exemption for the sale of company shares.
It is proposed that amendments be made to the legislation to close this loophole.
In addition, the participation exemption rules for foreign dividends do not contain a similar limitation for general foreign dividends exemption rules (in the Income Tax Act). This limitation denies tax exemption for foreign dividends if there is a deductible expense or reduction that is determined directly or indirectly with reference to a dividend.
For example, where a resident owns 20 percent of the shares in an unlisted foreign company, no tax is imposed on the foreign dividends, even though these dividends arose from amounts that previously qualified for a tax deduction. To address this concern, the South Africa budget proposes that changes be made to the legislation.
South Africa transfer pricing
It was also proposed that the definition of an “affected transaction” in the transfer pricing rules be refined.
Transfer pricing rules apply if a taxpayer or a controlled foreign company enters into a transaction with a non-resident “connected person”, on terms and conditions that are not at arm’s length, and derives a tax benefit from that transaction.
In the case of a transaction between a controlled foreign company and a non-resident “connected person”, a tax benefit may not be derived by the foreign company but may be derived by a South African resident shareholder as a result of a lower inclusion of controlled foreign company net income for the resident.
To address this situation, Minister Mboweni proposed that the legislation be amended to refer to a tax benefit that may be derived by a person, in relation to a controlled foreign company, that is a resident.
Minister Mboweni ended by saying he hoped that the budget would restore the confidence of the public, grow the economy, and improve South Africa’s employment and education challenges.
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