Taxation Laws Amendments 2008

Portfolio Committee on Finance

4 March 2008

2

Process

• Time for Public Comment:– Bill published on 21 February 2008

(subsequent website/email alert)– Comments due on 5 March 2007– Shortened Parliamentary calendar

• Further Key Dates:– 5 March: Taxpayer hearings– 12 March: NT/SARS Reponse– 19 March: Tabling

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Outline of Key Amendments

• Rates and thresholds– Adjustments– New thresholds plus depreciation

• Urgent matters– Pension Streamlining and codification of interpretations– Anti-avoidance

• Miscellaneous policy amendments– Holdovers from 2007– New isolated amendments

• Miscellaneous administrative amendments• *More complex substantive policy amendments to

follow in the Revenue Laws Amendment Bills

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Rates and Thresholds(Appendix I; also see Explanatory Memorandum)

• Key Rates– PIT adjustments– CIT 28% rate– Gold mining 34% formula– Foreign owned South

African branch 33% rate– Adjustments to fuel levy

and excise duties

• Key Thresholds– Income tax threshold

• Below 65 yrs – R46 000• 65 yrs and above – R74 000

– Interest exemption R19 000 (under age 65)

– Interest exemption R27 500 (from age 65)

– CGT exclusion R16 000– Bursary (R100 000

salary/R10 000 exemption)

– PBO housing ceiling: R7 000 household income per month

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Home Associations(Section 10(1)(e); Clause 9)

• Current Law: Sectional title, share block companies and other home associations are generally taxable except for homeowner levies

• Proposal: Up to R50 000 of investment income (e.g. interest) will be exempt per annum

• Note: Other related issues are under review (e.g. VAT, conversion of structures)

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Depreciation Issues

• Water Pipelines for Electricity Power Plants (Section 12D(1); Clause 12)

– 5% depreciation allowed

• Small Business Company Option (Section 12E(1A); Clause 13):

– Non-manufacturing small business companies may use the current 50:30:20 rate or a rate more generally available

– Allows for the 100% small equipment rate

• Sale-Lease Situations (Section 23D; Clause 18)– Old regime limited depreciation for landlord to the lesser of the

landlord’s/licensor’s cost or the cost of all previous connected tenants/licensees

– New regime clarifies the tenant/licensee look back goes only 2 years

Pension Tax Amendments

Streamlining

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Overall Retirement Issues

• General objective– To streamline and clarify the retirement tax

dispensation

• Specific proposals:– Ensuring the continued tax-free dispensation for

retirement savings– Allowing more flexibility within the retirement sector

without triggering a tax charge– Aligning retirement definitions in the Income Tax Act

with provisions in the Pension Funds Act

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Living Annuities (New definition in section 1; Clause 2 (m))

• Retirees are compelled to take 2/3’s of fund value as annuity – pension and retirement annuity funds

• Living annuities have always been accepted as annuities for tax purposes

• It has been argued that technically, living annuities are not annuities

• Should this not be clarified, many pension funds, retirement annuity funds and preservation funds may lose their tax-free status

• To clarify the tax position, living annuities are specifically recognised and defined in the Income Tax Act

10

Preservation Funds(New definitions section 1; Clauses 2(t) & (v))

• Preservation funds are registered as pension or provident funds for tax purposes

• A number of problems arose due to this registration process, including– Limited choice of funds upon termination of

employment – Lack of portability between preservation funds– Membership linked to employment

• Problems addressed in the new stand-alone preservation fund definitions

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Preservation Funds (2)(Section 10 & Para. 6 of the 2nd Schedule; Clauses 9(b) & 37)

• Growth within preservation funds will remain tax-free

• Tax-free transfers between preservation funds and other retirement funds

• Same tax treatment as other retirement funds upon a member’s:– Retirement; or– Withdrawal from the fund

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Retirement Lump Sums and Provisional Tax

(Para. 19 of the 4th Schedule; Clause 39)

• Provisional tax is payable on amounts not subject to withholding tax

• The tax is calculated with reference to a prior year’s taxable income

• Only recurring taxable income from a prior year should be taken into account and once-off amounts should be excluded

• Retirement lump sums (like capital gains) are not recurring payments and are excluded from the provisional tax base

Urgent Matters

Intra-Group and Cross-Border Avoidance

(Media Statement Release)

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Intra-Group 2007 Amendments(Section 45; Clause 26)

• 2007 Amendments– Group definition changed to exclude all taxpayers not subject

to worldwide tax (including foreign companies)– The narrowed group definition legislatively triggers a de-

grouping charge for pre-1 October 2007 transactions– Changes to be effective 1 January 2009

• Proposed 2008 Modifications– Foreign companies with a South African tax residence (i.e.

effective management) will remain in the group– All taxpayers subject to legislative de-grouping via the

amendment will be exempt from the de-grouping charge– The legislation will be effective as of 21 February 2008

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Company Groups

PARENT

SUB 1Seller

SUB 2Buyer

100% 100%

100 Note

Assets 100 value

20 tax cost

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Intra-Group Asymmetry

• In a group transfer, assets are transferred from one group company to another in exchange for a note or cash

• The assets transferred have a rolled-over tax cost, but the note and the cash have a market value tax cost

• Example: – Facts: Sub 1 transfers assets with a R100 value and

a R20 base cost to Sub 2 in exchange for a Sub 2 note

– Result: Sub 2 has a R20 base cost in the assets. Sub 1 has a R100 base cost in the note

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Intra-Group Avoidance

• Initial Intent:– Intra-group relief is intended as deferral rollover relief

(not as an exemption)– The goal is to restructure group ownership, not to

promote sale cash-outs (which should be subject to CGT)

• Current Usage:– Intra-group relief is being used to promote leveraged

buy-out acquisitions– In aggressive cases, the market value note (or cash)

is being used to turn deferral into an exemption

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Intra-Group Proposals

• The goal is to eliminate the potential exemption for cash-outs

• The proposal achieves this result by:– Limiting the tax cost of the note issued to the

lower of market value or tax cost of assets transferred (thereby duplicating gain)

– Disallowing internal cash transfers

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Intra-Group Push-Down Debt: Issue

• Intra-group rollover relief has become important for share acquisitions

• Instead of buying shares, debt is connected to assets via section 45 in order to obtain interest deductions on acquisition debt

• Query whether the proposed legislation should cater for this reality?

Acquiring

OPCOTarget

NEWCOBuyer

Bank

Bridging Loan

Permanent Loan

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Indirect Redomicile (Paragraph 64B; Clause 45(1)): South African Multinationals

SA HQ SA HQ

PARENTPARENT

Foreign Sub 1Foreign Sub 1 Foreign Sub 2Foreign Sub 2 Foreign Sub 3Foreign Sub 3

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Indirect Redomicile: General Treatment of South African Owned Foreign Subsidiaries

• SA competitiveness in foreign markets

• Dividend repatriations

• Greater markets for SA domestic operations

• Growth in SA company brands

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Indirect Redomicile: Protecting the South African HQ: What’s at Stake?

Charter

Intellectual Property

Passive Income

Domestic Required Operations (Consumption Plus Skills)

Foreign Sub and Operations

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Indirect Redomicile: Foreign Subsidiary Tax-Free Repatriations

SubsidiaryCash orShares

SHAREHOLDERS

SA HQ Parent

Foreign Subsidiary

SubsidiaryShares Sold

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Indirect Redomicile:Foreign Subsidiary Unbundlings

SHAREHOLDERS

SA HQ ParentForeign

Subsidiary

SubsidiaryShares Sold

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Indirect Redomicile: Arguments

• Taxpayer arguments

– SA shareholders receive additional overall value

– Probable inward listings

– SA shareholders will have greater CGT and UST

– Tax law should not apply to deals in progress

• Response

– The value of the newly independent foreign sub shares is offset by the decline in the HQ shares

– SA company shares devalued on the JSE

– Corporate-level CGT is lost

– The tax system can enact law to halt impending avoidance (especially if the deals are not final)

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Indirect Redomicile: What to Tax?

• What about future growth?• What about protecting the national brand?

Level 1 •Gain on HQ controlled shares

Level 2 •Net market value on deemed distribution of assets

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Multiplying Foreign CGT Exemption: Basic Rule (Section 23K; Clause 20)

• Foreign taxpayers are exempt from CGT on the disposal of assets, except for:– South African real estate– South African permanent establishments

• Tax treaties generally enshrine this rule

• International competitiveness and administrative reality mean that the CGT exemption will probably have to remain

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Multiplying Foreign CGT Exemption: Problem

• Foreign taxpayers are now taking the CGT exemption due to the market-based purchased cost

• Two steps:– Foreign taxpayers sell shares to a connected South

African parent, leaving the latter with a market value tax cost (obtained free of CGT)

– South African parent unbundles lower-tier subsidiaries with the new market value tax cost

• Foreign-owned South African groups are now completely CGT exempt on shares versus wholly local groups

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Multiplying Foreign CGT Exemption: Chart

F Parent

South African Parent

South African NEWCO

Sub 1 Sub 2

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Multiplying Foreign CGT Exemption: Remedy

• Foreign CGT exemption remains

• The tax cost of the connected person purchaser is limited to the lesser of actual cost or the tax cost held by the foreign seller (i.e. the tax cost before the tax-free market value step-up)

• A two year rule is added to prevent multiple tax-free steps before the South African purchase

Miscellaneous Policy Amendments

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Foreign Skilled Expatriates: 2007 Adjustment (Para. 9 of the 7th Schedule; Clause 40)

• 2007 Amendments:– Foreign expatriates visiting South Africa can receive tax-free

employer-provided accommodation for up to 1-year– Affirms SARS practice and overturns case law allowing for

unlimited employer-provided accommodation

• Proposed Modifications:– The exemption period is extended to 2 years in line with

temporary work permits– The rule operates with the implicit understanding that short-

term expatriates often retain a second home back in their home country

– The new exemption is subject to a monetary ceiling equal to the lesser of 25% of monthly salary or R25 000 per month

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R&D Incentive: 2007 Adjustment(Section 11D(7); Clause 11)

• Current Law:– Taxpayers receive a 150% deduction for R&D– If one party funds another to conduct R&D on the

funding party’s behalf– The 150% deduction applies to the funding party

• Problem:– The funding regime generally works, except if the

funding party is outside the tax net

• Proposed Legislation:– Taxpayers receiving funding can obtain a 150%

deduction if the funding party is not eligible for a deduction

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Reorganisations: 2007 Adjustments

• Collective Investment Schemes (Sections 42 and 44; Clauses 24 and 25)):– Corrects and clarifies the law so that collective investment schemes can be

formed and merged as initially intended• Ongoing Services (Section 42(1); Clause 24):

– Under current law, natural persons can receive newly issued shares in a company as part of a tax-deferred section 42 rollover either by actively participating in the Newco company, despite the failure to hold a 20% share interest in Newco

– Under the proposal, permissible active participation extends to any controlled group company in relation to the company issuing the shares

• Liquidations (Section 47(6); Clause 47):

– Tax-free liquidations can occur within an 18m month period (in lieu of the prior 6-month period) plus a discretionary extension

• 1 January 2007 effective date issues (Clause 63)):– In 2007, share-for-share relief was merged into the asset-for-share relief to

assist taxpayers– This relief was retroactive to 1 January 2007 at the behest of certain taxpayers– The proposed amendments clarify that taxpayers can using old share-for-share

relief automatically fall into the new merged tax-free regime

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Domestic Distributions: 2007 Adjustment

• Share Issues (Para. 74 of the 7th Schedule; Clause 47):– Clarifies that a company’s issue of new share is exempt from CGT

• Buybacks (section 1 “dividend” definition; Clause 2):– Clarifies that buybacks are treated as dividends (just like redemptions)

• Cross-Redemptions and Cancellations (section 1 “dividend” definition; Clause 2):– Eliminates schemes that seek to reduce company profits without

triggering STC• Deemed Intra-Group Dividends (Section 64C; Clause 30):

– Current law allows for a tax-free intra-group dividend unless the deemed paying subsidiary reduces profits without a corresponding increase for the parent shareholder

– Proposed law allows for a tax-free intra-group dividend unless the deemed paying subsidiary reduces profits without a corresponding increase for the parent shareholder or a connected company within the group

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Diamond Levy Amendments: 2007 Adjustment

• With implementation of the Diamond Levy pending, small operational issues have been identified

• Re-imports (Section 14 of the Levy; Clause 60):– The 40% and 15% local sales formulas are being adjusted to

properly account for re-imported diamonds subsequent sold within South Africa

• Transitional Rules (Section 14 of the Levy; Clause 60):– Calculations have been added to account for the first

assessment period if that period turns out to be shorter than 6 months

• Short-Term Diamond Permit Holders (Section 5 of the Levy (Administration); Clause 24 (Administration):– SARS will have the power to impose immediate collection for

taxpayers not regularly engaged in local diamond sales (e.g. temporary agents or foreign parties)

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Special Measures: 2010 World Cup South Africa

• Proposed Amendments to Schedule I to the Revenue Laws Amendment Act, 2006

– The Host Broadcaster is recognised as FIFA Designated Service Provider as it operates outside of the tax-free bubbles

– The definition of affiliated entities is broadened to cater for groups of companies which provide services to FIFA

– UIF and SDL payments by FIFA are restricted to employees who are resident in the Republic

– The Commissioner and FIFA may agree to specific areas which will be tax-free bubbles and the period FIFA can operate tax-free in the bubbles

– Entities (paragraph 6 entities) which have a commercial relationship with FIFA are not subject to withholding tax on payments amongst themselves

– Entities (paragraph 6 entities) whose employees’ “gross incomes” are exempt from tax need not deduct employees tax, SDL or UIF contributions from these employees

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Cross-Border

• Inward Listings (section 10(1)(k); Clause 9):

– The exemption for dividends paid by foreign companies listed on the JSE is extended to cover all foreign companies (not just those above a 10% JSE listing)

• Foreign cooperative repatriations (section 10(1)(k); Clause 9)):

– Dividends back to SA from foreign co-ops are exempt just like dividends from foreign companies

• Intra-CFC debt forgiveness (section 9D(fA): Clause 8):

– Both creditor loss and debtor gain will be eliminated on intra-CFC debt cancellations (just like other intra-CFC debt transactions)

• CFC multi-tiers (Para. 20 of the 8th Schedule; Clause 43):

– Ensures that only one level of tax applies if multiple levels of CFCs exist with certain shareholding falling below 100%

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Public Benefit Organisations (PBOs)

• Employer Withholding (Para. 11B of the 4th Schedule; Clause 38):

– Certain donations to PBOs are currently deductible for purposes of the year-end return

– These donations can now be taken into account on the PAYE system via employers

• PBO Liquidations (Section 30(3); Clause 30):

– Under current law, PBO status requires that PBO liquidation proceeds be transmitted only to “similar” PBOs (or to Government)

– The “similar” requirement is dropped

Administrative Policy Amendments

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Employees’ Tax

• Allow re-determination of amount of SITE where monthly tax was determined on amounts which exceed annual remuneration (Para. 11B of the 4th Schedule; Clause 38)

• Propose that no employees’ tax be set off against a taxpayer’s normal tax liability unless the employer has submitted an acceptable annual reconciliation to SARS. Effective date to be announced by the Minister. (Para. 28 of the 4th Schedule; Clause 28 (Administration))

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Administrative Penalties (Section 75A; Clause 11 (Administration))

• Propose that the current regime relating to administrative penalties be revamped.

• Introduce a more objective penalty system to be administered in accordance with defined set of criteria.

• Create more certainty for taxpayers.

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Tax Return Filing Requirements

• Supporting documents are no longer required to be attached to tax returns (Section 13, 13bis, 13quat, 18A, 27, 70, 72, 72A, 73, Para. 13A of the 1st Schedule, Para. 13 of the 4th Schedule)

• It is proposed that employers which fail to submit PAYE/IRP5 reconciliations to SARS should be penalised. The penalty may be remitted should circumstances warrant it. (Para. 13 of the 4th Schedule; Clause 17 (Administration))

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Interest for Non-Provisional Taxpayers

• Allow for the payment of interest (and charging of interest for individuals who are not provisional taxpayers from 7 months after end of tax year (effective date). (Section 89quat; Clause 14 (Administration))

• Propose that individuals who are non-provisional taxpayers may make a top-up tax payment before effective date should PAYE not be sufficient to cover annual tax liability. (Para. 23A of the 4th Schedule; Clause 19 (Administration))

• Current intention is for amendment to apply to 2007/8 tax year with “effective date” for calculation of interest from 1 October 2008

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Year of Assessment(Section 66; Clause 6 (Administration))

• Proposed that companies be allowed to use financial accounts ending on a fixed day approved by SARS, e.g. last Friday of a financial year. The day should fall within 10 days before of after the last day of a financial year.

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Payment of Tax and Interest(Section 88; Clause 13 (Administration))

• Clarify that decision of SARS not to receive or recover taxes chargeable while an objection or appeal is being considered does not affect the taxpayer’s ultimate obligation to pay interest.