Memorandum on the Tax Amendment Bill: B-38-2000
Department of Trade and Industry,
23rd October, 2000

This amendment includes a wide range of changes to the tax acts. Many of the amendments have a material effect on doing business in South Africa. The DTI has chosen not to comment on all aspects of the bill, but only on certain significant features that may discourage business activity in South Africa or reduce the competitiveness of South African firms.

1. Section 10(1)(gC) of Act 58 of 1962
This amendment exempts residents from taxation on foreign social security payments, and provides a temporary exemption for residents receiving pension payments from abroad. In view of the possibility of South Africa becoming a relatively cheap retirement destination for people from cold, rich, expensive countries, and in view of the fact that this could create tremendous employment opportunities in health care, geriatric care, and catering and accommodation services, it is suggested that this exemption should be permanent.

The National Treasury claims that foreign retirees "will not create high quality jobs for the South African economy". This may sometimes be true, but significant numbers of such retirees would necessarily create a wide range of service sector jobs, which would be very welcome in South Africa.

2. Section 10(1) (o) of Act 58 of 1962
This provision allows employees of South African firms employed abroad to be exempted from PAYE deductions if they are outside of South Africa for 183 days or more. There are some inconsistencies in the wording of the section, which leads to uncertainty.
In addition, there is some doubt as to the usefulness or practicality of this section. It appears as if it will be difficult for South African contractors with projects abroad to obtain exemption from this provision-some examples: a South African software company with a major Systems project in Jeddah or Accra; or a South African construction contractor building an airport in Singapore or a sewerage system in Dar es Salaam. If the South African contractors are forced to deduct South African PAYE for some or all of their employees on such projects, it could inhibit the competitiveness of the South African contractors, who could begin to lose contracts. Currently South African firms can compete successfully in some such projects.
Why are such projects important to South Africa?
a) They bring in foreign exchange through the export of services;
b) they facilitate the export of South African capital goods;
c) they improve the competitiveness of South African firms;
d) they allow South African firms to contribute at low cost to the rebuilding of African economies; and
e) they allow South African firms to use their resources profitably during periods of slow domestic growth.

In addition, s9D and the way that exemptions are defined could exclude some legitimate trading activities from tax exemption, which could also affect the above projects or projects with similar potential positive effects. The complexity of this section may lead to uncertainty, and might leave too wide a space for discretionary decisions by tax commissioners.

3. International headquarters of foreign multinationals
The bill appears to inhibit South Africa's competitiveness in attracting African regional headquarters of international companies.
Attracting international firms' headquarters is one of the targets for foreign direct investment identified by Investment South Africa (now Trade and Investment South Africa). The reasons are:
a) that it brings in foreign direct investment;
b) that it attracts revenues to pay for employees and services; and
c) that it could encourage these firms to locate other activities to South Africa, such as manufacturing, design, research and development, and distribution.

4. Tax sparing
Tax sparing goes beyond a double taxation agreement in that if a South African company abroad paid any corporate tax in the country of residence, even if it is significantly lower than the South African rate of taxation, the company would not be required to pay South African corporate tax for those activities.

Some commentators have proposed that a tax sparing provision would encourage investment by South African firms in developing countries with lower taxes than those that prevail in South Africa. Such investments by South African firms in Africa are important for regional development, and a provision for tax sparing arrangements could be considered. It might be possible to use such a provision as a bargaining chip with the developed countries with which we would like to have tax sparing arrangements-- i.e. a quid pro quo where we have tax sparing agreements with poorer countries and richer countries have tax sparing agreements with us.