Portfolio Committee on Finance
Revenue
Laws Amendment Bills &
Securities
Transfer Tax Bills
Response
Document
24
October 2007
1. BACKGROUND
1.1 Process
The Revenue Laws Amendment Bills,
2007, represent the second part of this year’s tax proposals as announced in
the 2007 Budget Review. The main issue is the broadening of the base for the
Secondary Tax on Companies (“STC”). This
base broadening which will come with a rate reduction from 12,5 per cent down
to 10 per cent.
These Bills are also accompanied by
the Securities Transfer Tax Bills, 2007.
The Securities Transfer Tax Bills are not a new tax but simply a
combination of two pre-existing taxes.
Stamp Duties on unlisted shares and the Uncertificated Securities Tax on
listed shares will be combined into a single transfer tax on shares. The Uncertificated Securities Tax operates as
the template for the newly combined tax with adjustments made to accommodate
unlisted shares.
National Treasury and SARS presented
both sets of bills before the Portfolio Committee on Finance at an informal
hearing held on 26 September 2007.
Public hearings were held before the Committee by 16 October 2007 and 19 October
2007. The National Treasury and SARS’ preliminary response (which is the subject of
this document) was presented on 24 October 2007. The date of tabling is set for 30 October
2007.
1.2
Public comments
A request for public comments was
announced by website-media release giving taxpayers approximately a month to
submit comments. The Portfolio Committee
on Finance and National Treasury/SARS received most of these comments during
the week of 7 October 2007. Total
comments received amounted to approximately 60 submissions (see Annexure).
2. RESPONSES
Provided below are responses to the
policy issues raised by the comments received.
This response section is outlined as follows:
(i) STC base broadening;
(ii) Group of companies relief;
(iii) Company reorganisations;
(iv) Capital versus ordinary shares;
(v) Intellectual cross-border payments;
(vi) Long-term insurers and controlled
foreign companies (CFCs);
(vii) Depreciation;
(viii) Exemption of occupational death benefits;
(ix) Oil and gas fiscal stability;
(x) Securities Transfer Tax;
(xi) Miscellaneous – Income Tax; and
(xii) Miscellaneous – Other taxes;
2.1 STC:
base broadening
Background (pre-2001 capital
profits/pre-1993 profits; section 1 “dividend” definition and section
64B(5)(c)): Under current law,
distributions out of capital and ordinary profits equally give rise to
dividends subject to STC unless those distributions are part of a liquidation
(or similar winding up or termination).
In the latter circumstance, liquidating distributions out of all
pre-1993 profits and pre-2001 capital profits are exempt. The proposed legislation repeals both
exemptions.
(ABASA; Association of Trust Companies in SA; Advocate
Meyerowitz; Edward Nathan Sonnenbergs; Ernst and Young; KPMG; Mallinicks; Old
Mutual; SAICA; The Banking Association SA; Werksmans)
Comment #1: The effective date of the proposed legislation is
unclear. The rules relating to section 1
appear to indicate that the proposed legislation will be effective for all
distributions as of 1 January 2009, but the section 64B amendments indicate a 1
October 2007 effective date. The 1
January 2009 effective date is obviously preferred to give taxpayers time to
adjust.
Response:
Accepted.
The proposed date for the repeal is 1 January 2009.
Comment #2: The proposed legislation repealing the exemption for
pre-1993 profits and pre-2001 capital profits is retrospective regardless of
whether the effective date is of 1 October 2007 or 1 January 2009. Many taxpayers will not be in a practical
position to utilise the exemption in either time-frame.
Response:
Not accepted.
The proposed repeal only impacts future liquidations. Dual profit systems cannot be maintained into
the indefinite future. Simplification
requires eventual hard cut-offs.
Background (unrealised profits;
section 1 “dividend” definition):
The proposed legislation clarifies that distributions will qualify as
dividends irrespective of whether those distributions come out of realised or
unrealised profits. Unrealised profits
within this ambit are taken into account even if not recognised in the accounts
of the company.
(PWC)
Comment: The proposed legislative inclusion of
“unrealised” profits will be administratively burdensome, requiring asset
valuations for many actual and deemed distributions. The proposed legislation should accordingly
limit “unrealised” profits solely to those assets distributed in
specie.
Response:
Not accepted.
The compliance concern is overstated.
Valuations will only be required for extraordinary dividends (or where
distributions test the boundaries of available profits). Most operating dividends typically do not
approach any profit boundaries. Distributions out
of unrealised profits would typically involve a borrowing against assets or the distribution of an asset in
specie, which would require a
separate valuation in any event.
Background (allocation of share
capital and premium; section 1 “dividend” definition):
Distributions out of (ordinary and capital) profits are subject to STC;
whereas, distributions out of share capital and share premium are outside the
ambit of STC. The distinction between
profits versus share capital/share premium is essentially based on company law
and accounting concepts. The allocation
of share capital and share premium to specific distributions is largely
unrestricted, subject solely to isolated limits imposed by company law or by
virtue of a company’s articles of incorporation. In order to restrict this free allocation,
the proposed legislation limits the amount of share capital/share premium that
can be allocated to redeemed / cancelled shares. Under this proposed system, the share
capital/share premium allocated to specific shares is limited to a formula
based on the relevant market value of the shares as compared to the total
shares of the company.
(KPMG; LSSA; PWC; SAICA)
Comment: The market value allocation of shares is
unrealistic. The share capital/share
premium created with the initial issue of shares bears no relationship to the
relative market values of those shares as those values evolve. The pro rata allocation of share
capital/share premium is especially problematic for preference shares whose value changes little
over time; whereas, ordinary shares typically rise in value over time. If the proposed amendment were to proceed,
the net result will be an unsubstantiated shift of share capital/share premium away from preference shares to ordinary shares.
Response:
Accepted.
The market value method was initially chosen due to concerns that
companies may not have sufficient records to classify share capital/share
premium per class. The comments received
suggest otherwise and allocation per class represents a better policy approach.
Background (impact of capital
distributions; paragraph 76 and 76A of the 8th Schedule):
Even though capital distributions are exempt from STC, these
distributions have a deferred impact under the capital gains tax system. Instead of being treated as an immediate
dividend, capital distributions are currently outstanding “proceeds” and gains that are triggered upon subsequent
disposal of the underlying shares giving rise to the capital distribution. Stated differently, capital distributions are
exempt from STC and capital gain tax is postponed until disposal of the
underlying shares. The proposed
legislation alters the capital gains tax impact by triggering an immediate
part-disposal for capital distributions in lieu of the current deferral system.
(Bhp Billiton; Deloitte & Touche; Ernst & Young;
Gold Fields; Jan. S De Villiers; KPMG; Mallinicks; New Clicks; PKF; PWC; SAICA;
The Banking Association SA; Webber Wenzel Bowens; Werksmans)
Comment #1: While the need for the amendment is generally
accepted, at issue is the proposed deemed disposal for capital distributions
occurring prior to the September 2007 release of the proposed legislation. More specifically, the proposed legislation
creates a deemed 1 July 2008 deemed disposal date for all of these prior
capital distributions. The 1 July 2008
deemed disposal of all shares involved in pre-existing capital distribution is
retrospective.
Response:
Partially accepted.
The initial legislation envisioned that capital distributions
represented deferral of capital gains tax, not an outright exemption (i.e. not
permanent deferral). The proposed amendment
merely ensures eventual recognition of this pre-existing liability as initially
intended. However, given the large
number of parties and sums involved, some accommodations will be made. Therefore, the deemed disposal date will be
moved from 1 July 2008 to 1 July 2011.
This change will mean that holders of shares will trigger gain in the ordinary course as normally intended (i.e. given the
fact that most shareholders normally sell their shares within a few
years). However, taxpayers who engaged
in a share capital distribution with the expectation of never disposing of
their shares in the normal course (i.e. who have completely stripped the
underlying company of value, thereby leaving that company as permanently dormant) will be
faced with an eventual deemed disposal as the legislation initially
intended. Given the large tax loopholes
that many of these deals have utilised, National Treasury and SARS are
reluctant to grant permanent shelter to this potential loss in revenue.
Comment #2: The proposed part-sale regime for capital distributions
is problematic in respect of foreign shares.
Dividends are exempt if paid to a South African shareholder (and certain
of their controlled foreign companies) owning at least 20 per cent of the
foreign shares giving rise to the dividend.
However, the same exemption does not apply to capital distributions of
the same nature. The need for an
incentive to repatriate capital distributions back to
Response:
Accepted.
The repatriation of share capital distributions back to
Comment #3: The proposed part-sale regime for capital
distributions should contain an escape clause for listed shares. An escape clause is needed for listed shares
because part-sale treatment (though correct theoretically) will create an added
administrative burden for many smaller (innocent) shareholders.
Response:
Not accepted.
The avoidance of concern can equally arise in a listed as well as
unlisted context. Private equity deals
have often been a culprit in this area, some of which seek to convert listed
companies into unlisted companies.
Background (dividend stripping;
paragraph 19 of the 8th Schedule): Judicial precedent prevents artificial losses
stemming from dividend stripping in the case of shares held as trading stock,
and specific legislation exists that prevents dividend stripping in the case of
shares of a capital nature. The current
legislative regime preventing dividend stripping in the case of shares held as
capital is triggered if the shareholder at issue receives an extraordinary
dividend within two years of purchase.
These rules essentially deny any capital loss to the extent of the
extraordinary dividend. The proposed
legislation strengthens the scope of this rule.
First, the trigger is now an extraordinary dividend that occurs two
years before sale (as opposed to two years after acquisition). Second, all extraordinary dividends within
this two year period add to proceeds (i.e. both to reduce loss or to increase
gain) upon subsequent sale.
(Deloitte & Touche; KPMG; PKF; PWC; SAICA; Werksmans)
Comment #1: The proposed anti-dividend stripping rule creates a
double tax charge. Taxpayers could be
subject to both the STC as a result of that distribution while also being
subject to additional capital gains tax due to the extraordinary nature of the
distribution. Therefore, the proposed
change should either be dropped, be limited to situations where the dividend at
issue is exempt from STC or the rule should be limited solely to prevent artificial
loss.
Response:
Accepted.
The potential for both
STC and CGT to apply to the same distribution has been noted and the rule has
been amended to only disallow capital losses
Comment #2: The proposed anti-dividend stripping rule should not
apply in listed situations because small listed parties would not seek to
benefit from these transactions.
Response:
Not accepted.
The avoidance of concern could happen equally in a listed and unlisted
context. It should be remembered though
that the proposed anti-avoidance rule applies only to “extra-ordinary”
dividends (which can effectively devalue the underlying shares to generate a
capital loss on those shares). This
limitation means that the anti-avoidance rule normally does not apply (e.g. to
listed shareholders receiving regular dividends in the ordinary course).
Background (reduction of investment
distributions; section 1 “dividend” definition; section 64B(5)(f)):
Dividends between companies within the same group are exempt from tax
under the notion that the underlying profits will eventually be subject to tax
when those dividends leave the group.
The proposed legislation seeks to ensure this result by allowing the
exemption only if a group company receiving an STC free dividend adds that
dividend to profits. In other words, a
corresponding reduction in profits for the distributing group company should be
matched by a corresponding increase in profits for the recipient group
company. Without this change, we
understand that a number of transactions are ongoing that seek not only to
create a permanent STC exemption but also an artificial capital loss.
(Ernst & Young; KPMG; The Banking Association SA;
SAICA; SAVCA)
Comment #1: In accounting, distributions may be reflected on the
books as a reduction in share investment as opposed to a dividend (see
International Accounting Standard 18).
This reduction in investment treatment especially occurs when a
distribution comes from pre-acquisition profits. This reflection of a distribution as a
reduction in investment should not give rise to immediate STC.
Response:
Accepted.
The accounting treatment of a distribution as a reduction in investment
should not give rise to immediate tax.
This reduction in investment (typically for distributions out of
pre-acquisition profits in respect of the newly acquired shares) is more akin
to a share capital distribution. With
this envisioned shift, the proposed legislation will accordingly treat
reductions in investment (in a group context) as a capital distribution that
will generally give rise to immediate capital gain (without any STC), but this
gain will be minimal or nil for newly acquired shares. The proposed legislative change (as altered)
will solve the avoidance of concern without prejudicing taxpayers.
Comment #2: The required addition of profits for the recipient
group company is unclear. What happens
if profits are added but offset by recipient group company losses? The addition of profits in this latter
circumstance should theoretically give rise to intra-group STC relief without
regard to offsetting shareholder losses arising from other transactions.
Response:
Accepted.
The proposed legislation should merely require that the distribution
give rise to additional “gross” profits in the hands of the group shareholder
recipient (without regard to offsetting losses). The proposed legislation will be altered
accordingly.
Comment #3: Reliance on accounting profits as a pre-condition
for the STC group exemption is misplaced.
Tax legislation is complex enough without unnecessarily creating a
debate on the meaning of accounting concepts.
Response: Not accepted.
STC has relied on the concept of accounting profits as the base since
its inception in 1993. The group
exemption is merely an extension of this pre-existing reliance.
2.2 Group of companies relief
Background (narrowing the group
definition; sections 1 and 41 “group of companies” definition):
Various forms of tax relief exist for transfers between companies within
the same group. The purpose of this
relief is to treat the group as a single economic entity in certain
circumstances. One key requirement of
group status is for the companies involved to have a 70 per cent share
ownership link. The proposed legislation
seeks to ensure that this 70 per cent linkage is of a permanent feature, not
just a transitory relationship. The
proposed legislation accordingly excludes shares held as trading stock, shares
subject to a contractual obligation to sell and shares subject to an option for
sale.
(Ernst & Young; KPMG; The
Banking Association SA; Werksmans)
Comment #1: The exclusion of trading stock shares is too
wide. For instance, banks holding
“properties in possession” housed in separate companies could be impacted.
Response:
Not accepted.
The exclusion for trading stock is designed precisely to target
investments of the kind raised.
Subsidiaries of this nature are not really part of long-term group
structure but more akin to a separate asset for potential sale.
Comment #2: The exclusion for shares subject to options is too
wide. For instance, shares subject to
pre-emptive rights as a security for financing, and “earn-in” arrangements
(with employees earning into the shares of a company if certain conditions are
satisfied) would be impacted.
Response:
Partially
accepted. Options that allow
non-group parties to acquire shares at market value at the time of exercise
will not trigger any de-grouping.
Options of this nature (such as embedded options akin to pre-emptive
rights) do not give non-group parties any special claim vis-à-vis group
ownership. This escape hatch, however,
presumably does not assist employee earn-in arrangements, but earn-in
relationships of this kind will rarely be of a sufficient percentage to cause a
de-grouping.
Background (de-grouping charge;
section 45(4)): Under current law,
the group of companies definition includes all companies with a 70 per cent
shareholder connection, regardless of whether those companies are domestic,
foreign, or wholly or partly outside the tax net. However, only transfers to fully taxable
companies within the tax net receive STC intra-group relief or trading
stock/capital asset rollover relief. The
proposed legislation narrows the group definition to include only domestic
companies that are fully within the tax net (from a substantive law and
administrative viewpoint). The narrowed
group definition will be effective as of 1 July 2008.
(Deloitte; KPMG; SAICA; Webber Wenzel Bowens)
Comment #1: The proposed change will adversely impact foreign
investment. Many foreign companies
operate as the parent company to South African subsidiaries that lack any South
African linkage with one another. The
change also prevents foreign companies with South African branches from
transferring assets to each other, even though these foreign companies are part
of the same group. In the final
analysis, any exclusion of foreign companies from this relief will be viewed as
discriminatory.
Response:
Not accepted.
Firstly, the change is not discriminatory. Only companies fully within the tax net (from a substantive and
administrative viewpoint) can be members of a group. Hence, the exclusion applies equally to foreign and domestic parties
outside the net. Secondly, the argument
is overstated because most foreign companies operate through a single
channel. The narrowed group definition
is important from a policy viewpoint if this form of tax deferral is to be
effectively maintained in the long term.
Comment #2: The proposed change will prevent section 21 public
benefit organisations from receiving dividends free from STC stemming from
controlled subsidiaries. This change
will undermine a valuable source of public benefit funding.
Response:
Not accepted.
The argument is flawed. Under
current law, public benefit organisations already fall outside the scope of the
intra-group exemption. The proposed
amendment would effectively mean that the STC intra-group deferral regime can
be converted into an outright exemption.
Comment #3: The proposed change will prevent group relief if a
South African holding company solely receives dividends (all of which are
exempt in the hands of the recipient even if the recipient is an otherwise
taxable entity). Any exclusion from
group status for exempt shareholders should depend on an exemption stemming
from the nature of the shareholder as opposed to the nature of revenue stream
(such as dividends that are exempt regardless of the recipient).
Response:
Accepted.
The proposed legislation admittedly contains a technical problem that creates
this undesirable result for South African holding companies. The proposed legislation will accordingly be
modified to remedy this concern.
Comment #4: One consequence of a narrowed group definition (to
be effective as of 1 July 2008) is that company members previously within a
single group may find themselves falling outside that group as of the
implementation date. This de-grouping
for pre-existing groups will trigger a de-grouping charge on 1 July 2008, thereby
triggering gains and losses for previous rollovers. The old group definition should be retained
for previous group transactions.
Response:
Partially accepted.
The recommendation suggested creates administrative difficulties. Two systems would have to be maintained – one
group definition for older transactions and one for newer transactions. Moreover, taxpayers forget that the new
regime also has benefits, such as the 6-year limit on the de-grouping
charge. If the old regime were to be
retained for older transactions as suggested, would these taxpayers be willing
to forego the benefit of the 6-year limit on the de-grouping charge for these
older transactions (or are they seeking the best of both worlds)? Again, the proposed problem can be remedied
through a restructuring in most cases by simply adding a holding company to act as a single entry point. This restructuring can generally be
accomplished free from South African tax.
Given the fact that some companies may have difficulty with restructuring
due to issues other than tax, the proposed 1 July 2008 effective date will be
shifted to 1 January 2009.
Comment #5: Two different effective dates for the narrowed group
definition exist – one for intra-group STC relief and one for intra-group
rollover relief. The group definition
for STC applies as of 1 October 2007 and the group definition for rollover
relief applies as of 1 July 2008. The
STC group definition date should be moved to 1 July 2008.
Response:
Not accepted.
The split effective date was intended.
A narrowed group definition for intra-group STC on 1 October 2007 is
consistent with the reduced STC dividend rate from that date. The date in respect of the narrowed group
definition represents a different trade-off, which allows taxpayers to avoid
the de-grouping charge with appropriate restructuring. No de-grouping charge is at stake in the case
of intra-group STC relief.
Comment #6: The revised formula for the de-grouping charge still
does not work. The revised formula gives
rise to double losses and is out of line with the formula for section 23J (the
formula for determining depreciation cost for connected person sales).
Response:
Accepted.
Despite intentions to the contrary, the proposed de-grouping charge does
indeed give rise to various problems.
The proposed legislation will accordingly be withdrawn for further
internal review.
2.3 Company reorganisations
Background (removal of financial
instrument prohibitions in respect of domestic rollovers and combination of the
company formation and share-for-share rollover regimes; sections 41 – 47):
Under current law, rollover relief for domestic reorganisations
generally does not apply to the transfer of financial instruments or to the
transfer of financial instrument holding companies (i.e. companies mainly
containing financial instruments). The
proposed legislation eliminates this restriction. Current law also contains two sets of related
rollover relief – one for company formations and the other for share-for-share
transactions. These two sets of relief
have been combined because the distinction is no longer relevant with the
removal of the financial instrument holding company test.
(Old Mutual; Webber Wenzel Bowens)
Comment #1: While the deletion of the financial instrument
holding company test is most welcome, removal of the domestic financial
instrument holding company definition is still premature. The definition will still have limited
relevance in certain other contexts (e.g. for purposes of the participation
exemption for the sale of foreign shares).
Response:
Accepted.
It is agreed that the removal of this definition was premature given its
use in other contexts. The definition
will accordingly be retained.
Comment #2: The effective date for the proposed changes should
be accelerated. Certain practical
difficulties with the share-for-share regime can be removed if the proposed
changes could cover most of 2007.
Response:
Accepted.
Given the fact that change should be widely favourable to taxpayers and
that the change will cover years of assessment that have not yet closed, the
effective date of the proposed amendment will be accelerated. The proposed legislation will accordingly
apply to years of assessment ending on or after 30 October 2007.
Comment #3: The new regime for asset-for-share acquisitions
generally removes a number of unnecessary restrictions. However, one benefit of the old
share-for-share regime has been overlooked.
While target company shares received by the acquiring company generally
obtain a rollover tax cost (i.e. the tax cost of each target company
transferor), the share-for-share regime allowed for the acquiring company to
receive a market value tax cost in listed situations. This market value rule is important in listed
situations because the number of target shareholders involved makes reliance on
target shareholder tax records impractical (which would otherwise be required
for rollover tax cost treatment).
Response:
Accepted.
The fair market value rule associated with the old share-for-share
regime will largely be retained within the new asset-for-share regime.
Background (connected person
depreciation limitations; section 23J):
Current law contains a number of isolated provisions limiting the
depreciable cost of property when that property is transferred among connected
persons. The proposed legislation
combines all of these isolated provisions and seeks to eliminate the double tax
elements of these isolated regimes.
(ABASA; SAICA)
Comment: The proposed regime requires the person who
acquires the depreciable property to account for all previous holdings by
connected persons. This accounting is
required even if these holdings occurred many years earlier. This long-term tracking of connected persons
is accordingly impractical.
Response:
Accepted.
The problem of tracing back through a potentially endless array of
connected persons is a feature of the isolated provisions of current law. The new regime will accordingly be limited
mainly to situations in which taxpayers directly acquire property from a
connected person. A special
anti-avoidance rule will also apply if property was held by a connected person
within two years before the acquisition.
Tracing back to the previous holdings of connected persons will
otherwise be eliminated.
Background (sale-repurchase of equivalent shares; paragraph
42A of the 8th Schedule):
Under current law, the sale of shares at a gain triggers tax, even if
equivalent shares of the same company are repurchased shortly thereafter. The proposed legislation provides relief if
parties are forced to sell their shares pursuant to a court order under section
311 of the Companies Act, 1973. This
relief allows the parties under court order to obtain rollover relief for the
forced sale if they repurchase the shares within 90 days of the forced disposal.
(ABASA; SAICA)
Comment #1: The proposed legislation applies only to listed
companies, not to unlisted. All
companies should benefit from this relief.
Response:
Not accepted.
Internal research suggests that the proposed transactions of concern mainly arise in listed situations. Further factual information would be required before the proposed
regime could be expanded to cover unlisted
situations.
Comment #2: The proposed relief applies only to arrangements
between the company and its shareholders.
The relief should also cover creditor workouts that fall within section
311 of the Companies Act.
Response:
Not accepted.
The proposed regime only allows for gain to be avoided upon the
repurchase of shares of the same kind and of the same or equivalent quality as
the shares sold. This relationship does
not exist in creditor situations if debt is sold, followed by the purchase of
shares.
Background (share cross-issues; section 24B):
If a company issues shares in exchange for assets, the company generally
receives a base cost in the assets received equal to their market value at the
time of the share issue. One exception
to this rule arises if two companies issue shares in exchange for the shares of
one another. Under current law, the
cross-issue results in each set of shares having a zero base cost. The proposed legislation provides an
exception to this zero base cost rule in order to accommodate self-funding
situations. If an operating company
issues ordinary shares (or preferred shares convertible into ordinary shares)
in exchange for preference shares issued by an investor company, the operating
company obtains a market value base cost in the investor company shares.
(Sanlam)
Comment: While the proposed relief for operating
companies utilising the cross-issue of shares is welcome, comparable relief
should be available for the investor company.
Response:
Not accepted.
From the operating company’s perspective, the transaction is akin to a
loan. Hence, the reacquisition of the
“loaned” amount cannot be viewed as gain except to the extent the amount
returned exceeds the loaned amount.
However, from an investor company’s perspective, the relationship is
more akin to the receipt of shares in exchange for services (with the full
benefit to the investors triggering ordinary revenue without offset). Second, National Treasury and SARS are
reluctant to trigger base cost for both cross-issuing parties without some
level of corresponding tax recognition.
For instance, in the case of capital gains upon the transfer of
appreciated property in exchange of the issue of shares, both the transferor
and the transferee company respectively receive a market value base cost in the
company shares and assets transferred.
However, this market value treatment comes at the price of a single
recognition of gain for the transferor.
The proposed solution for the cross-issue of shares follows a similar
pattern (one party is triggering ordinary revenue with both parties to the
transaction being left with a market value cost).
2.4 Capital versus ordinary shares
Background (capital treatment for 3-year shares; section
9C): Under current law, the facts and
circumstances analysis of case law generally prevails as to the ordinary or
capital status of shares. However,
taxpayers may make an election to treat all listed shares held as having a capital
status if held for at least 5 years. The
proposed legislation treats listed (domestic and foreign) shares and unlisted
(domestic) shares as having capital status if held for at least three years
(this capital treatment is mandatory, not elective).
(ABASA; Association of Trust Companies in SA; Deloitte
& Touche; KPMG; Maillinicks; Old Mutual; PKF; PWC; SAICA; Werksmans)
Comment #1: Clarification is required as to the ordinary or
capital status of shares sold before close of the 3-year period (or to any
other disposal of shares falling outside the system).
Response:
Accepted.
The proposed legislation only addresses shares held for more than 3
years. Shares outside the new
legislation simply revert to pre-existing law as to their capital versus
ordinary nature. To the extent not done
so, this subtlety will be clarified in the Explanatory Memorandum.
Comment #2: No reason exists to exclude holdings in unlisted
foreign shares from this deemed capital treatment. Admittedly, the participation exemption for
foreign shares of a capital nature may be of concern because this capital
treatment results in exemption (as opposed to a lower rate afforded for assets
of a capital nature in a domestic context).
However, this concern should lead only to the exclusion of foreign
shares eligible for this exemption.
Response:
Not accepted.
Several tax differences exist between domestic and foreign
shareholdings. The background analysis
(e.g. tax and business practice) leading to the amendment only covered domestic
share impacts.
Comment #3: All shares should receive the benefit of capital
treatment in respect of shares held for at least three years. No reason exists to exclude preference shares
from this regime.
Response:
Not accepted.
Preference shares that have no participating stake in underlying profits
are in many ways more akin to
debt than pure equity. The preference yield accordingly acts like
interest (and indeed is often determined with reference to interest rates of
some kind). It is questionable whether
automatic deemed capital treatment should prevail in these circumstances.
Comment #4: In calculating the 3-year time period, the
pre-existing holding periods of former assets should be added to the
calculation if the shares held are received in exchange for former assets as
part of any tax-free reorganisation rollover.
No exclusion for section 42 asset-for-share rollovers and for section 46
unbundlings should be contained in the final legislation.
Response:
Not accepted.
The purpose of the exclusions is to prevent other long-term assets from
being effectively converted into long-term shares qualifying for automatic
3-year capital treatment. For instance,
if the proposed recommendation were accepted, taxpayers with 3-year holdings in
real estate could simply incorporate that immovable property (i.e. transfer the immovable property for shares in a wholly owned
company), thereby automatically obtaining the 3-year capital treatment for the
shares of this newly formed property company.
Comment #5: The 5-year election regime of section 9B provides
special rules for shares received in substitution by reason of a subdivision or
similar arrangement or from an issue of capitalisation shares. Under these special rules, the newly issued
shares can take into account the time periods of pre-existing holdings of
identical shares. None of these special
rules exist in the new 3-year capital treatment regime.
Response:
Partially
accepted.
Taxpayers should not be required to start a new time count simply
because shares are consolidated or subdivided.
The rules in this area will follow the principles of paragraph 78 of the
8th Schedule, which provide similar
rollover relief for re-arranging the same class of shares in a single company.
Comment #6: The proposed legislation treats tainted section 24A
shares more harshly than the former 5-year election regime of section 9B. The old regime essentially allowed pre-1999
section 24A shares to receive capital treatment under the 5-year of section
9B. The new 3-year capital treatment
regime should not undermine this pre-existing situation.
Response:
Accepted.
The proposed legislation will not contain any exclusion for tainted section
24A shares after having taken into account the costs and benefits of
administrative enforcement. Taxpayers
previously benefiting from the prior rollover of ordinary revenue as prescribed
in section 24A will effectively obtain the added benefit of converting that
ordinary revenue to capital.
Comment #7: The proposed legislation contains an ordering rule
for multiple share holdings. This
ordering rule treats the oldest shares as being disposed of first (i.e. the
ordering rule relies on a FIFO formulation).
This rule is potentially in conflict with the capital gains rules, which
provide ordering rules based on the specific identification method, the FIFO
method or the weighted average method.
For compliance ease, the two sets of rules need to be aligned.
Response:
Not accepted.
While it is appreciated that two different ordering rules will apply for
the same set of shares, deviations between the two ordering rules are
unavoidable. For instance, the capital
gain regime allows for a weighted average approach in calculating base cost for
capital gains tax purposes; no such ordering rule is possible for determining
time in which shares are held for purposes of the 3-year rule.
2.5 Intellectual cross-border payments
Background (enhanced transfer pricing;
section 31): Current law
requires an arm’s length standard for prices relating to the cross-border
supply of goods and services if the cross-border supply is between connected
persons. This supply includes the
transfer and use of intellectual property as well as the associated
services. The proposed legislation
lowers the connected person threshold to include all 20 per cent shareholders
of a company even if other parties own a majority stake in that company.
(KPMG; SAICA; Sasol)
Comment #1: The new connected person test appears to apply to
all of section 31, which includes not only the arm’s length requirement
(section 31(2)) but also the thin capitalisation rules (section 31(3)). Presumably, the new connected person test
should apply solely for purposes of the arm’s length requirement (section
31(2)).
Response:
Accepted.
The proposed connected person test was intended solely for transfer
pricing, not the thin capitalisation rules.
The proposed legislation will be altered accordingly.
Comment #2: The new connected person test appears to apply to
all cross border supplies of goods and services, not only transfers of
intellectual property. Presumably, only
intellectual property should fall within the ambit of the new connected person
test.
Response:
Accepted.
The proposed connected person was intended to deal only with
cross-border intellectual property transfers (and related services). The proposed legislation will be altered accordingly.
Background (charges against the
South African tax base for South African developed intellectual property;
section 23I): Intellectual
property developed by a fully taxable party within
(Deloitte & Touche; KPMG; Mallinicks; PWC; SAB; SAICA;
Werksmans)
Comment #1: The proposed legislation is unnecessary because
Exchange Control prevents the offshore transfer of intellectual property.
Response:
Not accepted.
Application of Exchange Control to cross-border intellectual property
transfers lacks a consistent track record.
Moreover, sole reliance on Exchange Control to prevent this form of
offshore transfer is not sustainable.
Comment #2: The proposed legislation should create taxable gains
at the point the intellectual property is transferred offshore. Subsequent payments for the domestic usage of
this former South African intellectual property should be respected because all
of these payments are made pursuant to pre-existing projects.
Response:
Not accepted.
Taxpayers are essentially asking for more than simple protection against
retroactivity; they seek fiscal stability.
In essence, they are seeking to use the existence of pre-existing
contracts to prevent the application of any new tax legislation. It is widely recognised (even in private
contracts) that new law can alter pre-existing arrangements on an ongoing
basis.
Comment #3: The proposed denial of deductions applies if any
South African resident owned the intellectual property at any time. This requirement will be extremely hard to
comply with, especially for intellectual property formerly owned by South
African residents many years ago.
Response:
Not accepted.
Available records associated with intellectual property allow for a
comprehensive tracing of historical ownership.
The concern is overstated. Any
time limitation would effectively mean that the sale license-back problem would
eventually grow over time.
Comment #4: The proposed denial of deductions applies if the
taxpayer at issue (or a connected person) wholly or partly discovered,
developed, created or produced the intellectual property. This aspect of the legislation is too
broad. Inputs into the intellectual
property at issue can result in denial of tax, even though the contribution of
the taxpayer (or connected person) is relatively insignificant when the intellectual
property is considered in total.
Response:
Accepted.
The proposed anti-avoidance rule will be limited in this regard solely
to situations in which the South African contribution wholly or mainly
contributed to the development of the intellectual property (or a material part
thereof). A more exact test is
problematic, however, due to the ease with which intellectual property can be
varied.
Comment #5: The interaction of the proposed legislation and tax
treaties is unclear. Even if the payment
is not income in the hands of the payee, the proposed legislation allows the
taxpayer at issue to deduct 1/3rd of the intellectual property
payment if the payment is subject to 12 per cent withholding tax under section
35. The proposed legislation does not
address situations where tax treaties alter this 12 per cent rate.
Response:
Accepted.
The interaction of the proposed legislation and tax treaties will be
clarified. The 1/3rd deduction will be limited to
situations where the recipient is subject to tax at a rate of at least 10 per
cent after taking into account tax treaties.
Treaties lowering the rate below 10 per cent will prevent the
application of this 1/3rd deduction.
2.6 Long-term insurers and controlled
foreign companies (CFCs)
Background (impact of linked
policies on CFC status; section 9D):
Foreign companies that are owned or controlled by South African taxpayers
are regarded as CFCs. CFC treatment can
result in deemed income for South African taxpayers with a 10 per cent or
greater stake in a CFC. Current law
treats South African life insurers as owning all shares in foreign companies
which they technically hold, even though a large portion of these holdings are held on behalf of investment policy
holders. The proposed legislation
remedies this situation by excluding investment policy holdings from the 10 per
cent deemed attribution rule (these shares will still count toward CFC
status). This exclusion is justified on
the grounds that the life insurer is acting as a mere trustee on behalf of
these policyholders.
(The Banking Association
Comment #1: Investment policyholders moving into and out of
foreign company investments may still result in a foreign company becoming or
ceasing to be a CFC. The proposed
legislation only changes the rules for 10 per cent attribution, not the rules
for determining CFC status. Every
cessation of CFC status will continue to result in a deemed CGT event for the
South African life insurer (who typically satisfies the 10 per cent shareholder
threshold). The long-term insurer does
not have control over these policyholder decisions.
Response:
Not accepted.
The proposed legislation only seeks to ensure that life insurers are not
taxed on CFC income that stems from their trustee relationships. The proposed request now seeks a special
dispensation that could arise outside the life insurer context. Changes of CFC status are often admittedly
outside a taxpayer’s control.
Comment #2: It is submitted that other institutions investing on
behalf of their clients in foreign collective investment schemes are faced with
the same imputation problem on linked products as life insurers. The proposed legislation does not assist
these other institutions.
Response:
Not accepted.
The analogy drawn between the problems of long-term insurers addressed
in this Bill and other taxpayers is not accurate. Long-term insurers are unique from a tax
perspective owing to the trustee principle of the four funds approach. No other class of taxpayers operates under
this principle.
2.7 Depreciation
Background (commercial buildings;
section 13quin):
Under current law, commercial buildings are not entitled to claim any
depreciation allowances, except in special circumstances. The proposed legislation allows for
depreciation to be claimed for all of these buildings (plus improvements) at a
rate of 5 per cent per annum over 20 years.
(ABASA; Barloworld Motors; Deloitte & Touche; Ernst
& Young; KPMG; Old Mutual; PKF; SAICA; The Banking Association
Comment #1: The proposed legislation is limited to new and
unused buildings. Pre-existing buildings
do not receive the benefit of this regime.
No reason exists for this distinction; all buildings should be treated
equally.
Response:
Not accepted.
The proposed 5 per cent rate is intended to encourage the creation of
new structures. Application of the 5 per
cent rule to the acquisition of pre-existing commercial buildings would merely
result in a substantial deadweight loss at great expense to the fiscus. Moreover, it should be noted that the 5 per
cent rate is substantially above the rate generally applied for financial
accounting (the latter of which generally stands between 2 ½ per cent and 3 ½
per cent).
Comment #2: Even if the legislation is intended solely for new
and unused buildings, the proposed legislation should at least cover new
improvements on pre-existing buildings.
Response:
Accepted.
It was always intended that new improvements on pre-existing buildings
would fall within the ambit of the new 5 per cent depreciation regime. Any technical wording to the contrary will be
corrected.
Comment #3: The proposed legislation should have an accelerated
effective date. Taxpayers have already
contracted for commercial buildings with the knowledge of the pending
amendment. The proposed effective date
should apply from 21 February 2007, the date of announcement made by the
Minister of Finance.
Response:
Partially accepted.
The proposed 5 per cent rate will apply for all new and unused buildings
(and improvements) that are contracted from 1 April 2007 to the extent that
construction begins from this date. The
1 April date corresponds with the new financial year of many companies. The second requirement that construction
begins from 1 April 2007 date (as a second
prong) prevents the false backdating of contracts.
Background (port assets; section
12F): The proposed legislation provides
depreciation relief for port assets. The
proposed rate of depreciation will be 5 per cent annually over 20 years (the
same as airport assets).
(Deloitte & Touche; Safmarine; Transnet)
Comment #1: The proposed legislation should cover additional
port assets used for transport, such as off-dock container depots.
Response:
Accepted.
The proposed legislation will be altered to cover a wider list of port
assets associated with transport, including off-dock container depots. It should also be noted that the 5 per cent
rate for commercial buildings will provide relief for many port-related items
(such as warehouses).
Comment #2: The proposed legislation should cover capital works
for marinas and fishing harbours. Port
works dedicated to transport are not the only port infrastructure requiring tax
relief.
Response:
Not accepted.
The background analysis leading to the 5 per cent rate only covered
transport-related port assets. The
subject of marinas and fishing harbours will require separate analysis for a
later day.
Comment #3: The depreciation regime for port assets should not
be conditioned upon the taxpayer at issue being solely engaged in the business
of port operations. No reason exists to
exclude a taxpayer that is actively engaged as a port operator merely because
that taxpayer also has active operations dedicated to other areas.
Response:
Accepted.
The proposed regime will apply to all assets directly used for the
engagement of port operations so that taxpayers are not prevented from
simultaneously engaging in other operations.
However, the limitation against passive leasing will be maintained.
Comment #4: The proposed effective date for port assets should
be more inclusive. The new regime should
cover all port assets brought into use on or after 1 January 2008.
Response:
Accepted.
The “brought into use” concept will be utilised so that depreciation
will begin when the port assets are brought into operation in the production of income.
Background (environmental assets;
section 37B): The proposed
legislation provides comprehensive relief for environmental assets associated
with the process of manufacturing.
Assets that are closely associated with the manufacturing process (e.g.
air pollution control equipment to control pollution emanating from
manufacturing smoke stacks and water treatment that results in recycled water
used for further manufacturing) will receive a 40:20:20:20 rate. This rate is
on par with plant and machinery used in manufacturing. Environmental waste disposal sites, dams,
etc… will receive a 5 per cent annual rate (which is on par with manufacturing
buildings).
(KPMG; SAICA; Sasol)
Comment #1: The proposed legislation limits the relief solely to
environmental items required for purposes of complying with the South African
legal obligations providing for the protection of the environment. This limitation should be abandoned. No reason exists to discourage environmental
efforts that exceed those legal obligations.
Response:
Not accepted.
The proposed legal limitation prevents taxpayers from artificially
extending the environmental depreciation incentive to other structures that
only provide marginal environmental benefits.
Moreover, the limitation should not present a significant practical
issue for genuine environmental applications.
South African environmental legislation is in line with international
trends, thereby, requiring the most modern of environmental structures and
equipment.
Comment #2: The proposed 5 per cent annual rate for
environmental waste disposal assets is too low.
A proposed 10 per cent annual rate is more consistent with the useful
lives of the assets at issue.
Response:
Not
accepted. National Treasury’s
independent analysis suggests otherwise.
Information from key companies suggests that the accounting rate falls
between a rate of 2 ½ per cent and 5 per cent for these permanent environmental
structures. A higher rate exists for
plant and equipment associated with environmental treatment and recycling. The proposed legislation separately covers
this latter group of assets with a very generous 40:20:20:20 rate.
2.8 Exemption of occupational death benefits
Background (employer-provided death
benefits; section 10(1)(gB): Under current law,
only employer-provided death benefits payable in terms of the Compensation for
Occupational Injuries and Diseases Act is tax-exempt. Some employers supplement these payments by
paying additional amounts – these additional amounts are taxable.
(Deloitte & Touche; Ernest & Young)
Comment #1: The proposed amendment is not necessary. Proceeds of an employer group life insurance
policy are not taxable in the hands of the employee concerned. It is further argued that direct death
payments made by an employer to the deceased employee’s dependants are not
taxable.
Response:
Not accepted.
As suggested, the proceeds from an employer-provided life insurance policy are exempt in
terms of the Eighth Schedule. However,
direct death payments made by an employer to the deceased employee’s dependants
are generally taxable as a termination of employment benefit. The exemption is therefore required.
Comment #2: It is unclear whether the proposed exemption of R300
000 for employer-provided death benefits will also qualify for the pre-existing
R30 000 exemption for termination of employment by reason of death (i.e. for a
total exemption of R330 000). The interaction
should be clarified.
Response:
Accepted.
The interaction between the two exemptions will be clarified. Taxpayers claiming the exemption of R300 000
will not be eligible to additionally claim the pre-existing R30 000 exemption.
2.9 Oil and gas fiscal stability
Background (fiscal stability
agreements for oil and gas rights; paragraph 8 of the 10th Schedule):
In 2006, an incentive regime for oil and gas was added that replaced the
previous OP 26 lease system. This
incentive regime contains a fiscal stability clause that provides a contractual
guarantee that the incentives provided by the regime will not be altered to the
detriment of taxpayers for the duration of the oil and gas rights held. The proposed legislation clarifies a number
of technical issues arising from the fiscal stability negotiation process
between National Treasury and industry stakeholders.
(PetroSA)
Comment #1: The proposed legislation allows the Minister of
Finance to enter into a fiscal stability agreement with a potential oil and gas
right holder as long as that right is finalised within six months. However, the time limit should be open-ended
because the complexities of the arrangements pertaining to the underlying
rights often entail a protracted negotiation process outside of the taxpayer’s
full control.
Response:
Partially accepted.
Taxpayers should not request fiscal stability unless their future
receipt of an oil and gas right is sufficiently real. Pre-emptive requests are a waste of
resources, and unused fiscal stability agreements are to be avoided. Nonetheless, the period in which an oil and
gas right must be received will be extended to one year in order to cater for
unexpected difficulties. Furthermore,
even if a fiscal stability agreement lapses, nothing prevents taxpayers from
requesting a new agreement if the oil and gas right is realistically pending.
Comment #2: The proposed legislation allows the fiscal stability
protection to be freely transferred in terms of exploration rights (i.e. once
fiscal stability is granted in terms of an exploration right, any subsequent
holder of that right receives the same fiscal stability protection as the
initial holder receiving the protection).
The proposed legislation should similarly provide the same free transferability
of fiscal protection in respect of production rights.
Response:
Not accepted.
Free transferability of fiscal stability in relation to production
rights is a larger debate reserved for the Mineral and Petroleum Resources
Royalty Bill. At issue is how much
Government wants to be locked-in for years to come as a price for stimulating
investment. Acceptance of the request
would mean that the lock-in period lasts 30 years for all South African rights
across the country. The current proposed
loss of fiscal stability upon transfer may allow for accelerated change. On the other hand, this same lack of free
transferability may lead to distortions with some companies unduly holding onto
rights rather than selling to more efficient parties.
2.10 Securities Transfer Tax (“STT”)
Background:
The proposed legislation merges the Stamp Duty on unlisted shares with
the Uncertificated Securities Tax (“UST”) on listed shares. Most changes merely clarify existing law, simplify
administration and adjust the charge on unlisted shares so that the charge is
more administrable in this regard.
(Bobby Johnson; PWC; Webber Wenzel Bowens; Werksmans)
Comment #1: The proposed STT imposes an obligation on unlisted
companies to pay the STT on behalf of purchasers of unlisted shares. This obligation poses an unfair burden on
unlisted companies (even though the STT can be recovered by the company from
the purchaser).
Response:
Not accepted.
The proposed STT essentially follows the collection format of the
previous UST. Centralised collection
points are used with centralised collectors having a right of recovery from
purchasers. The proposed regime for
unlisted shares contains the same mechanism.
Comment #2: Penalties and interest stemming from STT violations
may unfairly fall on unlisted companies.
The violation may stem from actions of the purchaser, and yet no right
of recovery exists for the company to recover these penalties and interest from
the purchaser.
Response:
Accepted.
The proposed legislation will be altered so that the collecting agent can
recover interest and penalties that are attributable to the actions of the
purchaser.
Comment #3: In addition to the exemption for the liquidating
cancellation of shares, the proposed STT should contain an exemption for
cancellations stemming from buybacks, redemptions and so forth.
Response:
Not accepted.
The calls for exemption on redemption (buyback, etc…) have consistently
been rejected over several years. No
policy reason exists for an exemption of this nature. Moreover, an exemption for redemptions can
easily lead to avoidance (with the redemption exemption being used to disguise
shareholder-to-shareholder taxable sales).
Comment #4: The proposed legislation places a minimum value on
listed shares transferred. More
specifically, the minimum value cannot fall below the lowest price/closing
price. This lower threshold for listed
shares may be problematic if the acquisition involves transfers of substantial
shareholdings giving rise to block discounts.
Response:
Not accepted.
The proposed legislation merely leaves the current market value limits
in place. The lowest price/closing price rule prevents price manipulation.
2.11 Miscellaneous – Income Tax
Background (foreign expatriate
accommodation; paragraph 9 of the 7th Schedule):
No taxable value is placed on employer-provided accommodation if the
employee is required to work away from home (i.e. this accommodation is
effectively exempt). In the case of
foreign nationals working temporarily in South Africa, claims were made that
employer-provided housing for their South African work contracts should be
exempt even if the contract lasted for an extended period (two-to-four
years). The proposed amendment will
limit this tax-free benefit to 6 months.
This amendment will apply to tax years commencing on or after 1 March
2007.
(American Chamber of Commerce; Baker Hughes; Bhp Billiton;
British American Tobacco; CitiBank; Douglas & Velcich; Edward Nathan
Sonnenbergs; Ernst & Young; KPMG; PWC; PWC on behalf of Habitat for
humanity; Safmarine; SAICA; Sasol)
Comment #1: More time is needed for implementation should this
proposed legislation be adopted.
Taxpayers cannot be expected to retroactively pay tax on salary received
before the current legislation is adopted.
Response:
Accepted.
The proposed effective date will be changed. The legislation will be effective for tax
years commencing on or after 1 March 2008.
Comment #2: Numerous comments were received relating to this
proposed amendment. Concerns were raised
that this amendment will significantly increase employer costs for obtaining
foreign skilled employees working temporarily in
Response:
Partially accepted.
While the taxpayer interpretation leading to their claims for exemption
is misplaced, some concession may be necessary given the prior history. The exemption period will accordingly be
extended from 6 months to 1 year.
Visiting expatriates will also be eligible for the initial 1-year
exemption even if they know their stay will extend beyond this period.
Background (foreign tax credits;
section 6quat):
Taxpayers are eligible for section 6quat rebates (i.e. credits) for foreign
taxes paid in respect of foreign sourced income. No foreign tax credits are available for
foreign taxes paid in respect of South African sourced income because
(Bhp Billiton; Deloitte & Touche; Ernst & Young; Mallinicks; PWC)
Comment #1: The proposed legislation unfairly limits the
proposed deduction for foreign tax credits to total net income generated by the
activity subject to the foreign tax. No
reason exists for this limitation.
Response:
Not accepted.
The South African tax system ring-fences foreign losses so that these
losses cannot be applied against South African income. In this circumstance, the South African
receipts and accruals at issue seek the benefits associated with foreign source
income (offsets for foreign taxes).
Hence, one price of this treatment is a form of ring-fencing associated
with foreign sourced income.
Comment #2: The proposed legislation does not appear to allow
for excess losses stemming from deductible foreign taxes to be carried over
into later years. Carryovers should be
expressly allowed.
Response:
Not accepted.
Carryovers are not
permitted since they either reflect excess credits (e.g. 100% of capital gains
taxed in foreign country but only 50% in
Comment #3: Can taxpayers elect to choose to deduct foreign
taxes even if these foreign taxes are creditable? This issue needs to be clarified.
Response:
Accepted.
The proposed legislation is only intended to allow for deductions if
foreign taxes are not eligible for credits.
As a general matter, few taxpayers would want this choice (i.e. credits
are preferred if available), and therefore, no reason exists to add
administrative complexity for a choice that few would take. The proposed legislation and/or the
explanatory memorandum will be clarified accordingly.
Background (foreign currency
hedging; section 9D(9)): Under current law,
currency gains and losses arising from transactions between CFCs of the same
group do not give rise to tainted section 9D income. The proposed legislation seeks to neutralise
any hedging with outside parties in respect of these CFC intra-group loans.
(Deloitte & Touche)
Comment: The proposed legislation is welcome. However, it is requested that the effective
date of the change be made from late 2006 (since the initial request for change
dates back this far).
Response:
Partially accepted.
The proposed legislation will be given an effective date for years of
assessment ending on or after 1 January 2007.
There is a limit in which Government can go back in terms of legislation
without creating the complexity of re-opening tax returns. The mere fact that a request is made for
change does not mean that the change can automatically be made as of the date
of the request. The legislative process
takes time. Care is also required in
respect of retroactive changes because these changes may assist some taxpayers while disadvantaging
others.
Background
(ordinary income for salary in the form of shares; section 8C):
Top executives have long sought to reduce their tax liability on salary
through receipt of equity-related instruments of their employer company. In 2005, a new regime was added for enhanced
enforcement of salary received in this manner.
The essence of the new regime is to allow for deferral of tax if rights
to equity instruments are received.
However, the deferred tax charged applies at ordinary rates (and at a
time when full value can be readily accounted for).
(Deloitte & Touche; KPMG; Mallinicks; PWC; SAICA; The
Banking Association SA)
Comment #1: The proposed legislation extends the definition of
equity instruments to include any financial instrument that “derives its value
with reference” to a share. This
extension means that “phantom shares” (a common practice) will now be subject
to the anti-avoidance regime.
Response:
Accepted.
The proposed legislation will be dropped. The mischief of concern can be addressed
through enforcement of current law.
Comment #2: The proposed legislation extends PAYE withholding
beyond the technical employer, including associated institutions (such as
employee trusts). This extension will
mean that two different parties will be liable for the same tax,
Response:
Not accepted.
The proposed regime merely ensures that SARS has more than a single
option for collection. The party issuing
the shares is often not the same as the party holding the cash needed for ready
collection. This proposal cannot be used
to collect the same underlying tax twice (i.e. one from each separate party).
Comment #3: The proposed legislation is retroactive. The proposal not only applies to equity
instruments “acquired” on or after 30 October 2007, but also to those
pre-existing equity shares “held” on or after that date.
Response:
Accepted.
The proposed legislation will not apply to equity instruments “held” to
the extent the proposed legislation increases the tax burden on these
instruments. Only newly acquired shares
will be subject to this higher burden.
Background
(reduction of assessed losses for creditor compromise; section 20):
Current law potentially reduces the assessed loss of a debtor business
when certain creditors cancel their debts.
The proposed legislation clarifies the ambit of this reduction of
assessed losses due to creditor debt cancellation.
(PWC)
Comment: The proposed legislation goes too far. Only debt cancellations stemming from trade
creditors should adversely impact a debtor’s outstanding assessed losses.
Response:
Not accepted.
The principle at issue is recoupment.
Debtors that enjoy the benefit of an ordinary loss due to an expenditure
funded (directly or indirectly) by borrowed funds should recoup that ordinary
loss if that debt is later cancelled.
Narrow tracing in accordance with the suggestion would unfairly
prejudice the fiscus.
2.12 Miscellaneous – Other taxes
Background (Skills Development Levy
and public benefit organisations; section 4 of the Skills Development Levies Act):
Current law exempts public benefit organisations from the Skills
Development Levy. Proposed legislation
seeks to eliminate this exemption. Small
public benefit organisations would still benefit from the R500 000 exemption
threshold for smaller operations. This
change is motivated in part by the fact that public benefit organisations can
participate in trading activities.
(The Non-Profit Consortium)
Comment: The proposed amendment should be rejected. The additional charge on employees of public
benefit organisations will put further strain on scarce funding.
Response:
Accepted.
While the proposed amendment has legal grounds, the proposed amendment
will be dropped. Further sector analysis
is required.
Background (VAT direct and indirect
exports): Presently,
the Export Incentive Scheme in Regulation GN 2761 regulates indirect
exports. It is proposed that the
references to paragraph (a),(b) and (c) of the export definition be
deleted. As a result, exports may only
be zero rated as contemplated in the regulations.
(SAICA)
Comments. The only regulations currently issued in respect of
exports are the VAT export incentive scheme, which deal with indirect
exports. No regulations have been issued
for direct exports; and, therefore, no direct exports will be covered.
Response:
It is proposed that the requirements, which have to be met in order for the
direct and indirect export of goods to fall within the definition of exported,
be prescribed by regulation. The shift
to regulation will not prejudice direct exports.
Background (customs and intellectual
property):
Section 15 of the Counterfeit Goods Act (CGA) empowers customs officers to
seize and detain counterfeit goods which are imported into the Republic. In
order to supplement the provisions in the CGA, section 113A was inserted into
the Customs and Excise Act, 1964, (CEA) in 2002.
These
provisions have been the subject of litigation and although SARS has enjoyed an
encouraging degree of success in this regard, Senior Counsel had this to say in
a legal opinion regarding the possible amendments to the CEA in relation to
counterfeit goods:
“[T]he
enactment of section 113A of the CEA and the inter-relationship between the two
pieces of legislation is not exactly clear and it is likely to pose more
questions in the future that will have to be dealt with by the courts…
We
propose that the provisions dealing with customs officers and counterfeit goods
be streamlined and contained in only one piece of legislation, namely the
CEA. We also propose that customs’ act
mainly as a filter for goods under customs control and relinquish control and
responsibility for the goods to the proper authorities.”
The
proposed amendments are aimed at these ends and are also in line with the World
Customs Organization’s (WCO) model legislation.
One of the primary considerations of the WCO in drafting the model legislation
is that the holders of intellectual property rights have the primary
responsibility to take measures to protect their rights. The actions of a customs officer are
therefore limited to detention of the goods and the officer will not seize
goods. The right holder will have to
approach a competent court for a determination that the goods detained are
counterfeit goods that may be seized.
An
industry commentator’s views on these amendments were succinctly put in the
Business Day of 8 October; “I welcome the proposed changes to the Customs and
Excise Act as it clearly and concisely sets out the powers, rights,
obligations, time frames and procedures for SARS to deal with counterfeit
goods.”
Comment
#1: The
provisions of the CGA and the proposed amendment are in conflict.
Response:
Accepted. There will be consequential
amendments to the CGA to support the amendment in Chapter XB. Discussions with
the dti in this regard are ongoing. Although the consequential amendments to
the CGA will follow a separate Parliamentary process, both sets of amendment
will come into operation simultaneously on a date to be determined.
Should
further amendments to the CEA be necessary to ensure proper alignment between
the CGA and CEA or to improve the control over counterfeit goods, they will be
effected.
Comment
#2: No
provision is made for an extension of the time period prescribed to deliver the
written notice to the Commissioner and to the affected party.
Response: Accepted. A
provision is inserted to empower the Commissioner to extend the time period for
an additional period not exceeding ten days on good cause shown.
3. Newly added legislation
3.1 Hyperinflationary currencies
Current law taxes currency gains and losses with reference to
the taxpayer’s currency used for operations.
Therefore, if a taxpayer operates a business establishment in a foreign
country, currency gains and losses are generally determined with reference to the
currency of that country.
If no business operations are involved, the currency gains and losses
are determined with reference to the
The current system works reasonably
well unless the business establishment reports in a foreign currency that is
devaluing due to hyper-inflation. In
situations of this kind, the taxpayer is suddenly subject to significant
currency gains for any holdings of that foreign business establishment that are
in a different non-hyperinflationary currency.
As a practical matter, these non-hyperinflationary currency holdings are
common because businesses subject to a hyper-inflationary currency seek to hold
outside currencies as a hedge against the rapid deterioration.
In order to alleviate this
situation, the proposed legislation seeks to mitigate the adverse tax effects
of hyperinflationary currencies.
Taxpayers in this circumstance will be freed from the business
establishment currency. Third currency holdings will instead be
measured against the
3.2
Research and development (“R&D”)
In 2006, Government added a 150 per
cent deduction for R&D expenditure and a 50:30:20 depreciation rate for
R&D buildings. While the initial
legislation is well intended, the avoidance concerns are many. In the Taxation Laws Amendment Act, 2007 adopted earlier this year, a
stop-gap measure was introduced to prevent artificial acceleration of R&D
expenditures between connected persons by denying the 150 per cent rate for all
connected person funding.
The proposed legislation repeals the
stop gap measure as excessive. Connected
person funding will again be eligible for the 150 per cent rate to the extent
the connected person recipient actually spends the funds. Other adjustments are the removal of the 150
per cent rate for interest on borrowed funds dedicated to R&D and for
rentals dedicated to R&D.
3.3 Tax on Retirement Funds repeal
The Tax on Retirement Funds was repealed
as of 1 March 2007. The last payments in
respect of the tax were due on May 2007 (with reference to the six-month period
of 1 September 2006 to 28 February 2007).
Discussions have been ongoing with industry to provide a hard cut-off of
future audits in respect of the repealed tax.
This hard cut-off is important for certainty, especially for financial
statements. The proposed legislation
clarifies that no further assessments will be raised from 1 March 2008 except
for fraud, misrepresentation or non-disclosure of material facts (with no
assessments allowed from 1 March 2010 even if fraud, misrepresentation or
non-disclosure is present). This 1 March
date gives taxpayers long-term certainty while allowing SARS a final
opportunity to raise an assessment for egregious situations.
3.4 Pension adjustments
The Pension Funds Act was amended
with effect from 13 September 2007 to allow for the payment of certain court
orders (e.g. maintenance orders and divorce orders) by a retirement fund before
the member exits that fund. Payments in
terms of a divorce order were previously noted by the fund and paid when the
member retired or discontinued his membership of the fund.
These payments will become taxable
on the day the fund makes a payment in terms of the court order and will be
taxed as withdrawal benefits in the hands of the fund member. The fund may pay the amount stipulated in the
court order to the relevant person and may also release the tax due on the
amount paid to SARS. In the case where
the court order is made terms of the Divorce Act, the fund member will have a
right of recovery against the non-member ex-spouse for any taxes suffered on
the divorce payment paid to the ex-spouse.
Payments made by a fund in terms of
a maintenance order (lump sum awards and ongoing payments) will be taxable in
the hands of the fund member and tax exempt in the hands of the recipient. The fund member will not have a right of
recovery against the recipient for the tax maintenance payment.
3.5
Taxation of fishing persons
and seafarer salaries
In 2006, the definition of
“Republic” was extended from 12 nautical miles off the South African coast to
200 nautical miles. This change is
consistent with the UN convention and with other questions as to which country’s
law (including tax law)
governs any issue on the sea
As a result of the change, foreign
fishing persons and other foreign seafarers having operations within the 12-200
nautical range are now fully subject to tax at ordinary rates on their
salary. Similarly, South African fishing
persons and seafarers will lose the benefit of the 183-day salary
exemption. This change came into effect
as of 1 March 2007.
While the legal impact of the change
was understood at the time the 2006 legislation was adopted, National Treasury
and SARS have been informed that the change has largely taken the fishing and
seafaring industry by surprise. The
industry has not reacted by changing compliance systems for the collection of
the associated PAYE stemming from the new legislation. In order to relieve the potential back-tax
liability (plus interest and penalties thereon), the proposed effective date of
the legislation will be delayed until 1 March 2008 in respect of fisherman and
seafarers.
3.6 Withholding relief for pre-retirement withdrawals
Previous tax legislation (adopted
earlier this year) sought to exempt PAYE withholding for pre-retirement
withdrawals of up to R43 000 from PAYE withholding.
The R43 000 amount is consistent with the individual exempt threshold
for salaries. Unfortunately, there was not sufficient time
allowed for an adjustment to the computer system used by SARS to accommodate the R43 000
withholding exemption. The proposed
withholding relief of R43 000 is accordingly shifted to 1 March 2008 so SARS
has sufficient time to properly adjust its computer compliance systems.
3.6
CFC rulings
In 2006, legislation was passed authorising the Commissioner to exempt certain limited CFC
activities from tainted income treatment via the advance tax ruling system.
This authority for exemption seeks to ensure that the objective CFC
standards do not create unfair results for unique facts and circumstances. The Commissioner can only authorise this
limited form of relief if satisfied that a ruling of this nature will not result in an undue erosion of the tax base.
The tax base erosion limitation is
proving to be too vague for SARS to issue any advanced rulings in this
area. In practical terms, the tax base
erosion test has prevented the issue of any SARS rulings that mitigate the
potential harshness of overly prescriptive CFC rules. The base erosion test will accordingly be
repealed. SARS must, however, take all the related facts and
circumstances pertaining to the CFC at hand into account before issuing any advanced rulings.