By
Caroline Maxwell, London
Located at the southernmost
tip of Africa, South Africa (GMT +2) is bordered by
Namibia, Botswana, Zimbabwe and Mozambique, and totally
encloses Lesotho. There are currently 11 official languages
in South Africa, but for business purposes, English
and Afrikaans are most often used.
Although the economy is
in many areas highly developed, there are some weaknesses,
partly because of remaining inequalities between the
country's black and white residents, and partly due
to the country's international isolation until the 1990s.
The country could, then, be said to be in a state of
transition, as the government seeks to address the inequities
of previous regimes and foster good international trade
relationships with other countries.
Efforts so far appear
to have been successful, and South African business
has become increasingly integrated into the international
community; foreign investment into the area has grown
substantially over the past few years as a result. With
its advantageous location and a government receptive
to foreign direct investment, South Africa certainly
looks as though it is becoming an international force
to be reckoned with.
The South African business
infrastructure is generally well developed, and could
be seen as a model for other African countries to follow.
It includes an efficient physical infrastructure of
roads, rail and air transport, a well developed communications
network supported by reliable electricity supplies,
and a substantial financial support structure for companies
established in the country, including a network of merchant
banks, brokers, and financial services specialists.
Although the business infrastructure is not yet able
to compete with those of the most developed western
powers, it is certainly forging a path for other emerging
markets countries to follow; increasing investment in
telecommunications and technology should see it able
to compete on an international level in the near future.
In common with almost
every business jurisdiction, both on- and offshore,
South Africa has hopes of becoming the e-commerce hub
of its hemisphere. Although the groundwork has been
laid, the industry still seems to be in the process
of developing a coherent legislative framework and e-commerce
strategy.
Although you wouldn't
necessarily assume that South Africa's position at the
very bottom of the African continent would be an advantage
in terms of international business opportunities, it
actually makes the country a very good trans-shipment
point between the emerging markets of Central and South
America and the newly industrialised nations of South
and Far East Asia. South Africa is also ideally placed
for access to countries in the Southern African Customs
Union (SACU), and the Southern African Development Community
(SADC), an alliance of 15 countries with a combined
population of over 180 million.
For both international
and domestic investors, there are many investment opportunities
available in the modern South Africa: the country is
the world leader in several specialised manufacturing
areas: it produces and exports more gold than any other
international competitor, and also exports considerable
amounts of coal; and it leads in the field of mineral
processing to form feralloys and stainless steels. Several
other areas, such as tourism, agriculture and livestock
development, construction, and the service industry
are undergoing rapid growth at the moment, and look
likely to attract substantial foreign investment over
the next few years.
As previously mentioned,
the leadership is receptive to foreign investment, and
South Africa has made good progress in dismantling its
old economic system, which was based on import substitution,
high tariffs and subsidies, anti-competition measures,
and widespread government intervention. The government
has substantially reduced its role in the economy, and
in the interests of promoting private sector investment
competition, has reduced import taxes and subsidies
to local firms, eliminated the punitive non-resident
shareholders tax, removed certain limits on hard currency
repatriation, and reduced the secondary tax on corporate
dividends (soon to be replaced by a new dividends tax
in line with international norms).
Virtually all business
activities are open to international investors, although
in a few sectors, ceilings have been placed on the permitted
extent of foreign involvement, for example in the banking
industry in which foreign equity investment is limited.
At present, foreign investments are treated in essentially
the same way as domestic investments, and receive national
treatment for various investment incentives such as
export initiative programmes, tax allowances, and trade
regulations.
The main difference in
treatment between domestic and foreign investment is
in terms of the local borrowing restrictions imposed
by the Exchange Controls authorities. For business and
investing purposes, a non-resident is known as an 'affected
person', and where 25% or more of the firm's capital
assets are paid to a non-resident, or the firm is 75%
owned by a non-resident, it is deemed to be similarly
'affected'. At the time of writing, the maximum an 'affected'
company can borrow locally is 50% of the company's effective
capital (basically its net worth), plus an additional
figure based on the following formula:
100
+ SA Participation / Non-resident Participation x 100%
of total effective capital
The rate of normal tax
for companies in South Africa is 28% (lowered from 29%
in 2008), with an additional 10% 'STC' (Secondary Tax
on Companies, (lowered from 12.5% in 2007)) tax payable
on net dividends (dividends paid less dividends received).
Prior to the tax rate changes, the maximum effective
rate of company tax and STC was 37.8%. This rate applies
to companies that distribute all of their after-tax
profits as dividends. Double taxation is avoided by
the granting of a credit to companies for dividends
received from South African companies that have already
been subject to STC. Consequently, STC is effectively
imposed on the distribution of operating profits.
However,
from 2010, Secondary Tax on Companies (STC) will be
replaced with a 10% dividend tax at company level.
Branch profits tax (for
companies which are not resident in South Africa, but
do business there via a resident branch or subsidiary)
is 33% (reduced from 34% in 2007); they are exempt from
STC.
Before
2001, companies were only obliged to pay local taxes
on earnings arising in South Africa. However, as the
result of legislative changes which took effect in 2001,
SA-based multinationals are now taxed on their offshore
earnings as well.
SARS
has also targeted what it sees as abuses of transfer-pricing,
hitting at international companies which use overseas
subsidiaries to over-invoice costs to the home holding
company, thus transferring profit out of the country.
Legislation on transfer pricing was introduced in 1995
when exchange control regulations were relaxed. The
law gives the SARS the power to adjust the value of
offshore transactions where companies are related to
one another and have entered into an international transaction.
Changes
made to the South African corporate tax system in 2001
and 2002 have somewhat worsened the situation for foreign-owned
companies which have tax residence in the country, although
the 2003 and 2004 budgets ameliorated the situation
to some extent.
The
more visible measures affecting business in the 2006/7
budget included:
- Adjustments
to tax brackets for qualifying small businesses with
turnover less than R14 million, up from R6 million.
- A
150% deduction for R&D expenditure.
- A
tax amnesty for small businesses (turnover not exceeding
R5 million) in which taxes due for years ending up
to 31 March 2004 will be waived.
- A
10% non-disclosure penalty will be payable in 2005.
- A
reduction in the transfer duty for companies and trusts
from 10% to 8% with effect from 1 March 2006.
- Proposal
for an anti-avoidance rule in relation to the purchase
of a company's shares by its subsidiary.
Manuel
also announced a relaxation in exchange controls by
increasing the offshore individual allowance from R750,000
to R2 million. In addition, the requirement of a 50%
shareholding by South African corporate and parastatals
investing in Africa has been reduced to 25%.
A
1% cut in corporate tax, and confirmation that the Secondary
Tax on Companies (STC) will be replaced with a withholding
tax on dividends were the key features of the 2008 South
African government budget.
Finance
Minister Trevor Manuel announced as part of his 2009
budget speech on February 11 that the basic legislative
framework for the introduction of the new dividend tax
has been completed.
The
legislation providing for the dividend tax, which replaces
the secondary tax on companies (STC), was enacted in
2008, and will come into force once South Africa has
ratified a number of renegotiated tax treaties. However,
the government has still not fixed an implementation
date for the new tax, and Manuel said that it is "likely"
to come into force during the latter half of 2010.
Under
the dividend tax regime, local individual taxpayers
will be taxed at 10%; domestic retirement funds, public
benefit organisations and domestic companies will be
exempt; and foreign persons will be eligible for tax-treaty
benefits (i.e. a potential reduction to a 5% rate).
The
tax also provides for transitional credits, so that
tax paid under the secondary tax on companies can be
used to offset the dividend tax. The legislation also
contains a mechanism under which the paying company
(or paying intermediary) withholds the tax.
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