The
rate of normal tax for companies in South Africa is
29%, with an additional 12.5% 'STC' (Secondary Tax on
Companies) tax payable on net dividends (dividends paid
less dividends received). The maximum effective rate
of company tax and STC is 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. As an example
of the operation of STC, a company that distributes,
say, one third of its after-tax profits would be subject
to an effective tax rate of less than 33%.
However,
from
October 1, 2007, Secondary Tax on Companies (STC) will
be replaced with a dividend tax at company level, the
tax rate will be reduced from 12.5% to 10%, and the
tax base will be broadened.
A
split tax rate for small business corporations was introduced
in 2000, with a lower rate of 15% applying to the first
R100,000 of taxable income. In the 2003 budget, the
threshold for smaller firms to qualify for the lower
rate was raised from R3 million in revenue to R5 million.
The
2003 budget also introduced a double deduction for the
first R20,000 start-up costs of a new business. Also
included was a four year accelerated write-off for capital
expenditure relating to research and development in
the field of applied natural sciences, and accelerated
depreciation programs for manufacturing assets.
Branch
profits tax (for companies which are not resident in
South Africa, but do business there via a resident branch
or subsidiary) is 35% at the time of writing; they are
exempt from STC.
Income
tax for individuals is levied on a progressive basis,
with the top rate of 40% applying to taxable income
over 400,000 Rand per annum for the 2006/2007 fiscal
year. After changes in the 2006 budget, taxable income
up to R100,000 was charged at 18%; up to R160,000 at
25%; up to R220,000 at 30%; and there are further bands
for 35% and 38% rates.
In general, individuals earning less than R60,000 a
year from employment are not required to file tax returns
if they do not have taxable investment income.
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Corporate Income
Tax
Prior to the 1st of January, 2001, South African income
tax had been levied on a source basis, but now all resident
individuals and companies are taxed on their world-wide
income.
An
individual is deemed to be resident for tax purposes
if they are 'ordinarily resident' (not set in stone,
but usually defined as having some continuity of residence
in South Africa, storing your belongings there, and
having the intention to return), whereas for a company,
residence is determined by where the entity is registered,
or effectively managed.
In
an attempt to maintain South Africa's appeal as a holding
company location, those companies which qualify as IHCs
(International Holding Companies, see below) are still
classified as non-resident for tax purposes regardless,
but there are certain criteria which must be fulfilled
in order to qualify. (NB The IHC regime was finally
abandoned in 2004.)
Foreign
dividends received by, or accruing to resident entities
were officially taxable from February, 2001, until 2004,
unless there was a double taxation agreement in place,
the foreign tax was equal to at least 27%, or the South
African shareholding in the company was more than 10%.
For
companies with South African presence which could not
make use of the IHC regime, the best course of action
was to limit, as far as possible, the extent of that
presence. Many corporations make use of offshore holding
companies in jurisdictions which have strong ties with
South Africa (for example Mauritius, the Channel Islands,
the Cayman Islands, and the Isle of Man) to hold investment
portfolios and other assets. This means that the South
African branch of the operation will be taxed at normal
SA corporate rates, but returns on other assets held
in the offshore company can benefit from a low-tax regime.
This
works as long as not more than 50% of the offshore company
is ultimately owned in South Africa - otherwise the
offshore company is a Controlled Foreign Entity (CFE)
and its South African owners (those with an interest
over 10%) will be taxed on a proportionate part of its
income (there are complicated exceptions for genuine
operating income, ie for an operation with 'commercial
substance').
In
2004, recognising that existing rules tended to discourage
corporate investment in South Africa, the government
decided to scrap the 30% tax imposed on non-exempt overseas
corporate earnings. South African economists applauded
the move, suggesting that it could pave the way for
the return of millions of rand invested overseas during
the immediate post-apartheid period. The participation
exemption limit was also increased to 25%.
In
September, 2005, it was proposed to make further changes
to the rules governing the taxation of offshore corporate
income. In future, the tax liability of profit generated
offshore by a South African company would be assessed
according to the level of South African ownership under
plans proposed by the South African Revenue Service
(SARS).
Under
the draft Revenue Laws Amendment Bill a firm's income
would be taxed in South Africa where more than 50% of
South African shareholders exercise voting control in
the foreign arm of the domestic company or the parent
company.
The tax law situation at the time that the proposal
was made dicated that any income earned by an offshore
company controlled from South Africa, otherwise known
as a controlled foreign entity, is liable to be taxed
if South African tax residents hold rights to the offshore
unit's capital and profit.
According
to tax experts, multinational groups that have offshore
operations will be required to take a tax test in order
to qualify for exemptions to the new rules. If they
do not qualify, they will be taxed at 29%.
Intellectual
property disposed of by foreign branches will be exempt
from tax in South Africa under the proviso that the
company has held such property for at least 18 months.
The proposed changes also reduce the burden of paperwork
needed by companies to gain tax breaks on overseas activities.
In
addition, the new rules would remove the requirement
for insurance, banking and financial services companies
to apply for licences from the banking authorities to
carry out activities overseas.
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Capital
Gains Tax
Capital
Gains Tax doesn't exist in the offshore jurisdictions
likely to be used by South African companies for asset-holding
structures, but a resident South African may have a
problem with capital gains tax on the offshore disposal
of assets - as with income, it is important to make
sure that assets held offshore have commercial 'substance'
or are held within entities which themselves have substance
and are not likely to be classified as CFE's.
'Substance
enhancement' is obtained by the utilisation of domestic
experience, the availability of unique services in the
offshore jurisdiction, the application of commercially
justifiable profit margins, and the management of the
company (within limits) in the chosen jurisdiction.
Resident South African individuals and entities are
subject to Capital Gains Tax, introduced in 2002, on
the disposal of their assets world-wide, and non-residents
on the disposal of certain assets in South Africa (with
assets to include both moveable and immovable property).
The tax is levied on a realisation basis, with emigration,
donation and death all counting as realisation. This
latter has caused some concern, as duplication of tax
is almost certain to occur - for example, on an individual
level, a death will trigger both CGT and Estate Tax,
although the government insists that the taxes are targeting
different areas.
At
the time of writing, the first R10,000 ($1,200 approx)
of any capital gains or losses is exempt from tax, and
other exemptions include primary residences, personal
use assets, assurance and retirement benefits, compensation,
and foreign currency converted for personal use. The
tax is charged at a rate between 1% and 10.5% depending
on the yearly income of the taxpayer. For companies
the rate is 14.5%.
A
second Revenue Laws Amendment Act, passed in October,
2002, introduced sweeping changes to the rules governing
corporate restructurings, affecting mergers and acquisitions,
internal asset transfers, unbundling transactions, the
exchange of shares, and liquidations. Tax practitioners
and consultants in South Africa were far from impressed
with the finished result. Deloitte and Touche Partner,
Mark Crisp described the new legislation as 'problematic'.
For
company formations, the Act lays down that tax should
not be imposed if the taxpayer is transforming direct
asset ownership into an indirect share interest, or
is not cashing out. While the transferee company can
be newly formed or previously existing, both it and
the transferor company must be domestically incorporated.
To qualify for the tax-free basis, the transferor must
acquire a minimum of 25 per cent of the ordinary or
participating preference shares and hold the interest
for at least 18 months. Property subject to debt may
be freely transferred. The transfer of financial instruments
does not qualify.
Tax-free
exchanges for shares are limited to ordinary shares
and participating preference shares. The principle behind
the share-for-share rules is that deferred capital gains
made on the transformation of a direct interest into
an indirect interest should be tax free, but only if
both companies are domestic. There should be no capital
gains tax if the investor is not cashing out the investment.
A minimum 25% acquisition of ordinary or participating
preference shares applies to the shareholder of the
target company, but only for non-listed companies, and
to qualify for tax-free treatment the acquiring company
must acquire more than 50% of closely-held target companies
and 35% of listed ones. In the exchange of shares, the
shareholders in the target company must receive at least
25% of the shares of a closely-held acquiring company.
As
for intra-group transfers, the two subsidiaries must
have been South African domestic companies for the previous
18 months, then capital gains tax won't have to be paid
until the asset is sold externally to the group or until
the buyers and vendors cease to be part of the same
group. In addition the threshold for exemption from
secondary tax on companies was lowered from 100 per
cent to the 75 per cent level.
The SA Revenue Service's general manager of tax law
administration at the time, Kosie Louw, said the rules
to encourage unbundling should not be seen as a general
mechanism to disguise tax-free cash or property dividends.
Relief from capital gains tax applies only if the parent
distributes a subsidiary in which the parent controls
more than 50% for closely-held subsidiaries or 35% for
listed subsidiaries. Parent and subsidiaries companies
must be domestic, the shareholding must have been held
for 18 months and the unbundling distribution must reduce
share premium before revenue reserves. Where domestic
companies are liquidated into a controlling parent,
tax relief is only granted if the parent owns 75% of
the shares in the liquidating subsidiary. The bill's
liquidation rules incorporate anti-loss trafficking
rules, including the loss of all regular and capital
assessed losses in the subsidiary.
Treasury
Chief Director for Tax Policy, Martin Grote said that
the new rules would allow banks, insurance companies
and other financial institutions to restructure in a
tax-free manner, thus helping to reduce the potential
'cascading effect' of capital gains taxes on multi-tiered
organisations.
Other
measures introduced by the 2002 Revenue Laws Amendment
Act included amendments to CGT laws, changes to the
residence-based taxation regime, and alterations to
the treatment of strategic investment incentives and
foreign dividends.
The
South African Institute of Chartered Accountants (SAICA)
suggested that rather than simplifying the country's
tax code for the benefit of taxpayers, the new legislation
actually complicated matters. Speaking to a paliamentary
finance committee, SAICA's tax committee chairman, Beric
Croombe suggested that the retroactive nature of some
of the provisions contained within the new bill would
disadvantage those taxpayers who had already made returns
under the old system, and argued that several of the
changes introduced under the amendments will actually
have 'a marked impact in the tax planning and offshore
structure of SA multinationals.'
In
February, 2005, Trevor Manuel announced a proposed change
to the tax treatment of company restructurings to support
“more efficiently realigned business structures”. This
meant a reduction in the 75% shareholder threshold for
intra-group tax-free transfers to 70%.
In
addition, attention was given to the 75% ‘look-through'
test for determining passive financial instrument company
status which, it is thought, may be too high in the
case of domestic and foreign restructurings involving
multi-tier company structures. Furthermore, the ‘more
than 25 per cent threshold' for tax-free formations
will also be examined, as it is considered a hindrance
in company formations.
Manuel
also pledged to reduce the tax burden surrounding equity
transactions by eliminating all financial transaction
taxes on share issues from January 2006, a move to designed
to encourage firms to undertake equity financing rather
than debt financing.
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Regulation
Of Tax Advisers
In
October 2004 the South African Revenue Service (SARS)
released draft legislation increasing the regulation
of tax consultants and advisers in order to promote
better compliance and ensure that taxpayers receive
advice which is consistent with South Africa's tax laws.
Pending the creation of a separate board to oversee
the regulation of tax practitioners in South Africa,
SARS proposed an amendment to the Income Tax Act which
was expected to create a requirement for all tax practitioners
to register with the receiver for a transition period,
until a separate bill creating the new regulatory board
was passed. However, it was thought that certain individuals
would be exempted from the need to register, including
advocates and lawyers who provide advice or assist clients
during, or in anticipation of, litigation; insurance
brokers who sell retirement annuities to clients and
also advise on the tax consequences; and employees who
provide advice or complete documents for their employers,
such as a group tax manager or a payroll supervisor.
In addition, articled clerks, supervisors or managers
of law or accountancy practices who provide advice or
complete documents while under the supervision of a
tax practitioner would also be exempted.
SARS also proposed the introduction of an advance tax
ruling for taxpayers, setting out the framework of rules
for binding general rulings, binding private rulings
and binding class rulings.
Enabling
legislation for South Africa's new Advance Tax Ruling
System came into effect in October 2006.
The
System authorises the Commissioner to issue two new
types of rulings: binding private rulings and binding
general rulings.
According
to the South African Revenue Service:
"Under
this system, taxpayers may formally request a ruling
from the Commissioner in connection with the interpretation
and application of the tax laws to a specific proposed
transaction, subject to certain limitations."
"Provided
that there is full disclosure of all material facts,
the ruling will generally be binding on the Commissioner
when an assessment is made in connection with that transaction."
"The
Commissioner will also publish all binding private rulings
in an edited form to protect confidentiality. This is
being done to provide information and guidance to taxpayers
generally and to ensure that all taxpayers operate on
a level playing field. The binding effect only applies,
however, to the applicant who requested the ruling.
The binding private rulings may not be cited as precedent
by any other taxpayer."
The
Commissioner began to accept applications for binding
private rulings on October 16, 2006.
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Budgets
In 2005 And 2006
The
2005 budget brought in tax incentives aimed at helping
South Africa re-establish its shipping register, including
the introduction of a tonnage tax regime, taxing shipping
companies at fixed rates according to the size of their
ships, and not according to the company's business income
results, lowering the effective tax rate paid by companies
in the industry.
A
number of measures were announced by Finance Minister
Trevor Manuel to help the development of the small business
sector, which expand the categories of small business
companies eligible for relief to cover personal services,
and increase the turnover limit for eligible companies
from R5 million to R6 million.
In
addition, small businesses are subject to a new rate
structure and a simplified and enhanced depreciation
regime, while the frequency of value added tax filings
is to be reduced from two month intervals to four month
intervals.
On
the issue of place of supply rules concerning VAT, clarification
was issued to provide certainty for those undertaking
certain international transactions, such as the buying
of services, and purchases conducted via the internet.
International
taxation rules came under fresh scrutiny after Manuel
revealed that the authorities had discovered that new
legislation in certain offshore jurisdictions had rendered
some legal tests ineffective at lessening the impact
of “harmful tax practices by tax havens”. Moreover,
Manuel reported that recent experience with the South
African controlled foreign company rules meant that
the residence-based income tax system needed to be improved.
On
the personal income tax front, the budget brought about
some minor tax benefits through adjustments in tax bracket
thresholds and an increase in the primary tax rebate,
while in an attempt to attract skilled foreign workers
to South Africa, consideration was also be given to
possible changes to the tax residence definition, to
allow for extended South African visitation.
Manuel
conceded that the switch to a worldwide taxation system
had put foreign workers at a disadvantage when relocating
to South Africa, and as an alternative, suggested tax
amendments which could seek to alleviate the capital
gains tax burden on foreign assets acquired before entry
into the country, in addition to certain subsequently
acquired foreign assets.
Businesses
were disappointed by the 2006/7 budget: although Trevor
Manuel tweaked various tax thresholds to deliver several
billion rand in personal income tax cuts, he decided
against cutting corporate tax.
Despite
corporate and personal income tax revenues running well
ahead of government targets thanks to a growing economy
and more efficient tax collection methods, Manuel resisted
the temptation to loosen the fiscal reins, leaving most
major tax rates on hold, including the 29% corporate
tax rate and the unpopular secondary tax (STC) on companies.
The
more visible measures affecting business 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 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%.
2007/08
Budget
Changes
introduced in the 2007/08 Budget affecting business
included the fact that from October 1, 2007, Secondary
Tax on Companies (STC) will be replaced with a dividend
tax at company level, the tax rate will be reduced from
12.5% to 10%, and the tax base will be broadened.
The
dividend tax will be converted from company to shareholder
level as soon as certain international tax treaties
have been renegotiated.
Other
key measures included:
- The
treatment of the sale of shares held for longer than
3 years as a capital gain/loss;
- The
introduction of the depreciation of commercial buildings
over a period of 20 years;
- Changes
to certain tax rules to ensure that BEE and other
similar restructurings do not
encounter undue tax costs;
- Allowing
donations to PBOs of up to 10 per cent (previously
5 per cent) of taxable income as a
deduction;
- Exemption
for stamp duty on lease agreements with a duration
shorter than 5
years;
- Extending
the scope of deductions for environmental expenditure;
and the release of draft legislation on the regulation
of tax practitioners
For
individuals, changes introduced by that Budget included:
Income
tax on individuals is reduced by R8,4 billion. This
means that an individual younger than 65
years of age earning–
-
R43 000 or less pays no income tax;
-
R60 000 pays tax equal to an average rate of 5 per
cent of the earnings and saves R540 tax a year;
-
R150 000 pays tax equal to an average rate of 15 per
cent of the earnings and saves R1 415
tax a year; and
-
R450 000 pays tax equal to an average rate of 27 per
cent of the earnings and saves R6 415
tax a year.
From 1 March 2007 no tax is imposed on the interest
or rental income of retirement funds. The 2007-08 Budget
also introduced increased exemption for interest income
and distributions from unit trusts.
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