South Africa: Summary of Domestic Taxation Regime

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The rate of normal tax for companies in South Africa is 28% (reduced from 29% in 2008), with an additional 10% 'STC' (Secondary Tax on Companies) tax payable on net dividends (dividends paid less dividends received). 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) was reduced from 12.5% to 10%, and tax base broadened in anticipation of its replacement with a dividend tax.

The dividend tax replaces the STC with effect from April, 1, 2012 and will be levied at 10% of the amount of dividend paid.

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.

In the 2011/12 tax year, small business corporations are taxed at 0% on income up to R59,750; 10% on the amount between R59,750 and R300,000; and 28% on the amount above R300,000.

In 2009, an optional parallel tax regime intended to dramatically simplify tax compliance for small firms was launched. Under the turnover tax system, which went into effect on March 1, 2009, qualifying small businesses only need to submit two interim returns and a final return for assessment. This should translate into a substantial saving in time and costs relating to the current provisional tax, income tax and VAT system which requires businesses to submit an average of 10 returns a year.

For the 2011/12 tax year, the turnover tax is charged at the following rates:

• ZAR0 to ZAR150,000: 0%;
• ZAR150,001 to ZAR300,000: 1%;
• ZAR300,001 to ZAR500,000: ZAR1,500 plus 2% of the amount above ZAR300,000;
• ZAR500,001 to ZAR750,000: ZARR5,500 plus 4% of the amount above ZAR500,000
• ZAR750,001 and above: ZAR15,500 plus 6% of the amount above ZAR750,000.

Branch profits tax (for companies which are not resident in South Africa, but do business there via a resident branch or subsidiary) is 33% 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 R580,000 per annum for the 2011/12 fiscal year. In 2011/12, taxable income up to R150,000 is charged at 18%; up to R235,000 at 25%; up to R325,000 at 30%; up to R455,000 at 35%; and up to R580,000 at 38%.

In general, individuals earning less than R120,000 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 the corporate tax rate.

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 CFEs.

'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 R20,000 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 personal income tax rates, but only 25% of the gains. For companies the rate is 14%.

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% 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% to the 75% 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% 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 R5m to R6m.

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 March 31, 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 March 1, 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 was reduced to 25%.

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2007/08 Budget

Changes introduced in the 2007/08 budget affecting business included a proposal to replace the Secondary Tax on Companies (STC) with a dividend tax at company level at reduced tax rate of 10% and a broadened tax base. This was initially going to be put into effect on October 1, 2007, but the measure was delayed until 2009. The STC was, however, lowered from 12.5% to 10% from this date.

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% (previously 5%) 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 was 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% of the earnings and saves R540 tax a year;
• R150,000 pays tax equal to an average rate of 15% of the earnings and saves R1,415
  tax a year; and
• R45, 000 pays tax equal to an average rate of 27% of the earnings and saves R6,415 tax a year.

From March 1, 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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2008/09 Budget

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, announced by Finance Minister Trevor Manuel on the 20th February, 2008.

Manuel unveiled an overall package of R10.5bn in net tax relief, including a cut in the headline corporate tax to 28% from 29%.

The most significant measure announced by Manuel impacting on business was the second phase of reforms to STC, a tax which has often been cited by observers as a major hurdle to foreign investment. This will culminate in the introduction of a final withholding dividend tax at shareholder level in 2009.

In the first phase of the reform process, the rate of STC was reduced from 12.5% to 10% with effect from October 1, 2007. This reduction was coupled with a broadening of the tax base through the closing of commonly exploited 'loopholes.' A further broadening of the base is planned for 2008.

The second phase of reform entails the actual conversion of the STC into a dividend tax on shareholders. As stated in the 2007 Budget Review, the implementation of this second phase is contingent on the revision of international tax treaties that limit withholding tax on dividends to 0%.

The tax treaties in question are Australia, Cyprus, Ireland, Kuwait, The Netherlands, Oman, Seychelles, Sweden and the United Kingdom. At the time of the budget announcement, most of these treaties had been renegotiated and were awaiting executive signatures and parliamentary ratification. It is anticipated that this phase will be completed by 2009.

According to Manuel, the new STC regime will follow the classical system of taxing distributed profits. As a general rule, shareholders will be subject to the new tax. The rate of the new tax will be 10%, as is currently the case for STC.

This dividend tax will be a separate final withholding tax, and dividends will not form part of shareholder income (the latter of which is taxable at marginal rates). As with the STC, the new tax will apply to distributions during the life of the company as well as in liquidation.

Non-corporate and non-resident shareholders will generally be subject to tax at a 10% rate on the full amount of dividends received.

Under transitional arrangements, it has been decided that STC credits accumulated prior to the implementation of the new system will be forfeited. However, given the delayed timing of the change, Manuel stated that taxpayers can still utilise STC credits in the interim.

Other important measures announced by Manuel included:

• Personal income tax relief for individuals amounting to R7.7bn as a result of tax band revisions.
• A simplified tax package for very small businesses with an annual turnover up to R1m.
• An increase in the compulsory VAT registration threshold from an annual turnover of R300,000 to R1m.
• Incentives to encourage venture capital equity investments in small and medium-sized businesses.
• R5bn in tax subsidies over the next three years to support the emerging industrial policy.
• A review of learnership allowances to encourage apprenticeships.
• Measures to encourage private land owners to protect biodiversity.
• The introduction of an electricity levy of 2 cents per kilowatt hour.

2009/10 Budget

Constrained by shrinking economic growth and falling tax revenues, Finance Minister Trevor Manuel was forced into announcing a more conservative budget for 2009/10 compared with previous years, with tax cuts largely confined to tweaking personal tax thresholds and providing new incentives to encourage energy efficiency and investment in new technologies.

"The 2009/10 tax proposals and revenue projections take cognizance of a significantly weaker economic environment," stated the government's summary of its tax proposals. "The global financial crisis, recession in most of the developed world, a dramatic decline in commodity prices and cooling domestic consumption expenditure have all contributed to a decline in aggregate demand and business confidence."

In addition to personal tax cuts designed to counter the effect of 'bracket creep' and more generous tax allownaces for savers, Manuel announced a number of new environmental tax measures, including an additional depreciation allowance for companies achieving measurable energy efficiency gains.

Other environmental proposals included:

• an increase in the plastic bag levy from 3 cents to 4 cents per bag from April 1, 2009;
• the introduction of an environmental levy on incandescent light bulbs of about R3 per bulb to promote energy efficiency and reduce electricity demand;
• exempting income derived from the disposal of primary certified emission reductions (CERs) from tax or subjecting it to capital gains tax instead of normal income tax. Secondary CERs are to be classified as trading stock and taxed accordingly.
• adjustment of the existing ad valorem excise duties on motor vehicles to incorporate CO2 emissions as an environmental criterion from March 1, 2010; and
• an increase in the international air passenger departure tax, which stands at R120 per passenger on flights to international destinations and R60 on flights to Southern African Customs Union member states, to R150 and R80 respectively from October 1, 2009.

The Mineral and Petroleum Resources Royalty Act (2008), which was scheduled to be implemented from May 1, 2009, was postponed until March 1, 2010, resulting in gross savings of about R1.8bn in 2009/10 for mining companies.

2010/11 Budget

Against a background of recovery from the global financial crisis, Finance Minister Pravin Gordhan acknowledged the reduced revenue generation the South African economy had experienced during this time. Revenue raised was expected to be R69 billion less than budgeted for. The main focus of the budget were youth unemployment, education and health. Increased borrowing as well as the introduction of taxation on gambling winnings became necessary to fund planned expenditure.

Among the measures implemented were:

• introduction of dividends tax from 1 April 2012 (replacing the STC regime)
• introduction of taxation of gambling winnings above R50,000
• a review of the tax incentives aimed at the shipping registry introduced in the 2005 budget
• an increase in air passenger tax from R80 to R100 on flights to Southern African Customs Union member states, and to R190 from R150 on international flights

The Finance Minister announced the introduction of the Tax Administration Bill. The bill is designed to integrate administrative provisions from a number of tax acts, assisting and improving tax compliance in South Africa by supplying consistency in the tax law. Mr Gordhan, during a media briefing in June, 2011, commented: "The Income Tax Act, 1962, will lose approximately 25% of its volume once the Tax Administration Bill has been passed by Parliament, so it is next. A consolidation of the Act is planned for 2012.” He further added that the bill is only part of a whole re-write of fiscal legislation in the country.

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