Withdrawal of withholding tax on service fees
The withholding tax on service fees has introduced unforeseen issues, including uncertainty on the application of domestic tax law and taxing rights under tax treaties. To resolve these issues, it is proposed that the withholding tax on service fees be withdrawn from the Income Tax Act and dealt with under the provisions of reportable arrangements in the Tax Administration Act (2011).
Foreign companies and collective investment schemes
Section 9D of the Income Tax Act taxes South African owners of foreign-owned entities on amounts equal to that entity’s earned income. This has adverse consequences for collective investment schemes that hold shares in foreign collective investment schemes. There is uncertainty as to whether it is the local fund or the investor in the local fund that should be considered to be the holder of the participation rights in the foreign collective investment scheme. For clarity, it is proposed that collective investment schemes be excluded from applying section 9D to investments made in foreign companies.
Bad debt deduction
Section 11(i) of the Income Tax Act provides for a deduction of any debt owing to the taxpayer that has gone bad during the year, provided that this amount is or was included in the taxpayer’s income. Where a taxpayer, not being a money-lender, lends an amount denominated in a foreign currency to another person, any exchange differences arising on such a loan are taken into account in the determination of taxable income as an inclusion in or deduction from income, as the case may be. However, where such a loan becomes bad, no deduction is available under section 11(a) of the act regarding any exchange gains included in income. The loss is of fixed, rather than floating, capital. The result is that a taxpayer would not be entitled to any tax relief in relation to irrecoverable amounts on which they have been taxed. Based on the above, it is proposed that section 11(i) of the act be amended to specifically apply to any exchange difference in respect of a debt that has been included in income.
Interest withholding tax where interest is written off
The Income Tax Act requires that tax be withheld from interest paid to a foreign person. Interest is deemed to be paid on the date on which the interest becomes due and payable. In situations where interest withholding tax is paid on interest that becomes due and payable, but the interest is subsequently written off as irrecoverable, there is no mechanism for a refund of interest withholding tax already paid. It is proposed that a mechanism be developed to allow for a refund of interest withholding tax paid.
Tax base protection and hypothetical foreign tax payable due to foreign group tax losses
In 2009, a high-tax exemption was introduced for controlled foreign companies (CFC). As a result, all CFC income is exempt from tax in South Africa in cases where the CFC pays an amount of foreign tax equal to at least 75 per cent of the tax that would have been due and payable in South Africa, had the CFC been a South African tax resident. The high-tax exemption is based on a calculation of hypothetical amount of foreign taxes, by disregarding foreign group company losses. Government is aware that in applying this calculation, an exemption is granted in situations where no foreign tax is actually payable. In addition, in the absence of the high-tax exemption, no foreign tax rebates would have been granted in this regard to avoid economic double taxation. In order to address the unintended anomaly, it is proposed that the adjustment for foreign group losses in the calculation for high-tax exemption be deleted.