As with any election year, the National Budget Speech for 2019, delivered by Finance Minister Tito Mboweni, did not contain many surprises. Perhaps the Minster's biggest challenge was convincing the rating agencies that the National Treasury has a sound plan for rescuing Eskom from its current debt levels, especially in circumstances where revenue collection is ZAR15.4 billion below expectations.
Here are some of the key take-aways and tax amendments announced in the Budget Speech earlier today.
No increase in the VAT rate and expansion of the zero-rated items
Consumers will be relieved to know that there was no increase in the VAT rate. To mitigate the effects of last year's increase in the VAT rate to 15 percent the zero-rated items list will be expanded to include white bread, cake flour and sanitary pads.
No change in corporate or personal income tax rates, but fiscal drag impact for individuals
Over the past four years there have been significant tax increases to fund revenue shortfalls, increases in the government's expenditure commitments and the demand for free higher education.
While it may have been tempting to increase the corporate tax rate, it was recognised that it should remain at 28 percent to promote foreign investment and economic growth in South Africa.
There has been no inflationary increase in the personal income tax brackets, meaning individuals may be paying more tax if they creep into another tax bracket.
General tax increases are the increase of the fuel levy by 29c/litre and increase in the excise duties on alcohol and tobacco by between 7.4 percent and 9 percent.
Dividend stripping rules will now cover substantial dividend distributions used to devalue shares
Specific anti-avoidance legislation was introduced in 2017 to curb share buy-backs and other dividend striping transactions, which previously allowed corporate taxpayers to divest on a tax-free basis.
Amendments were made to these provisions in 2018 and significant amendments have been announced again.
The National Treasury has indicated that taxpayers have been undermining these provisions by target companies declaring substantial dividend distributions to its current shareholder (a company) and subsequently issuing shares to a third party. By not disposing of shares in the target company (or deferring the disposal) the anti-avoidance rules are not triggered. To curb these types of transactions, the dividend stripping provisions will be amended with effect from 20 February 2019.
Review on the taxation of the Collective Investment Scheme industry back on the table
In last year's Budget Speech it was indicated that some collective investment schemes (CISs) are trading frequently and arguing that the profits are of a capital nature and not trading profits, which the CIS would otherwise be required to distribute to its investors in terms of the tax legislation.
As a result, it was proposed that the disposal of financial instruments by a CIS within 12 months of their acquisition would be deemed to be income and of a revenue nature. If implemented, this would obviously have devastating effects on the CIS industry.
The proposal was subsequently dropped, but the Finance Minister indicated today that the investigation into this issue will be revisited as part of the 2019 legislative cycle.
Unlisted REITS may eventually get equal treatment
Currently, the taxation provisions governing real estate investment trust companies (REITs) are limited to REITs that are listed.
After much lobbying by the REIT industry together with the implementation of the Financial Sector Regulation Act (2017) and the establishment of the Financial Sector Conduct Authority, which caters for the regulation of unlisted REITs, the government will consider extending the current tax regime to unlisted REITs.
Welcome refinement to the variable remuneration provisions
Section 7B of the Income Tax Act was introduced to match the timing of the accrual / incurral to the date of payment, which would otherwise lead to accelerated tax deductions or accruals without an actual receipt of the cash.
The National Treasury has recognised that the scope of these provisions is currently limited in its application and will be expanded to include other qualifying payments. This should hopefully negate some of the adverse cash flow implications being experienced by taxpayers under the accrual system.
Various initiatives to clarify the corporate reorganisation rules and related anti-avoidance rules
The corporate reorganisation rules provide South African companies with the opportunity to restructure their businesses without triggering any immediate taxes.
The National Treasury has indicated that a number of refinements will be made to these rules to (i) correct any anomalies present, and (ii) clarify the interaction between these corporate reorganisation rules and other provisions of the Income Tax Act.
For example, the National Treasury has announced that amendments will be made to address the following:
- To ensure that deferred tax liabilities will be taken into consideration when determining whether asset-for-share transactions have been implemented on a value-for-value basis.
- The special interest deduction rules contained in section 24O of the Income Tax Act will not be allowed where a controlling interest is acquired in an operating company that is not actually generating income.
- The corporate restructure provisions do not currently deal with the treatment exchange items and interest-bearing assets transferred during corporate restructuring, which will now be specifically dealt with.
- The treatment of VAT in relation to the corporate restructuring transactions will be revised to account for the transfer of fixed property which does not constitute a going concern for VAT purposes.
Extension of the definition of permanent establishment
The definition of a permanent establishment (PE) in the Income Tax Act currently makes reference to the recently amended definition in Article 5 of the Model Tax Convention on Income and on Capital of the Organisation for Economic Cooperation and Development (OECD). Due to the OECD's recent Base Erosion and Profit Shifting (BEPS) action plans, this definition has been significantly broadened.
When South Africa signed the OECD multilateral instrument it did not elect to expand the PE definition contained in its treaties. This has created an anomaly in that the PE definition in the tax treaties does not align with the PE definition in the Income Tax Act.
The National Treasury has announced that there will be a review of the PE definition in the Income Tax Act to determine whether the limited or broader definition should be adopted.
PAYE registration requirements for non-resident employers
All South African resident and non-resident employers are required to register with SARS and submit monthly and bi-annual tax returns for purposes of pay-as-you-earn (PAYE). This includes non-resident employers who are not obliged to withhold PAYE.
In the case of a non-resident employer, the current PAYE legislation can create an unnecessary compliance obligation on the part of the employer.
Accordingly, the National Treasury has announced that it will review this current registration requirement to determine whether an exclusion for the registration for this type of employer is warranted.
Value-Added Tax (VAT) – group of companies definition to be expanded for electronic services regulations
With effect from 1 April 2019, the regulations prescribing the list of electronic services that will be subject to VAT in South Africa have been expanded significantly.
In order to limit its application somewhat, these regulations provide that electronic services provided to "group companies" will, in certain instances, be excluded from the electronic services provisions.
The definition of "group of companies" currently requires that the shareholder holds 100 percent of the shares in the controlled group company. The National Treasury has recognised that this can exclude companies merely because they have employee incentive schemes or other empowerment programmes. The "group of companies" definition will thus be expanded.
Domestic treasury management company (DTMC) rules going back to their old ways
The DTMC regime was introduced to promote the expansion of investments into other African countries. The regime offers the DTMC certain tax and exchange control benefits.
In 2017 the Income Tax Act was amended to allow the DTMC to be a foreign incorporated company provided it was tax resident in South Africa. The exchange control regulations were never amended on the same basis, which would preclude corporates from making use of the regime in these circumstances.
It appears that the National Treasury will now be back-tracking on this Income Tax amendment and is again insisting that the DTMC is incorporated (and tax resident) in South Africa to qualify.
Tax administration – mandatory disclosure rules
Apparently offshore structures and arrangements have been devised in an attempt to circumvent the financial account reporting obligations under the OECD's Common Reporting Standard. The standard is used for the exchange of information between contracting states.
These mandatory disclosure rules will be introduced in South Africa and it is proposed that similar penalties to those in force for non-compliance with the reportable arrangement provisions will apply for non-compliance with these rules.