On July 5, 2012, the Taxation Laws Amendment Bill 2012 and Tax Administration Amendment Act were released for public comment. This ITSNewsalert provides an overview of the significant proposals which may have an impact on inbound and outbound investment in South Africa. Please note that they are currently only proposals and are therefore subject to change prior to enactment.
Corporate tax amendments
Interest-deduction for controlling-share acquisitions Interest expenditure will be deductible in respect of debt that finances the acquisition of a “controlled group” interest in the equity shares of the target company —i.e. the target must end up being at least 70% held by the purchaser group. This is a very significant development in South Africa (SA), where the default rule remains that interest incurred in funding share acquisitions is non-deductible.
Hybrid debt and interest
From January 1, 2014, the “hybrid debt instrument” rules are to be extended to include instruments that, inter alia, are redeemable only after 30 years or more, or have a yield not determined with reference to time-value-of-money principles, or determine that payments are subject to the borrower’s solvency/liquidity, and others. The “interest” payments are deemed to be dividends for both the payer and the recipient, thus not only denying a deduction for the payer but also creating SA Dividends Tax implications.
A substantially restructured regime is proposed for the reduction of debts, especially for less than full consideration. Specific “ordering” rules (e.g. dis-apply capital gains tax (“CGT”) if Donation Tax applies, etc.) are proposed, as well as the possibility of completely tax-free debt-relief. Mismatched asset-for-share/debt transactions Where there is a difference between the market values of a transferred asset and the shares/debt issued as consideration by the purchasing company, new rules are introduced to target the difference. Different implications are proposed depending on whether it is the asset that has the higher market value or the consideration, and on whether the consideration is shares or debt.
The rates on interest and royalties are both to be increased to 15%. The existing royalty rules as well as the not-yet-operational interest rules are replaced and re-written to create withholding regimes similar to the recently-implemented Dividends Tax system.
CFCs that suffer a high rate of foreign tax, may be exempt from the “effective management” test and thus from being SA-resident. Furthermore, SA-residents who grant financial assistance or the use of intellectual property to such high-taxed CFCs could be excluded from the transfer pricing rules for those transactions. On the other hand, all SA-source interest and royalties earned by CFCs will be subject to the normal withholding tax rules and be exempt from normal income tax (as opposed to being exempt from withholding tax whilst being subject to the standard inclusion rules).
In 2011 SA’s re-organisation relief (roll-over) rules were extended to cover CFC groups. The 2012 proposals seek to expand the CFC application.
CGT participation exemption
The exemption is re-written, to restrict the exemption to disposals to third-party non-residents, in tandem with the expansion of the group re-organisation rules.
Following the Tradehold Supreme Court of Appeal decision (that held that the meaning of “alienation” in Article 13 of the relevant DTA includes deemed disposals), it is proposed that the tax years of migrating taxpayers will be deemed to end on the day before they become resident in the other country and that, furthermore, migrating companies will be deemed to have been liquidated and re-incorporated.
The existing regime is enhanced by relaxing certain requirements for companies that are temporarily dormant, and by extending the transfer pricing exemption (currently available for financial assistance) to royalties.
Foreign investment funds
Further amendments are proposed to ensure that foreign investment funds do not inadvertently become tax-resident (effectively managed) in SA.