The Minister of Finance, Tito Mboweni, delivered South Africa’s 2019 Budget speech to Parliament on 20 February 2019.
In the 2019 Budget Review tax amendments have been proposed by the Minister and we have set out below a summary of certain of these proposals. It is important to bear in mind that the enacting legislation in respect of these proposals will only be sent out for public comment later in the year.
Refining the foreign employment income exemption
South African residents who spend more than 183 days in employment outside South Africa will have to pay South African income tax on foreign employment income that exceeds R1 million as and from 1 March 2020. To ease the administrative burden on employers, employees’ tax to be withheld may be set off against foreign income tax withheld.
Non-resident employer registration requirement
The requirement in the Fourth Schedule to the Income Tax Act, which obliges non-resident employers who pay remuneration to register for employees’ tax with SARS irrespective as to whether the employer is obliged to withhold PAYE, is to be reviewed.
Share buybacks and dividend stripping
In 2017 and 2018 anti-avoidance rules dealing with share buybacks and dividend stripping were revised. The rules which were amended to prevent harm to legitimate corporate reorganisations are now being undermined by taxpayers through arrangements whereby a target company would distribute a substantial dividend to its current company shareholder and issuing shares to a third party. The result being that the current company’s shareholding in the target company is diluted and these shares are then not immediately disposed of. These new rules are to take effect on 20 February 2019.
Venture Capital Company rules
The VCC rules provide for a special interest deduction relating to debt-financed acquisitions of controlling shares in an operating company, but require that the acquirer of those shares assess whether they still qualify for the deduction under certain circumstances. It has been proposed that this requirement be reconsidered if the acquirer remains a (direct or indirect) controlling shareholder of the specific entity after certain reorganisation transactions.
The definition of ‘permanent establishment’
There is an inconsistency between the definition of permanent establishment in the Income Tax Act and the definition used in the double tax treaties of which South Africa is a party. It has been proposed that the definition of permanent establishment in the Income Tax Act should be reviewed to determine if a limitation is required.
The transfer pricing rules
The definition of ‘affected transaction’ in the transfer pricing rules in the Income Tax Act will be reviewed and possibly amended in line with the OECD model definition to include transactions between associated enterprises.
Value-added tax reorganisation rules
The VAT Act provides relief to groups of companies who reorganise their corporate structure by deeming the supplier and recipient of goods and services of a transaction in terms of section 42 or 45 of the Income Tax Act as the same person. This relief is however only applicable if the transaction relates to a going concern. Transactions involving only fixed assets do not receive this relief and it is proposed that the rules be reviewed and amended to clarify the tax treatment of these transactions.
Section 72 of the VAT Act
A constitutional review will be conducted of the discretionary powers given to the Commissioner, in terms of section 72 of the VAT Act, to apply provisions relating to the calculations of the payment of tax or the application of any provision, exemption or zero rating where ‘difficulties, anomalies or incongruities’ have arisen.
In light of the consultations held during August 2018 and the release of the discussion paper ‘Review of the Diesel Fuel Tax Refund System’, Government will be introducing industry specific provisions for each sector to ensure a more efficient diesel refund administration system. The focus of these provisions will be eligible activities and not eligible users. Draft rules and notes on the standalone diesel refund administration will be published and released later this year.
Income tax thresholds
The personal income tax brackets will not be adjusted, but the primary, secondary and tertiary rebates will be increased by 1.1% to counteract the effects of inflation. Taxpayers who receive inflation related increases in 2019 will have a larger personal income tax burden.
The fuel levy will increase by a total of 29 c/litre, which consists of:
- A 15c/litre increase in the general fuel levy;
- A 5c/litre increase in the Road Accident Fund Levy from 3 April 2019; and
- The introduction of a 9 c/litre carbon tax on fuel.
The carbon tax on fuel will be levied at 9c/litre on petrol and 10 c/litre on diesel and will become effective on 5 June 2019. No diesel refund may be claimed against the carbon tax on fuel.
Employment tax incentive
The eligible income bands for the employment tax incentive will be adjusted upwards to counter the effects of inflation. From 1 March 2019 employers may now claim R1 000 for employees earning R4 500 monthly and the incentive will reduce to zero when an employee earns a monthly income of R6 500.
The excise duties on alcohol and tobacco products will be increased by between 7.4% and 9%.
Value added Tax
SARS has taken steps to clear the VAT refund backlog by reducing the amount in the VAT credit book from R41.8 billion to R31 billion (end January 2019) through payments averaging R22.2 billion per month in 2018. SARS has revised the estimate of the ideal amount in the VAT credit book from R19 billion to R22 billion due to a rise in VAT refund clams, suspected fraud and taxpayers not submitting the required documents.
From 1 April 2019 the following items will be added to the list of zero rated items:
Energy Efficiency savings tax initiative
The Energy Efficiency savings tax initiative, which provides companies with a tax deduction for energy-efficient investments which was introduced in 2013 to offset the impact of the Carbon tax, will be extended to 31 December 2022. The administration of this incentive will also be reviewed.
Carbon tax will be implemented on 1 June 2019 to ensure South Africa meets its obligations under the Paris climate agreement by giving effect to the polluter-pays principle and aims to ensure that business and households take the costs of pollution into account when making consumption and investment decisions.
Carbon tax will be jointly administered by SARS and the Department of Environmental Affairs. Draft rules will be published by March 2019 to complement the following regulations:
- The draft regulation on the Carbon Offsets will be finalised at a workshop in March 2019;
- Trade Exposure regulations will be published by the end of February 2019; and
- Benchmarking regulations will be published in March 2019 after consultation with stakeholders under the Partnership for Market Readiness.
A policy paper will also be published during 2019 to review the role new forms of tax can play in addressing climate change and air pollution. A possible tax on ‘single use’ plastics including straws, caps, beverage cups and lids, and containers to curb their use and encourage recycling, will be considered under the paper.
In 2019 draft legislation will be published for public comment on the introduction of a 1% levy on Gambling activities to fund rehabilitation and awareness-raising programs.
Base erosion and profit shifting
South Africa will continue playing an active role in combating base erosion and profits shifting. The rules against excessive debt financing will be reviewed against best practice to strike a better balance between attracting capital investment and adequately protecting the corporate tax base.
Tax treatment of oil and gas activities
Government will review its current oil and gas tax regime as provided for in the tenth schedule to the Income Tax Act, which provide of the use of fiscal stability agreements. Fiscal stability agreements guarantees that the headline rates of tax and the rules behind the calculation of tax liabilities remain constant during the duration of a company’s oil and gas right. No fiscal stability agreements have been signed in the last five years. The current oil and gas tax regime is to be reviewed in 2019.