TAX proposals released by the Treasury last week, which are meant to assist South African multinational companies doing business in Africa, have been welcomed by experts.
The proposals are contained in the Taxation Laws Amendment Bill, which gives details on the planned changes announced by Finance Minister Pravin Gordhan in his budget in February. The proposed changes in the bill are in line with previous announcements by Mr Gordhan to establish South Africa as a gateway to Africa, and can be seen as a way to address criticism that other head-office regimes such as Mauritius offered more attractive incentives than South Africa.
Tax experts said there was a heavy anti-avoidance theme throughout the bill but the drafters had recognised commercial realities and proposed measures to ensure economic relief.
"South Africa is grappling with the realities of doing business in Africa and Treasury is really trying to assist taxpayers," said Billy Joubert, a tax director at Deloitte. Mr Joubert said foreign companies wanting to use South Africa as their gateway into Africa could expect relief from the "effective management" test in respect of a highly taxed controlled foreign company. Until now there was concern that if there was much guidance from South Africa to a foreign subsidiary in Africa, effective management was deemed to be from South Africa. It was then treated as a tax resident in South Africa, with double-tax implications. The proposals allow for exemption from the test when the foreign subsidiary is subject to an effective tax rate of 21% or more, and has a substantive business establishment in the African country.
"It is a good change as often there is no intention to avoid tax. It is a commercial reality of doing business in an environment where there is a critical shortage of skills to give assistance from South Africa.
"In other instances it is because someone with critical skills is doing the work from South Africa while waiting for a work permit," Mr Joubert said.
The bill also proposes changes to potential transfer pricing adjustments with regard to interest-free loans, if certain requirements are met. "There are commercial reasons why a company is not charging interest, it is not only done to avoid paying tax," Mr Joubert said.
The drafters were cognisant of the difficulties many companies faced, and proposed certain debt-relief measures. This was to prevent them incurring capital gains, triggered by debt cancellations or debt reductions. "Relief for these companies is essential if economic recovery is to occur. The tax system unfortunately acts as an added impediment to the recovery of companies and other parties in financial distress," he said.
According to the explanatory memorandum, the tax potentially imposed on parties receiving the benefit of debt relief in effect undermines the benefit of the relief. Most problematic is that tax debt forgiven by the South African Revenue Service due to a company's inability to pay also gave rise to capital gains.
But Johan Troskie, associate director at KPMG, said banks could struggle with the proposed changes to the tax treatment of preference shares and other instruments in financing transactions. Returns from a transaction could in future be deemed interest and not dividends, making them taxable income. "Banks used preference shares in many instances because it gave them an exempt income when financing a transaction." Mr Troskie said with the proposed changes it would be far more difficult to secure tax-exempt income, which could increase the cost of transactions.