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The Draft Taxation Laws Amendment Bill, 2011 (“the TLAB”) was
released by National Treasury on 2 June 2011 for public comment.
The TLAB includes some of the most significant and far ranging
amendments to the Tax Act of recent years, with a strong focus
on tax avoidance and tax planning, particularly in the finance
sector. A media statement released at the same time signals that
significant attention will be given to further legislation to
combat perceived avoidance. Between the media release and the
TLAB, a considerable focus has been devoted to the taxation of
company distributions in the form of returns of capital,
dividends and the deductibility of interest. Certain of these
changes will have an immediate impact on corporate and finance
transactions.
Corporate tax – local
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A number of substantial anti-avoidance measures are
proposed:
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One of these measures is the suspension of
the operation of section 45 of the Income Tax Act (the
intra-group transactions) from 3 June 2011 until 1
January 2013. This is amid fears by National Treasury
that this section is open to abuse where excessive debt
is created in the target business and that the relief
provision is not being utilised for its intended
purpose.
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The proposals indicate a new focus on the
cession of dividends, particularly in circumstances
where the dividends are separated from the underlying
shares, such that the cessionary only acquires dividends
purely for their tax-free nature or shares held as
trading stock under certain circumstances. It is
proposed that such dividend cession arrangements would
be subject to tax as ordinary revenue.
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Further anti-avoidance proposals relate to dividends
received in respect of shares, where the shares are
backed by third parties, through for example, put or
call options (including contingent puts). Dividends from
such arrangements may be treated as ordinary revenue
subject to certain discretionary exemptions, if the
proposals become law. Conversely, it is proposed that
interest payments on “perpetual” debt instruments will
be recharacterised as dividends.
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The TLAB also proposes amendments to the Income Tax Act for
the refinement of certain provisions in light of the
impending introduction of the Dividends Tax:
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These proposals entail amendments to section
8E such that the 3-year condition for inclusion in the
definition of hybrid equity instrument would be
increased to 10 years.
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Another proposal deals with the
quantification of the CTC reduction in the case of
capital distributions and share buybacks, (where a
distinction is now drawn between specific and general
listed share buybacks). In the case of a liquidation
distribution, all the CTC will be deemed to have been
transferred with the liquidation distribution. These
returns of capital will be subject to the capital
distributions rules of the Eighth Schedule.
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The Value-Extraction Tax is to be repealed on
the same date that the Dividends Tax becomes operative.
The effective date for the Dividends Tax is anticipated
to be 1 April 2012.
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An important change has been proposed in relation to
capital distributions. Currently capital distributions
are to be treated as part-disposals of the relevant
shares on 1 July 2011 (where the distribution was made
between 1 October 2007 and 1 July 2011). It is proposed
that the relevant date will be extended to April 2012
and also a change has been made to the manner of
calculation of the resultant capital gains tax
liability.
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New rules are proposed to deal with the transfer of
contingent liabilities in the sale of a business as a going
concern, and the deductibility by the seller. Related rules
deal with the raising of a provision in the hands of the
purchaser who acquires such contingent liabilities and also
features in the calculation of the base costs of the assets
acquired in terms of such a sale. Anti-avoidance rules will
be introduced to target dividends declared prior to the sale
of shares in a company where the purchaser has effectively
funded the distribution thereof.
Cross border transactions
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Changes are proposed to the controlled foreign company
(“CFC”) regime. These proposals involve the inclusion of
protected cell companies into the CFC regime, other
proposals affect foreign business establishments while most
of the changes relate to the calculation of the net income
of a CFC.
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A new section 10B is to be introduced which will replace the
exemption for foreign dividends and the participation
exemption. The participation threshold for the participation
exemption under this new section will be reduced from 20% to
10%.
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The introduction of a new foreign tax rebate is proposed in
terms of which taxpayers would claim a deduction in respect
of any foreign withholding taxes imposed on management fees
for services rendered to them in South Africa.
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Further amendments are proposed in the TLAB to the transfer
pricing provisions. These amendments are intended to give
the Commissioner the power to make secondary adjustments
including the power to create a deemed dividend.
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Additional refinements to the international headquarter
company regime are also proposed. The proposals entail the
relaxation of some of the requirements for entry into the
headquarter company regime, such as the 80% per asset and
receipts or accruals requirement. At the same time, the
proposals will introduce new requirements for companies
intending to participate in the headquarter company regime.
It is proposed that companies will be required to obtain
approval from the Minister of Finance in order to enter the
headquarter company regime. Furthermore, these companies
once approved would be required to submit annual reports to
the Minister.
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Certain amendments are proposed to the corporate restructure
rules in the Income Tax Act which may facilitate
amalgamation or liquidations of foreign companies.
Individuals
Some of the amendments proposed affecting individuals relate
to the introduction of a third rebate for the elderly, the
treatment of contributions to certain long-term insurance
policies by an employer as fringe benefits as well as the
introduction of a medical tax credit rather than a deduction in
respect of contributions made to medical schemes. A number
of these issues were highlighted during Minister, Pravin
Gordhan’s Budget Speech earlier in the year.
Share Incentive Schemes
Further amendments are proposed in relation to the recent
changes, which targeted dividends paid on certain “restructured”
instruments. These deal with the exemption from tax on dividends
which flow through certain share scheme trusts.
VAT
Some relief has been afforded to the developers of
residential property where such property is temporarily let out.
The output tax adjustment which results from such “change of
use” will now be deferred for the earlier of 3 years or the date
of sale of such trading stock.
The article was initially
published by Edward Nathan Sonnebergs and we make reference to
them, news@ens.co.za.
| Alexis Sacks
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Dave Rich
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