Taxation Laws Amendment Bill, 2011
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
- A number of substantial anti-avoidance measures are proposed:
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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%.
- 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.
- 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.
- 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.
- Certain amendments are proposed to the corporate restructure rules in the Income Tax Act which may facilitate amalgamation or liquidations of foreign companies.
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.
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, firstname.lastname@example.org.
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