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SARS Releases Responses On Budget Tax Amendments

Wednesday, August 4, 2010

South Africa’s National Treasury and the South African Revenue Service (SARS) have released a response to public comments on the draft 2010 Taxation Laws Amendment Bills.

The draft bills were published for public comment in May. Following extensive consultation, their final versions are expected to be tabled before the end of this month.

Within the initial proposals dealing with individual employment tax issues, all employer-provided motor vehicles were to be included in income tax returns, based on a 4% monthly calculation. This can be reduced by business use and certain private costs incurred by employees and, for pay-as-you-earn (PAYE) purposes, the monthly inclusion rate was set at 3.2% (80% of the 4% rate).

After consultation, the rate will now be reduced from 4% down to 3.5%, and will be reduced by a further 0.25% if the cost of the employer-provided vehicle includes a full maintenance plan. In addition, the monthly PAYE rate will be 20%, rather than 80%, of the normal rate, if the vehicle is intended to have no more than 20% private use. However, employers will be jointly liable with the employee in cases where the rate is incorrectly reduced.

With regard to the savings interest exemption, under the initial proposal the exemption threshold for individuals was to be limited to interest received from such sources as bank deposits, listed bonds and government paid interest. Other forms of interest were to fall outside the exemption.

However, due to concerns that the proposal may not have had the impact intended, and whether an interest exemption actually promotes savings, the proposal has been withdrawn.

Under business tax issues, a new anti-avoidance measure had been proposed which would have reduced the level of deductions relating to financial instruments if the taxpayer could not prove the source of funding of the financial instruments, the income from which is exempt from tax.

This amendment has had to be withdrawn due to the difficulties it could have caused. However, it was noted that government remains concerned about the amounts of dividend and other income from financial instruments that are acquired solely to reduce taxable income.

In 2009, a window was granted allowing taxpayers to transfer out of pre-existing companies or trusts created to avoid the payment of transfer duty (an arrangement which is no longer allowed). After taking into account criticisms of the 2009 window, amendments were proposed in 2010 to provide a more flexible regime. The 2010 amendments also required, in return for the exemption from transfer duty, the distributing company or trust to be liquidated, wound up, or de-registered.

It is now proposed that the 2010 regime be further widened so that the distribution rules will no longer be restricted to the originating funders (and their spouses). Qualifying distributions can be made to a broader set of shareholders or beneficiaries. In addition, the revised relief will accommodate multi-tier structures. Nonetheless, the requirement that the distributing company or trust (including structures with multiple tiers) is liquidated, wound-up, or de-registered in order to qualify for the relief on transfer duty remains unchanged.

Under international tax issues, originally the cross-border interest exemption was to be limited to cross-border portfolio interest flows and to trade finance. Despite strong opposition, the proposal will proceed, with some modifications. While it has been argued that the current open-ended exemption may act as an implicit incentive for foreign investment and offshore borrowing, the risks to the tax base have been considered to be too high.

It has, however, been conceded that the proposed taxation of cross-border interest should be a 10% final withholding tax, so as to be more consistent with international practice. The effective date of the proposal will be delayed until January 1, 2013 in order to renegotiate certain tax treaties with zero interest ceilings, to the extent those treaties can lead to a continuing erosion of the tax base.

The amended version of the bills also contains a new provision addressing the taxation of limited liability companies, limited liability partnerships and other hybrid entities. In essence, these entities will be treated as conduit entities (that is, as domestic partnerships) if so treated abroad. The proposal stems from concerns about ongoing uncertainty in relation to these entities and will assist foreign investors who use foreign limited liability companies and partnerships as regional investment funds. This proposal will be effective from October 1, 2011 to allow time for further comment.