NEWS

 

Dark Clouds Gather Ahead of Annual Budget

OMINOUS clouds are gathering before the annual budget later this month, with talk of even more tax income needed to finance future government spending.

Tax legislation is complex and even though South Africa is considered to have comprehensive and sophisticated tax systems, many hold the view that a lot of it is choking economic activity.

Efforts to attract investment to South Africa and to ease the cost of doing business are overshadowed by a heavy dose of tax-avoidance measures, says Doelie Lessing, a tax director at law firm Werksmans.

President Jacob Zuma’s state of the nation address last week gave an indication that there was going to be very little good news for taxpayers in the budget.

Keeping in mind that tax revenue is under pressure, professional services firm PwC expects Finance Minister Pravin Gordhan to follow international trends by increasing personal income tax.

Kyle Mandy, head of tax technical at PwC, says there is a strong chance of a 2% increase in the maximum marginal rate to 42%, which could raise additional tax of R6bn each year.

Ms Lessing says the easiest way to increase revenue dramatically is to increase the VAT rate to 20% and rake in billions of rand in additional tax revenue.

Given the sociopolitical landscape in South Africa, with its huge income disparities, that idea will never fly.

Mr Mandy agrees that there is no chance of such a big increase in the VAT rate, but adds that an increase of only 1% to 15% would raise additional tax of R16bn.

Some changes in the Taxation Laws Amendment Act to ease the burden of doing business in SA were a step in the right direction, but the changes are so narrow that the potential uptake will be minute. The Treasury has allowed interest deductions where shares were acquired through a loan, as part of an effort to clamp down on some complex schemes that were created to obtain the deduction.

Leon Rood, a tax director at Werksmans, says the principle that interest is not deductible if a taxpayer obtained a loan to buy shares that would offer tax-exempt income such as dividends, is clearly set in our tax system. This, Mr Rood says, has led to complex structures being created with the main aim of obtaining the deductions, which in turn has led to complex legislation to get rid of the schemes.

In the Taxation Laws Amendment Act of 2012, the Treasury introduced some relief to allow for interest deductions, but the requirement to qualify means that a company has to obtain at least 70% of the shares in the target company, and the company in which the shares are bought must be an operating company.

Mr Rood says that in company law a controlling share is considered to be 50% plus one share. It means that in most black economic empowerment transactions, where a shareholding of 26% is acquired, the buyer will not qualify for the interest deductions on a loan.

Several tax law amendments have been made in which the qualifying holding for receiving tax exemption has been lowered from 20% to 10%.

That would be a reasonable holding, as it is surely a business investment rather than a mere portfolio investment. "Interest can be a huge cost and the only reason I can think of why the change is so narrow is that the Treasury is afraid they will receive huge deductions without the ability to police it," Mr Rood says. "They do not want to open the door too wide for fear of having to close it again later when they are flooded."

The introduction of the headquarter company regime in South Africa to compete with Mauritius has followed a similar path.

The initial tax benefits for companies to make South Africa their headquarters for investment into Africa was just not enough to make South Africa an attractive destination.

But Ernst & Young tax director Des Kruger is bullish about the regime after the Treasury recently relaxed the requirements necessary to obtain tax benefits.

The benefits include dividends tax relief, interest-withholding tax relief and transfer pricing relaxation in certain circumstances.

The premise of the regime is that investments that move through the South Africa headquartered company should not attract South African tax merely because these investments were routed through SA, Mr Kruger says.

 

Source: www.bdlive.co.za

<back

 



  

 

Copyright © 2004-2014 Africagrowth Institute. All rights reserved