The ramping-up of country-by-country (CbC) reporting to regulate transfer pricing and combat cross-border tax evasion, in terms of the Organization for Economic Co-Operation and Development’s (OECD) base erosion and profit shifting (BEPS) policies heralds a new tax landscape. It makes different demands of tax authorities worldwide and considers information at a finer level of detail. It also creates greater visibility amongst tax authorities and exposes companies with international structures especially those that have not been implemented correctly.
The risk associated with international structures thus rises significantly and companies need relevant strategic advice to ensure that these structures withstand the scrutiny of tax authorities across the world.
It is important to note that ‘tax’ should always follow business and never the other way around. There should always be a valid business purpose and commercial rationale for setting up an offshore structure. The following international tax principles should always be considered:
Substance over form, whereby true effect will only be given to the legal form of a transaction if the substance is the same. It would be important to demonstrate that there are capital infrastructure and people in the offshore entity sufficient to support the revenue that is being recognized in that country. You cannot have a post box in a tax favourable jurisdiction without people functions, risks and assets that are commensurate with the revenue being recognized there. How would a revenue authority know, you may ask? They could request the financial statements of the offshore entity and soon deduce that there is no substance by virtue of income being accounted for but no corresponding rental expense, payroll and other expenses that would need to be incurred in the production of that income, in other words, no substance.
Residence, place of effective management (‘POEM’) or management and control are basic tests of residency in most countries. In other words, you cannot have an offshore entity in country B that is effectively managed in another country, country A. In that case, the offshore entity in country B could be considered to be a tax resident of country A. The basic principle around POEM is it is the place where the key decisions are taken by directors and senior managers i.e. the place where the ‘shots are called’.
Controlled Foreign Company Rules (‘CFC’) which are implemented in tax legislation in most countries. In South Africa, these rules apply if an SA tax resident or residents, either individually or jointly, hold more than 50% of the participation rights or are able to exercise more than 50% of the voting rights either directly or indirectly in a foreign entity. In that case that foreign entity is considered to be a CFC and subject to tax in SA subject, to certain exclusions one of which is the Foreign Business Establishment exclusion which in broad strokes means that it must have an office that it intends to occupy for at least a year with people, capital infrastructure and resources.
Transfer pricing generally relates to all intercompany transactions. In South Africa, the legislation applies to all cross-border intercompany transactions between connected parties which generally means where there is at least a 20% shareholding. It would need to be supported to Revenue Authorities across the globe that pricing is market-related. The recent implementation of Country by Country reporting creates greater visibility to tax authorities’ across the world on the activities, size, financial and tax position of companies within the Multinational Entity Group.
South Africa Sourced Income – South Africa has a worldwide basis of taxation whereby non-residents are taxed on South African sourced income. As such if your offshore entity conducts activities in South Africa and these activities are considered the originating cause of income, such income would be subject to tax in South Africa subject of course to any double taxation relief that may exist by virtue of a Double Taxation Agreement.
General Anti Avoidance Provisions would be the overarching wrapper to ‘catch all other’ not caught by one or more of the above principles.
South African beneficiaries of Offshore Trusts – South African resident beneficiaries as a general rule are taxed where a donation is made to an offshore trust but also where interest-free loans are advanced. In such case, the attribution rules apply to attribute income and capital gains of the offshore trust which are taxed in the hands of the SA beneficiary.
Where a distribution is made by the offshore trust to an SA beneficiary the latter will be taxed on that distribution based on the nature of the income out of which it was distributed e.g. if it was a foreign dividend the beneficiary will be taxed at an effective rate of either 0% or 20% depending upon the shareholding in the foreign company declaring the dividends and if it is interest, a marginal tax rate of 45% may be applied or a tax rate of 18% on a capital profit.
In terms of the Act, there is an exemption from tax on foreign dividends where the person holds at least 10% of the equity shares and voting rights in the foreign company; referred to as the participation exemption. This exemption also applies to the disposal of share where the disposal is exempt from CGT.
As such, if the current year’s income of the trust comprised a dividend, that dividend is not taxable in the hands of the donor or the lender under the interest-free loan and neither is it taxable as a capital gain if the trust had disposed of the shares.
Similarly where such dividend or gain has been capitalized and in a future year that capital was awarded to a beneficiary in SA that award would be exempt from tax on the dividends or the CGT. However if the trust had earned the dividend and distributed in the current year, the beneficiary would have been taxable at the rate of 20% while a capital profit made in the same year is not taxable.
Draft legislation has now been put out for public comment incorporating the following changes to the attribution and distribution rules.
In determining an amount that should be included as taxable income in the hands of a resident who made a donation, settlement or other dispositions to a foreign trust and that foreign trust holds shares in a foreign company, it is proposed that the participation exemption in respect of foreign dividends should be disregarded, provided that those foreign dividends are paid by a foreign company where more than 50 per cent of the total participation rights or voting rights in that foreign company, are directly or indirectly exercisable by that resident who made a donation settlement or other dispositions to a foreign trust or connected person in relation to the resident.
If these attribution rules do not apply and a trust receives a dividend where it holds a greater than 50% interest, and the dividend is capitalized, an award out of capital in the future year to a beneficiary in SA will be taxable at an effective rate of 20%. The participation exemption will not apply.
The new rules if included in the legislation will also apply to CGT so that where CGT would not have applied under the attribution rules, or out of an award of capital in the current or future year, will in future be subject to CGT. The participation exemption will not apply.
The new rules are intended to apply to any dividend received or disposal of shares on or after 1 March 2019.
If these changes are successfully implemented, it should mean that any dividend on a qualifying interest or any profit on disposal of a qualifying interest derived by an offshore trust on or before the 29 February 2019 and capitalised should still be able to be awarded out of capital, tax-free in the following year
Contact us at Tuffias Sandberg if you in need of assistance in local or international tax-related issues.
Here’s some good news on a win/win/win scenario for businesses (big and small), young work-seekers, and South Africa generally.
Everyone will be happy to learn that government’s initiative to encourage increased youth employment, the Employment Tax Incentive or ETI (commonly also referred to as the “Youth Employment Tax Incentive”), has now been extended for ten years.
So let’s recap what the ETI is, how it works, what conditions apply, and how it benefits you as an employer on the tax front, as summarised in a convenient ETI Calculation Table from SARS.
There is chronic unemployment in the country and it is especially felt by the youth where up to 50% cannot find a job. The Employment Tax Incentive (ETI) is designed to encourage companies to employ “youths” (between the ages of 18 to 29) for 1 to 2 years.
Incentives for employers to make use of the ETI are attractive. You can deduct from your monthly PAYE owing the amounts shown below in the third column. In addition, these deductible amounts are exempt from Income Tax i.e. you get a double benefit.
The monthly calculated ETI amount per qualifying employee is determined as follows:
There are conditions – the employer must be in good standing with SARS and employees (apart from being aged 18 to 29) must have valid ID documents (or be a legal refugee).
This is a good incentive and it helps to address one of South Africa’s intractable problems. Another advantage is you can over the two year period identify employees with potential who will fit into your business.
Speak to us to ensure you claim this incentive correctly.
“Tax Freedom Day” has a nice positive ring to it, but the reality is that it highlights just how much of our working lives we have to devote to paying the Taxman his share. And the worse news is that our “Freedom Day” has been getting later every year.
2019 is, unfortunately, no exception. We’ll discuss when the “average South African” started working for himself or herself this year, and we’ll look at trends over the past few decades in light of our general slide towards more and more taxation.
We’ll end off with a global comparison and a thought on whether we enjoy sufficient economic benefits to justify our position in the world Tax Freedom Day rankings
In the current year, it will take the average South African 137 days to pay off his taxes and only from the next day does the taxpayer then work for himself or herself – this day is known around the world as Tax Freedom Day (TFD). The 138th day of 2019 was 18 May.
So, what does this tell us?
The news is not good – in 1994 TFD was 101 days. Last year TFD was on 13 May, a slippage in one year of 5 days.
Looking at the Free Market Foundation’s formula, if GDP rose then TFD would drop. Broadly speaking, this tells us that not enough tax revenue is being channelled into investment as investment leads to a growth in GDP. This is hardly surprising when you consider that salaries are the largest component of government expenditure.
On the other side of the equation, we are being increasingly taxed. In the last few years, VAT and income tax have risen whilst new taxes such as the Sugar Tax and now Carbon tax have been implemented.
The President has promised that he will reform the economy to make it more attractive to invest in South Africa – let’s hope he succeeds.
Where does South Africa stack up globally?
We are in the middle of the scale – it depends on the structure of the country. Welfare states like Norway and Germany approach 200 days whilst countries like the USA and Australia are just over the 100 day mark.
The question we have to ask ourselves is whether South Africans enjoy sufficient economic benefits to compensate for being approximately 5 weeks behind the USA and Australia?
Tax season 2019 begins on 1 August (1 July for taxpayers who are registered for eFiling or have access to the MobiApp) and SARS has taken further steps to reduce the burden on both taxpayers and SARS’ administrative systems.
This year there are three initiatives:
- Increase the threshold of submitting tax returns from R350,000 to R500,000,
- Enhancements to the MobiApp and improvements to EasyFiling,
- Moving out the dates for submission of returns.
Threshold increased to R500,000
Taxpayers with employment-only income now only have to file a tax return if their annual employment income exceeds R500,000 (previously R350,000). The provisos to this are taxpayers must have:
· Only one employer during the tax year,
· No other income such as rentals received or car allowance etc,
· No other additional deductions to claim e.g. medical costs or retirement funding,
· Not made a capital gain of R40,000 or more.
A problem SARS has had with this is that many of these taxpayers still submit returns – up to 25% of tax returns received do not need to be filed.
In a further effort to prevent taxpayers submitting unnecessary returns, SARS will send each of these taxpayers a simulated outcome as if they had filed a return which will show no tax is due.
Should you file a return even if you don’t have to?
If you may be in line for a tax refund, then it pays to do a tax return. In addition, if you think you may need a Tax Clearance Certificate it is probably prudent to complete a tax return.
This will save any potential delays as SARS may query why you did not file your income tax form.
Enhancements you need to know about
SARS has been making efforts to upgrade their IT systems to reduce the number of people who use SARS branches to complete tax returns.
Thus far this has had limited success, so SARS is increasing its efforts this year.
- The MobiApp
This enables taxpayers to submit their returns using their smartphones. Security has been enhanced by:
- A biometric authentication facility,
- A one time pin has been added,
- The use of security questions, and
- You can easily reset your password and username.
One really good feauture is the scanning and uploading of documents.
Note: the MobiApp cannot be used for provisional payments.
The system is now more user-friendly for making payments, submitting your return and uploading documentation.
In addition, Notices issued by SARS will be more specific, e.g. the Notice will specify what documentation SARS require in the event of verification and audit.
Taxpayers may use the MobiApp or EFiling from 1 July but may only use branches for submitting their returns from 1 August.
Your Tax Season 2019 Deadlines
What is of interest in the table above is that the deadline dates have been moved out for manual submissions (it was 21 September last year) and for non-provisional taxpayers (31 October in 2018) whilst there is no change for provisional taxpayers.
Contact us for advice specific to your situation.
Firstly, there are no major deadlines in June but tax season opens in July, so make sure you have all your documentation ready for your 2018/2019 Income Tax Return.
SARS and Tax Ombud Sign Cooperation Agreement to Improve Service
Then there is some good news – a Memorandum of Understanding (MOU) has been entered into between SARS and the Office of the Tax Ombud (OTO).
In recent times, the OTO has been critical of SARS particularly in the area of tax refunds.
The recent Nugent Commission of Enquiry into SARS was told of refunds being held back at year end to bolster revenue collections.
In the last tax year, SARS increased VAT refunds by R38 billion to address this problem. SARS also released a Service Charter in 2018.
The MOU sets out a platform whereby each party can collaborate to mutually resolve issues.
The Ombud has hailed this agreement as he believes it will speed up the resolution of taxpayer queries. At the same time both parties have stressed that the MOU will not affect their respective independence.
The agreement also covers other areas of cooperation whereby SARS will improve the flow of information to the OTO, will make key staff available to the Ombud in resolving taxpayer complaints and will assist the OTO with Human Resources, Finance and Procurement.
This MOU is a welcome step for taxpayers as faster resolution of complaints is clearly in their interests.
Whether you have recently started a new venture or have had a small business for a while don’t forget that SARS offers two types of favourable tax treatments for small entities:
- Turnover Tax on micro businesses
- Tax on Small Business Corporations (SBCs).
This is a tax on entities with a turnover of R1 million or less per annum. Tax rates are:
|TURNOVER TAX FOR MICRO BUSINESSES – NEW TAX TABLE|
|Taxable Turnover||New Turnover Tax Rates|
|R0 – R335,000||Nil|
|R335,001 – R500,000||1% of taxable turnover over R335,000|
|R500,001 – R750,000||R1,650 + 2% of taxable turnover over R500,000|
|R750,001 and above||R6,650 + 3% of taxable turnover over R750,000|
The maximum tax payable is R14,150 per annum assuming a turnover of R1 million. This is a very low amount – for example, assume the entity is a company and makes R200,000 taxable income, then it will pay R56,000 in income tax versus R14,150 above.
Turnover Tax businesses pay no other income taxes (such as Provisional Tax and Capital Gains Tax) but will need to collect and hand over Employee Tax, and VAT should the business entity choose to voluntarily register for VAT.
In terms of who may register for the tax the field is broad – companies, sole proprietors, partnerships, close corporations and cooperatives are eligible.
Another break is that these entities need only keep limited records as follows:
- Income received
- Dividends declared
- Any Asset over R10,000
- Any Liability over R10,000 at year end.
There are restrictions placed on the business, the main ones being:
- Owners cannot hold investments in other companies except listed entities and other public-interest entities such as bodies corporate;
- The business must have its year end on 28 February (to comply with SARS requirements in terms of dates when tax payments are to be made);
- If more than 20% of income received is from investments or professional services, the business will not qualify;
- NGOs, public benefit organisations and recreational clubs cannot apply;
- Labour brokers and personal service providers are also not eligible;
- The proceeds from the sale of capital assets cannot exceed R1.5 million in a three year period.
As soon as turnover exceeds R1 million in a business’ financial year, it must de-register as a Turnover Tax entity.
Turnover Tax is not that popular with organisations. Commentators have speculated this is due to:
- The SARS administration workload.
- Keeping only limited records reduces the business’ ability to analyse how well (or badly) it is doing. Having information is particularly important in the early stages of a business.
- A further important aspect is that with turnover tax you cannot deduct your expenses – so if your business is a loss-making one (as many start-ups are) or if its taxable income (revenue less expenses) is minimal, you could well pay more tax on the turnover tax basis than on the normal income tax basis. You cannot carry forward any losses you incur from one year into the next year as this is only a tax on turnover. Over time, this can negatively affect cash flow.
- To qualify for the Turnover Tax, you must register before the tax year starts and thus you need to weigh up carefully if Turnover Tax is best for your business.
Small Business Corporations
SBCs are one step up from Turnover Tax entities and must be:
- A company
- A close corporation
- A personal liability company or
- A cooperative.
Turnover cannot exceed R20 million a year and once taxable income goes above R550,000 the SBC becomes liable for the 28% corporate tax rate.
|SMALL BUSINESS CORPORATIONS – NEW TAX TABLE|
|Taxable Income||New SBC Tax Rates|
|R0 – R79,000||Nil|
|R79,001 – R365,000||7% of taxable income over R79,000|
|R365,001 – R550,000||R20,020 + 21% of taxable income over R365,000|
|R550,001 and above||R58,870 + 28% of the amount over R550,000|
These are attractive rates as a normal company would pay R154,000 when taxable income is R550,000 – so at that level, SBCs save just over R95,000 in tax.
The restrictions applicable to Turnover Tax (above) also largely apply to SBCs. Also, the company’s shares must be held by only “natural persons” (some trusts also qualify – take specific advice if applicable). Importantly all shareholders in an SBC may only hold shares in that one SBC and no other company, CC or co-operative (there are some exclusions including for listed share investments), otherwise it will be disqualified from the special tax regime.
In addition, SBCs qualify for accelerated tax depreciation – if plant or machinery is used in a process of manufacture then the whole cost can be written off in the first year of acquiring it. Other assets also qualify for faster tax write-offs.
As a rule of thumb, if choosing between the two tax regimes, SBC favours capital-intensive or low mark-up entities.
Both the Turnover Tax and SBC allowances can be attractive to small businesses, but the above is of necessity only a summary.
Contact us if you think your business may qualify for, and benefit from, either of these dispensations.