Balancing today's demands with tomorrow's opportunities - Budget 2020/21 Tax & Legal - Deloitte
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Balancing today’s demands with tomorrow’s opportunities Budget 2020/21 Pre-Budget Commentary South Africa Tax & Legal
Contents The 2020/21 National Budget: A call to action. Hard work ahead............................................................. 1 Personal taxes - The fragile state of South Africa’s golden goose ............................................................ 3 Changing the trajectory of South Africa’s economic environment ........................................................... 5 Is a reduction in the corporate income tax rate on the cards? ................................................................. 6 The impact on the fiscus of the country’s sluggish economic growth ..................................................... 8 The implications of the recently published NHI Bill and what it means for the country........................ 9 Is another VAT increase looming?................................................................................................................. 10 Will the personal tax rate be increased?...................................................................................................... 10 A new tax is born............................................................................................................................................. 11 Transfer pricing - Important considerations for minority shareholders................................................ 12 Broadening the tax base by limiting tax deductions for interest charges.............................................. 13 State of carbon tax.......................................................................................................................................... 15 Illicit trade flows: The broader impact on supply chains........................................................................... 17 Good faith does not exempt taxpayers from paying understatement penalties to SARS................... 18 Oil and gas industry developments in South Africa .................................................................................. 19 Can government further promote share ownership through employee share plans?........................ 20
Making an impact that matters | Budget 2020/21
The 2020/21 National Budget:
A call to action. Hard work
ahead…
By Delia Ndlovu, Managing Director: Deloitte Africa Tax & Legal
Finance Minister Tito Mboweni has a We hope that the 2020/21 Budget will
mammoth task ahead of him as he seeks to
present the 2020/21 Budget Speech later
include commentary relating to the below
questions. The MTBPS
this month, against South Africa’s weak
fiscal position and the scrutiny of ratings What austerity measures is Treasury
indicated that the
agencies. taking to keep expenditure under
control?
gross debt-to-
South Africa’s economic outlook has Government has indicated various cost GDP ratio outlook
deteriorated considerably, negatively saving measures. We expect mention of
impacting on revenue collections. SOEs and financial discipline, measures also paints a
The South African economic growth
to manage the public sector wage bill
and details on the proposed funding bleak picture,
forecast remains low compared to other
Sub-Saharan African countries. According
mechanisms for the National Health
Insurance Bill and free university
being projected
to the International Monetary Fund, GDP
growth in Sub-Saharan Africa is forecast to
education. to increase to
be 3.5% in 2020/21. However, South Africa What alternative mechanisms is 75.8% of GDP
will only reach a sluggish 1% growth by government considering to increase
2021. In the Medium-Term Budget Policy tax revenue? in 2027/2028.
Statement (MTBPS), the minister said that
South Africa’s economy is expected to
We are aware that to increase revenue
collections, SARS has already embarked on We expect the
grow to 1.7% by 2022. increasing their capacity by both hiring the
people as well as embracing digitisation.
minister to outline
Tax revenue projections were revised
down over the medium-term, reflecting
The R1 billion allocated to SARS, in the
MTBPS over the next few years, will assist
plans to stabilise
weak in-year collections, and the lower tax the revenue authority in implementing this debt-to-GDP
base outlook. In the MTBPS, the minister these plans.
acknowledged that SARS expects to collect ratio, and confirm
R1.37 trillion this year. This is R53 billion,
or 4%, less than expected. Furthermore,
In the MTBPS the minister indicated that
there will be further cooperation between whether the plans
and according to Tax Statistics 2019, the
total corporate income tax contribution as
SARS and the Financial Intelligence Centre
at the South African Reserve Bank to assist
he previously
a percentage of total tax revenue has been
declining steadily over the past decade,
in fighting illegitimate cross-border flows
and tax evasion. It will be interesting to see
indicated in last
from 26.7% in 2008/09 to 16.6% in 2018/19. what tax reforms the minister implements year’s National
considering to achieve this objective.
The MTBPS indicated that the gross debt- Budget speech
to-GDP ratio outlook also paints a bleak
picture, being projected to increase to
The conundrum facing the minister though
is whether or not to increase taxes. South have made an
75.8% of GDP in 2027/2028. We expect the
minister to outline plans to stabilise this
Africa’s corporate income tax rate is high
compared to many other developed
impact.
debt-to-GDP ratio, and confirm whether countries, e.g. the United States (at 21%)
the plans he previously indicated in last and the United Kingdom (at 19%). Further,
year’s National Budget speech have made increasing personal income tax will put
an impact. a strain on consumers that are already
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Making an impact that matters | Budget 2020/21
feeling the pressure of a depressed economy. Support for small businesses – an important
Increasing VAT could have some political backlash. engine for economic growth and job creation – will
Therefore, we believe that the minister’s options to also be sought after. The cost of tax compliance
increase tax are limited. remains a significant challenge for small
businesses. Addressing this issue, in conjunction
There have been recent discussions globally with other measures such as tax incentives or tax
around the taxation of the digital economy. Some breaks for small and medium-sized enterprises,
countries are implementing a specific tax for would reduce the cost of doing business and
taxing the digital economy in order to increase aid this important segment of the economy. For
tax revenue (e.g. France implementing a 3% digital example, South Africa could lower the cost of doing
services tax [DST]). The budget may provide some business by automating registration and filing
clarity as to South Africa’s position on potentially processes.
introducing this type of tax.
Consideration should be given to reducing the cost
What plans does government have to of travel to South Africa in order to support the
revitalise economic growth? tourism industry.
The possibility of more load-shedding continues
to pose a serious threat to SA’s economic Businesses and investors will be hoping for
performance, competitiveness and business evidence of a move towards greater policy
confidence. This issue needs to be tackled in coherence and consistency, along with better
the budget speech, including updates on the regulatory certainty. Wider reforms to improve
diversification of SA’s power generation. the ease of doing business in SA for all corporates
would also be a welcome development.
The emerging digital economy, meanwhile, should
also be top of mind as the world moves towards 5G
connectivity. To reduce the cost to communicate
and boost SA’s competitiveness, businesses will be
looking for interventions to accelerate the licensing
of high-demand spectrum.
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Making an impact that matters | Budget 2020/21
Personal taxes - The
fragile state of South
Africa’s golden goose
By Anthea Scholtz, Partner, and Claudia Gravenorst,
Senior Manager, Deloitte Africa Tax & Legal
The 2020/21 National Budget will continue the total tax revenue. Other taxes (e.g.
to have an underlying dual challenge, transfer duty, capital gains tax) account for
namely that we not only need to grow our the balance of the revenue collected in the Our country is
economy, but very importantly, we also 2018/19 fiscal year.
need to grow our economy inclusively – so heavily reliant on
that more South Africans can participate in
it and can benefit from it.
The South African taxpayer – the
fragility of the golden goose a relatively small
This year the minister will again need
The SARS report shows that the country’s
total tax collections for the 2018/19 fiscal base of taxpayers
to walk a tight rope when delivering the
National Budget Speech as he seeks to
year of R1 287.7 billion, was footed by a
very small portion of the population. The
to generate the
navigate the fiscal, tax and economic
landscape in order to bring about the
tax collections was also R14.5 billion behind
the revenue collection target of R1 302.2
majority of the
necessary structural economic changes,
while at the same time ensuring that South
billion (though there was a 5.9% increase
over the prior fiscal year).
country’s revenue
African citizens are not unduly burdened collections.
with further tax hikes. The report indicates that of the 3.2
million companies which were registered
To address South Africa’s many challenges, for corporate income tax at 31 March
we of course need a buoyant revenue base 2018, just over 814 000 companies were Whilst these statistics should be viewed
and as always, “tax” is one of our main assessed for tax in the 2018/2019 fiscal within the context of South Africa’s
sources of revenue for the government. year, and only 24.3% of these latter progressive income tax system (where the
companies had positive taxable income (i.e. wealthy contributes a greater proportion
Whilst South African taxpayers continue to paid tax). towards supporting the state than the poor
feel the “tax” pinch on their disposable and hence the more you earn, the higher
incomes, the South African Revenue More concerningly, of this 24.3%, only tax you should pay), these taxpayers seem
Service (SARS) 2019 Tax Statistics report 380 companies had taxable income in to be bearing a disproportionate share of
(which was published during December excess of R200 million and collectively, the country’s tax burden.
2019) highlights the fragility of the South these 380 companies contributed 57.2%
African revenue collection ecosystem – our of the corporate income tax collected in It is thus unlikely, given the current
country is heavily reliant on a relatively 2018/2019. economic environment, that the maximum
small base of taxpayers to generate the marginal tax rate would be further
majority of the country’s revenue Similarly, of the 4.9 million individuals increased (it was increased from 41% to
collections. assessed for tax, 1.5 million individuals 45% for the 2018 tax year). That said, it is
earned taxable income in excess of anticipated that the tax brackets at the
In South Africa, personal income taxes, R350 000 and these individuals contributed higher marginal tax rates will have low or
value-added tax (VAT) and corporate 83% of the total personal income tax no inflationary adjustments and hence
income taxes collectively account for collected. limited tax relief, whilst continued tax relief
approximately 80% of the total tax will still be granted for low income earners.
revenues of the country. Of the It is clear from these statistics, that a very
R1 287.7 billion revenue collected during small percentage of the South African The question is thus: What alternative
the 2018/19 fiscal year, personal income population is financing the tax bill and that measures could be considered to generate
taxes continue to be the main contributor further, the “man-on-the-street” is paying a additional revenue for the fiscal coffers,
to our country’s tax coffers, contributing a significant amount of tax (both direct taxes other than increasing personal tax rates?
total of 38.3% of the total tax revenues. VAT such as personal income tax as well as We explore some of these below.
contributed 25.2% and corporate income indirect taxes, such as VAT).
tax contributed approximately 16.6% to
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Making an impact that matters | Budget 2020/21
Indirect taxes developments are also starting to take Conclusion
As is the case every year, the “sin taxes” place at SARS, most notably it has re- A revenue budget that supports South
(i.e. tax on alcohol and tobacco) is established its Large Business Centre Africa’s future, should go further than
expected to increase as well as possible (LBC) unit. just tax increases and alternative
increases to “environmental taxes” (e.g. avenues should be considered to
plastic bag levy, electricity levy). Increasing capacity and skills in certain generate additional revenues. Whilst the
specialist tax areas, making it easier for main component of our revenue base
Due to the increase in the use of electronic taxpayers to liaise with SARS, targeting will as always be tax revenues, tax is
cigarettes and tobacco heating products, specific industries and sectors, as well as certainly not the only solution to raise
there could potentially be a tax levied on increasing the digital capabilities of SARS, additional revenues. Key parts of the
these items as well. will go a long way in assisting SARS to solution must also include expenditure
generate additional revenue and meet its cuts, curbing the size of the civil service,
We also anticipate an increase in the fuel revenue collection targets. reducing policy uncertainty, restoring
levy, a consumption tax that is “hidden” in investor confidence, creating jobs and
the price of petrol. Per the SARS 2019 Tax focusing on state-owned entities.
Statistics report, this levy has had a 55% Cross-border flows and tax evasion
increase from the 2014/2015 fiscal year South Africa continues to look at ways to No doubt there are tough times ahead
(generating R75.3 million in 2018/2019) effectively combat the significant financial and South Africans will have to continue
and we anticipate that this may increase leakages in the South African economy to tighten their fiscal belts, come 1 March
further in the next fiscal year. through the erosion of the tax base, profit- 2020.
shifting and illicit money outflows. The
A gambling tax may also be on the cards use of tax havens by taxpayers whereby
as National Treasury’s 2019 Budget review profits are shifted to no-tax or low tax
document alluded to fact that government jurisdictions where the taxpayer has no
intends issuing draft legislation for or very little economic presence, remains
comment on this matter. a significant concern to the fiscus. It is
however also a significant potential pool of
Whilst we do not anticipate an increase in revenue, if South Africa manages to get its
the “wealth taxes” such as estate duty and fair share of these taxes.
donations tax, executive remuneration
may come under the spotlight. The re-building of the transfer pricing
unit at SARS will ensure that targeted
Reforming SARS to its former glory audits are conducted and that shifting
SARS was once the crown jewel of revenue profits through transfer pricing schemes is
authorities on the continent. However, due clamped down.
to the tax administration and governance
issues at SARS in recent years, revenue It appears that steps are underway at
collections were below targets and SARS to focus on this matter and attempts
inefficiencies crept in. SARS is now slowly to stop this leakage will add significantly to
emerging from this dark cloud … the revenue collection efforts.
The recommendations from the findings
of the Nugent Commission of Inquiry
into Tax Administration and Governance
are being implemented. Many positive
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Making an impact that matters | Budget 2020/21
Changing the trajectory
of South Africa’s
economic environment
By Hannah Marais, Associate Director: Africa Insights, Deloitte Africa
With hard work lying ahead, the upcoming Budget Speech
will need to signal the right messages to the market - that
government will stabilise the economy and make some hard
fiscal and structural choices.
South Africa has been stuck in a low Particularly worrisome was the projected The MTBPS then added that some of
growth rut for the last decade. The ongoing growth in nominal debt cost, these reforms can be implemented
country’s growth has lagged behind many which is growing at a substantially higher using minimal state resources and
emerging markets and most of its African rate than GDP and faster than any other with immediate effect. For example,
peers (some countries, such as Ethiopia, spending category over the three-year government can reduce the cost of
Ghana and Rwanda, have doubled their forecast period. With R11.50 of every R100 travelling to South Africa through an open-
economies in size, growing 7% or more on currently spent by government on debt skies agreement, and cutting the red tape
average this past decade). service costs and R34 of every R100 on for small businesses in the tourism sector.
public sector compensation, this further
South Africa’s deteriorating economic limits key areas that spending should be It can facilitate the diversification of power
environment, compounded by political focused on, including education, health generation by granting licences to the
instability and policy uncertainty, drought and infrastructure. roughly 30 small-scale energy projects.
and unstable electricity supply, as well Telecommunications services can be
as a weak external environment, has Acknowledging that the growth and expanded by fairly allocating spectrum,
had a drag on business and consumer revenue outlook has deteriorated, thus enabling the rapid expansion of
confidence, alongside income and government has taken first steps towards the country’s fibre infrastructure and
spending. The inability to address stabilising the debt-to-GDP ratio, by a reduction in costs. The cost of doing
much-needed structural reforms has reducing planning baselines, including business can be lowered by automating
also worsened South Africa’s relative goods and services and transfers, by registration and tax filing processes.
international rankings on competitiveness about R80bn over the next three years. Such interventions could create fertile
and doing business. But as reported by National Treasury, ground for longer-term reforms.
these measures are not sufficient. In fact Furthermore, medium-term reforms
Low growth, more debt a total of R150bn in savings over the next should begin immediately within the
Hinged on even lower 2019 GDP growth five years are required to stabilise South transport, water, telecommunications, and
expectations than initially assumed in the Africa’s debt-to-GDP outlook – something industrial and trade policy.
2019 Budget, the Medium-Term Budget that ratings agencies will be monitoring
Policy Statement (MTBPS) presented closely. With hard work lying ahead, the upcoming
a widening fiscal deficit and quicker 2020 Budget Speech will need to signal
rising debt-to-GDP ratio outlook. This is Changing the trajectory the right messages to the market, i.e. that
based on lower tax revenue projections From the perspective of the National government will stabilise the economy
(reflecting weak in-year collections and Treasury, it is clear that economic reforms and make some hard fiscal and structural
a lower tax base outlook) and spending are urgently required. Although many choices. Although some of the stricter
pressures that increased since the 2019 reforms might not have immediate impact fiscal measures and proposed reforms
Budget. The latter included additional on GDP growth (expected around 1% in are likely to be unpopular and are only
support to struggling state-owned the short term), they have the potential anticipated to pay economic dividends
enterprises (SOEs), and a reversal of the to unlock higher and job-creating growth in the medium term, they will assist in
proposed savings from compensation outcomes in years to come. boosting certainty, upping productivity
measures such as early retirement. A number of short, medium and longer- and reducing inefficiencies in order to
term interventions were proposed in a create the necessary conditions for
detailed August 2019 Treasury publication. growth.
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Making an impact that matters | Budget 2020/21
Is a reduction in the corporate
income tax rate on the cards?
By Le Roux Roelofse, Director: Global Business Tax Services and National
Technical Leader, Deloitte Africa Tax & Legal
A reduction in the headline CIT rate could well be a net
positive for South Africa.
The headline Corporate Income Tax (CIT) rate • A decrease in the tax buoyancy in the past
of 28% may well be reduced by one or perhaps four years, from 1.4 in 2014/15 to 1.2 in
two percentage points. Our prediction is 2018/19, indicates lower compliance levels
informed by the following factors: in a difficult economic environment. The tax
buoyancy ratio is a measure of the change
• South Africa’s CIT rate is uncompetitive when
in tax revenue to the change in the tax base
measured against some of our major trading
or GDP. A buoyancy ratio of 1 means that tax
partners. In its 2018 Budget Review, National
revenues keep up with economic growth.
Treasury noted by way of example that the
United States has reduced its rate from 35%
We are of the view that a reduction in the
to 21%, the United Kingdom from 30% to 19%,
headline CIT rate could well be a net positive
the Netherlands from 26% to 21% (currently
for South Africa. It would make South Africa’s
25%) and China’s rate is 25%. According to
CIT rate more competitive in relation to the
National Treasury, “at 28% South Africa is
country’s main trading partners, provide a cash
becoming an outlier, providing an incentive for
injection to struggling corporate taxpayers, and
companies to shift profits abroad and pay lower
increase the tax buoyancy ratio. The Minister of
taxes elsewhere”.
Finance may therefore just be tempted to lower
• According to Tax Statistics 2019, published the CIT rate.
by National Treasury and the South African
Revenue Service (SARS), CIT’s contribution
to the total tax take has declined from 26.7%
in 2008/09 to 16.6% in 2018/19, and the CIT-
to-GDP ratio has reduced from 6.9% to 4.4%
during this period. This decline is attributed
to “sluggish economic growth, structural
challenges in some sectors of the economy, low
confidence levels and political uncertainty”. It
is clear that companies are struggling to
remain profitable and that the declining CIT
collections are not attributable to too low CIT
rates.
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Making an impact that matters | Budget 2020/21
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Making an impact that matters | Budget 2020/21
The impact on the fiscus
of the country’s sluggish
economic growth
By Botlhale Joel, Director: Global Business Tax Services and
Financial Services Industry Leader, and Kabelo Malapela,
Director: Global Business Tax Services and Financial Services
Industry Tax Specialist, Deloitte Africa Tax & Legal
...one begins to understand the logic for the deep structural
reforms delineated by the Minister of Finance, Tito Mboweni,
in his 2019 Medium-Term Budget Speech.
While the majority of South Africans were • Corporate Income Tax (CIT), VAT and Looking at the facts and figures above,
battling load-shedding woes and heading personal income tax accounted for 80% one begins to understand the logic for
off for their long anticipated and well- of total revenue collected with the fuel the deep structural reforms delineated
earned summer vacations in December, levy and other specific customs and by the Minister of Finance in his 2019
the South African Revenue Service (SARS) excise duties contributing approximately Medium-Term Budget Speech. Given the
published its 12th annual Tax Statistics for 19% of revenue, with the remaining 1% slow pace at which these reforms are
2019. The report is compiled together with made up by other taxes. being implemented, the bleak economic
National Treasury and covers all taxes, growth outlook projected for South Africa
• The number of companies registered
from corporate income tax, all the way to and the pressure from rating agencies for
for corporate income tax has declined
the Health Promotion Levy or what most meaningful reform, all eyes will be on the
from 3.2 million in 2017/18 to 2 million
of us know as “sugar tax”. Minister’s 2020 Budget Speech on the way
2018/19.
forward.
In short, the report makes for grim • CIT collections as a percentage of GDP
reading, collection targets have been declined slightly from 4.7% for the three Thinking back to Minister Mboweni’s list
missed, taxpayer compliance has declined fiscal years 2015/16 - 2017/18 to 4.4% of the 10 “important growth ingredients”,
and the SARS is constrained in its capacity mainly as a result to contractions in what appears to still lack the necessary
to collect taxes, however, these are hardly some sub-sectors of the manufacturing focus is the much needed support to
newsworthy and the majority of South industries such as petroleum, basic iron small business, as a means to supporting
Africans are aware of the current state of and steel, as well as metal which were our young, growing population to become
affairs that we find ourselves in. affected by power outages in quarter 1 entrepreneurial and help South Africa
of 2019. get to similar growth levels as the likes of
The devil, as they say is in the detail, as Kenya, Ghana and Ethiopia. It would again
• Personal income tax was the single
one starts delving into the report (of appear that we are still missing a beat in
largest contributor accounting for more
more than 300 pages), the impact of the terms of addressing the growing threat
than 38% of revenue. It is interesting
country’s sluggish economic growth over of youth unemployment in our country
to note that personal income tax
the past five years on the fiscus becomes by seemingly driving the focus on getting
contributed R279.4 billion more than
glaringly evident. Further, given the youth employed as opposed to helping
corporate income tax in 2018/2019.
economic forecast for 2020, a turnaround them become the entrepreneurs and
may not be around the corner as many • The number of VAT vendors registered employers of the future.
had hoped. for VAT increased by 3.8% while
registered importers and exporters was
Below is an outline of some of the key up 2.5% and 2.3%, respectively year-on-
figures of the SARS report: year.
• SARS collected R1 287.7 billion against
a revenue collection target of R1 302.2
billion resulting in a deficit of R14.5
billion.
8Making an impact that matters | Budget 2020/21
The implications of the
recently published NHI
Bill and what it means
for the country
By Ashleigh Theophanides, Director: Life Sciences and
Healthcare Industry Leader and Rachaad Omar, Associate
Director: Life Sciences and Healthcare, Deloitte Africa
The lower than expected inflation levels and the slowdown in
the economy means that trying to stimulate the economy is
going to be a key priority for the forthcoming budget.
South Africa’s National Health Insurance There is no specific large-scale The implementation phases of NHI
(NHI) Bill 2019, was introduced to the investment/budget directed towards NHI according to the Bill is based on timelines
National Assembly on 8 August 2019 or the public sector health. South Africa’s that don’t link back to any measurable
and is bound to create debate. It is level of public health spending, per capita milestones and outcomes. Further
expected that there will be various areas and as a percentage of government’s thought and clarity around this is needed.
of uncertainty created by this Bill. It does, overall spending, is comparable to that of
however, create a roadmap for the way other upper middle-income countries. The While the Bill has provided greater clarity
forward on NHI with greater detail on the conflicting objectives that the government around certain aspects of NHI, it has
operational processes and structure of currently finds itself in, from free higher introduced other uncertainties. These
NHI, making this proposed system seem education and bailing out of various SOEs, uncertainties need to be ironed-out
less of a pipe-dream and more of a reality. including Eskom, means that additional in order to get better buy-in from all
The lower than expected inflation levels funding directed explicitly at healthcare is participants in the healthcare sector.
and the slow down in the economy means less likely.
that trying to stimulate the economy The one aspect that the government has
is going to be a key priority for the The White Paper estimates a funding reiterated recently and is evident from
forthcoming budget. The recent reduction shortfall of R 72 billion for NHI by the Bill and public discussions is that the
in the repo rate by 25 bps to 6.25% in 2025/2026, when NHI is likely to be process forward is one healthcare system
January is an attempt to do just that. launched. This is based on an assumption for everyone and not a pseudo public/
Further cuts can be expected in the first of 3.5% annual economic growth. The private system. This is different from
quarter and last quarter of 2020 as well. recently published NHI Bill has highlighted previous thinking where it was anticipated
the key sources of the funding as that the private sector will assist the public
As was seen from the last budget, the key being money appropriated annually by sector to become sustainable over time
spending areas for government over the Parliament from the following key sources: and that people would be free to choose
past year has been on social services. R general tax revenue, reallocation of between the two systems. The evidence
1.10 trillion of the R1.83 trillion government funding for medical scheme tax credits of failed SOEs in South Africa are likely to
expenditure has been directed to to NHI; payroll tax and a surcharge on create huge apprehension as to the future
learning and culture, health, community personal income tax. success of this NHI system proposed in
development and social development. this manner. More work is required by
While this is significant, the year on year Section 33 of the Bill is bound to create both government and all stakeholders
increase directed towards healthcare high levels of uncertainty around the role to alleviate the fears of the public and
from 2018/19 and projected to 2021/2022 of medical schemes post implementation propose a detailed road-map that is clear,
remains at a modest average annual rate of NHI. The complementary services deliverables driven, well-defined and
of 7%. that medical schemes may provide is not sustainable.
clearly defined nor is the benefit package
that NHI will provide.
REFERENCES
1. South African Health Review 2019/National Health Insurance: vision, challenges and potential solutions
2. Minister of Health: National Health Insurance Bill
3. Department of Health: White Paper on National Health Insurance
4. SA National Treasury: RSA Budget 2019 Highlights
5. Trading Economics: South African Interest rates //tradingeconomics.com
9Making an impact that matters | Budget 2020/21
Is another VAT increase
looming?
By Severus Smuts, Director: Indirect Tax Leader, Deloitte Africa Tax & Legal
It has been two years since the Minister of accommodation are exempt from VAT and Whilst the VAT rate increase may be
Finance announced a 1% increase of value- therefore a rate increase will have minimal welcomed by some with the view of
added tax (VAT) as part of government’s impact on those items. improving our economy, the overwhelming
efforts to contain a budget deficit. majority will experience the hardship of
However, in light of the current financial We also expect guidelines to be issued on having to pay more for basic necessities.
demands, has this VAT rate increase made certain topical areas of VAT such as: Also, businesses will once again need to
a big enough financial impact or is a big amend systems and review contracts.
• Electronic invoicing;
deficit once again on the cards?
• Foreign donor funded projects;
We will not be surprised if another VAT
rate hike is announced. For obvious socio-
• The VAT treatment of partnerships and ... we will not
economic reasons a rate increase would
joint ventures; as well as
be surprised if
need to go hand in hand with VAT relief for • Transitional rules concerning existing
poorer households such as, an expanded section 72 rulings (special arrangements another VAT rate
list of zero rated food items and other
necessities as well as an increase in the
for taxpayers approved by the South
Africa Revenue Service) in view of the hike is announced.
social grant. As it stands, public transport recent changes to this provision.
by road and rail, education and residential
Will the personal tax rate be
increased?
By Jaco la Grange, Associate Director: Global Employer Services,
Deloitte Africa Tax & Legal
Although tax receipts are lower than Other proposals which should also be
expected, an increase in the marginal tax considered are:
rate for individuals is not expected. This – an increase in the residential
would be in line with findings of the Davis accommodation exemption – which has
Tax Committee that an increase in the top been done year-on-year in the past; and
marginal tax rate would not yield substantial – an increase in the R1 million exemption
additional tax revenue and may well provide from tax in respect of remuneration
further impetus to increasing the number of earned for services rendered outside
individuals emigrating from South Africa. South Africa.
That said, in line with the trend over the last The interest exemption will not be increased,
few years, the ‘tax bracket creep’ relief is however, the tax free investment amount
likely to be at the lower end of the tax table and the R350 000 maximum tax deduction
and be focused on the below 30% tax rate. for retirement fund contributions, would
require revision upwards.
10Making an impact that matters | Budget 2020/21
A new tax is born
By Suzanne van der Merwe, Director: Indirect Tax, Deloitte Africa Tax & Legal
In South Africa, like many other countries, The 3% French DST applies to revenue
we are now familiar with value-added derived from the provision of, for
tax (VAT) on electronic services, example, online placement of advertising The nature
introduced in 2014. The measures aim and the sale of collected user data, the
to tax consumption of services provided facilitation and provision of underlying of business
electronically from outside South Africa to
a South African recipient.
supplies of goods or services directly
between users, etc. This is in some ways
has changed
The rules were amended significantly in
very similar to the VAT base and looks
to levy tax based on the location of
dramatically and
2019 and we anticipate will be further
refined to cater for this rapidly changing
the customer. The above digital tax will the digital economy
remain in place and will accrue until an
and agile environment. Of particular international agreement in this regard is is impacting us all,
interest is the interpretation of the group reached.
company exclusions and the complexities individuals and
created by intermediary services. The nature of business has changed
dramatically and the digital economy
businesses alike. The
There is also much debate regarding the
extent of human intervention required for
is impacting us all, individuals and
businesses alike. The way in which value
way in which value
a service to fall outside the ambit of that
of an electronic service for VAT purposes.
chains operate and how value is created chains operate and
has transformed significantly. As can
Another area worthy of an electronic be seen from the above, this makes how value is created
tweet or two is whether business to determining taxing rights extremely
business (B2B) transactions as well as complex. Tax legislation needs to has transformed
business to consumer (B2C) transactions
should be governed by the South African
cater for the pace set by this rapidly
changing landscape, which requires
significantly.
electronic services VAT legislation. Some significant consensus, collaboration and
jurisdictions have opted for an election consideration.
process where the local business in a B2B
transaction self-accounts for the VAT on
the electronic service it receives.
These are just some of the concepts that
have to be analysed when determining
whether to levy VAT on transactions that
take place in the digital economy.
VAT on electronic services should,
however, be distinguished from digital
services tax (DST). France became one
of the first countries to introduce DST.
Although the legislation is not subject
to any time limitation, it is temporary
since the DST will be applicable only
until a consensus is reached at the
Organisation for Economic Co-operation
and Development (OECD) level.
11Making an impact that matters | Budget 2020/21
Transfer pricing - Important
considerations for minority
shareholders
By Billy Joubert, Director: Transfer Pricing Leader and BEPS Specialist,
Deloitte Africa Tax & Legal
We have, in practice, encountered many • The arrangements negotiated as part of
situations where transfer pricing rules apply
to local entities which are majority owned by a
setting up LocalCo result in it earning profits
which are higher than those regarded as
In practice the
foreign shareholder, but with a minority local
shareholder or shareholders. This scenario
arm’s length in terms of the MNEs global
transfer pricing policy. Notwithstanding
existence of
happens regularly in South Africa, significantly being required to effectively give away more transfer pricing
due to our BEE rules, but is by no means than an arm’s length level of profits from
unique to South Africa. There are often local the local entity, the MNE decides to proceed rules can serve
ownership requirements which apply in order
for multinational enterprises (MNEs) to obtain,
with setting up LocalCo because of the wider
commercial interests of the group. to protect the
in new territories, rights such as mining rights,
broadcasting licenses, banking licenses etc.
• A significant long term intra-group interests of
arrangement (for example, a franchise fee)
In some cases the local shareholder may be
the government of the relevant country (or a
is agreed as part of the process of setting local minorities
legal entity owner by the government). In other
up the local entity. Due to economic factors,
the arm’s length amount to be retained by
since they are
cases it may be a local resident or residents.
the MNE outside the country (for example,
the franchise fee) subsequently becomes
designed to
In practice the existence of transfer pricing
rules can serve to protect the interests of local
lower than the amount agreed when setting ensure an arm’s
up LocalCo. The MNE is unwilling to adjust
minorities since they are designed to ensure an
arm’s length return for the local entity (LocalCo)
the franchise fee downward since this would length return
result in the local shareholder effectively
from intra-group transactions. Therefore, the
local shareholder may well be reassured that
earning higher profits that those which for the local
they are not being prejudiced by intra-group
were envisaged when the local shareholder
originally invested in LocalCo.
entity (LocalCo)
pricing arrangements since these need to be
shown to be arm’s length. • LocalCo requires additional shareholder from intra-group
However, the interaction between local
funding. It cannot afford an additional interest
cost. Therefore it is proposed to the local transactions.
ownership and transfer pricing rules can shareholder that the funding be provided by
be complex. Situations which we have way of an injection of additional share capital.
encountered in practice include the following: However, the local shareholder is unable (or
unwilling) to inject the additional share capital
• The MNE’s overriding transfer pricing policy
required in line with its existing shareholding.
is such that local distributors are set up
The MNE, on the other hand, cannot subscribe
as limited risk distributors (LRDs). In other
for additional shares in LocalCo because
words, the local entity has limited profit (and
this would result in it acquiring too great
loss) potential. This is a significant underlying
a shareholding, thereby diluting LocalCo’s
dynamic in determining the value at which a
shareholding. Therefore the MNE decides that,
local shareholder may invest into LocalCo.
in order to stabilise the operations of LocalCo,
• Due to an updated benchmark search, after a it has no choice but to provide the funding by
number of years, the target profit margin for way of an interest free loan.
LocalCo is revised upwards or downwards.
This will correspondingly affect the return of
the local shareholder and may mean that the
local shareholder ends up receiving more (or
less) than the extent of the profits anticipated
when they made the original investment into
LocalCo.
12Making an impact that matters | Budget 2020/21
Therefore transfer pricing rules can • On the other hand, as already noted,
impact on local ownership structures
(and vice versa) in many different ways.
transfer pricing rules may be reassuring
for minority shareholders since they
An important final
Therefore this aspect needs to be carefully
considered. The precise action to be taken
assist in discouraging adverse pricing
practices within an MNE. Therefore a
point is that the
depends on the specific facts, but a few local minority shareholder may regard existence of local
overriding guidelines are as follows: transfer pricing rules as protecting its
• Local shareholders, at the time of making
interests. ownership rules –
an investment into a LocalCo, need to • The possibility of subsequent revisions and the impact of
be aware of the existence of underlying of the transfer pricing policy (in line with
transfer pricing policies within the MNE the ongoing evolution of the MNEs global these on transfer
and how these may potentially impact on transfer pricing policy) also need to be
the returns which they earn. discussed and considered. This means prices – needs to
• The effect of transfer pricing policies
that the consequences of such revisions
can be provided for in the agreements
be disclosed and
can be an issue of crucial significance to
the relationship between the MNE and
concluded between the shareholders.
analysed in the
the local shareholder. It is crucial that
awareness of the transfer pricing policies
An important final point is that the transfer pricing
existence of local ownership rules – and
be created at the time when the upfront
negotiations with the local shareholder
the impact of these on transfer prices – documentation of
needs to be disclosed and analysed in the
are conducted. This is because the
subsequent discovery by the local
transfer pricing documentation of the MNE. the MNE.
This is obviously of particular importance
shareholder that, for example, its profit
where the local ownership arrangement
potential from the investment in LocalCo
has the effect of requiring a deviation from
is limited, can result in disillusionment
the normal transfer pricing practices of the
and a loss of trust in the integrity of the
group.
MNE.
Broadening the tax base
by limiting tax deductions
for interest charges
By Lance Collop, Associate Director: Global Business Tax Services,
Deloitte Africa Tax & Legal
There is a strong possibility that the tax A general cap of this nature would be in
base could potentially be broadened line with global trends to prevent tax base
by expanding the rules that limit the erosion in accordance with BEPS action plan
deductibility of interest, possibly by of the Organisation for Economic
introducing a general cap on all interest Co-operation and Development.
incurred to a certain percentage of taxable
profits in a given year.
13Making an impact that matters | Budget 2020/21
State of carbon tax
By Raynard Maneschijn, Senior Manager: Global Investment and Innovation
Incentives, Carbon Tax Specialist, Deloitte Africa Tax & Legal
South Africa’s carbon tax regime is taxpayer has an approved Tier 3 reporting regime will work.
beginning to take shape, with several sets methodology, and in all other cases
of legislation being finalised or published section 4 (2) would apply. Many of the major concerns raised by
for public comment in the past few There are certain specific cases where stakeholders, at the last session hosted
months. In this article, we provide our the fuel energy content values provided by National Treasury in March 2019,
analysis on the various changes and new for use with section 4 (2) of the CTA and have not been addressed. Specifically,
information that has been made available. those used for reporting to DEFF are we still believe that the regulations
different. The impact of this misalignment are unnecessarily wider in scope than
The Taxation Laws Amendment Act is that emissions reported to DEFF, and they need to be, dealing with both the
(TLAA), which was gazetted on 15 January those reported to SARS may not be the generation of offsets and the use of
2020, made several technical changes to same. offsets in the South African carbon
the Carbon Tax Act (Act 15 of 2019) (CTA). tax regime, where it is only the latter
The two most noteworthy changes are Allowances that should be pertinent under these
those to the tax base, as well as to the Originally process emissions received a regulations.
allowance mechanisms. 70% allowance, and due to a technical
error in the drafting, fugitive emissions Further, we note that COP25 failed to
Tax base received only a 10% allowance. With the produce a rulebook and replacement for
The most noteworthy change in the amendments contained in the TLAA, the Cleaner Development Mechanism
TLAA is to the carbon tax base. Which is a 60% basic allowance now applies to (CDM), which may come to an end in
defined in sections 4 (1) and 4 (2) of the all greenhouse gas (GHG) emissions December 2020. The development of
CTA. Originally the tax base was defined sources. Further to this, process and local offset methodologies seems to still
as the sum of greenhouse gas emissions fugitive emissions sources will receive an be a process in its infancy, with only a
as determined by a Department of additional 10% allowance. framework currently being considered.
Environmental Affairs (DEA) (now This means that offset producers will
Department of Environment, Forestry Section 12L likely have limited options in the short
and Fisheries [DEFF]) approved reporting Section 12L has been amended so that to medium term to generate offsets
methodology. the incentive can be claimed for years effectively.
of assessment ending before 1 January
The original definition would therefore 2023. This prolongs the period for Draft benchmark and trade exposure
allow DEFF results to be used by the which taxpayers will be able to obtain regulations
South Africa Revenue Service (SARS) in an incentive for measured and verified Draft regulations regarding the Z-factor
verifying carbon tax submissions. This was energy savings. To date, this incentive benchmark as well as the trade exposure
possible as annual emissions reported to has rewarded energy efficient companies allowance were published for public
DEFF under the National Greenhouse Gas with a total of more than R2-billion in comment on 29 November 2019.
Emissions Reporting regulations (NGERs) tax deductions, although the application
in March, would match those reported to process remains stringent. The benchmark allowance regulations
SARS in July. are relatively straightforward, however
Carbon offset regulations one important point to note is the
However, it was understood from These regulations were gazetted as requirement for a measured and verified
changes incorporated in the TLAA, as final on 20 November 2019. There have emissions intensity to be used. Currently,
well as stakeholder sessions attended been several technical changes to the a relatively stringent measurement and
with National Treasury, that section 4 regulations, but no major changes to verification process by a third party South
(1) would only be applicable where a the process and scope of how the offset African National Accreditation System
14Making an impact that matters | Budget 2020/21
(SANAS) accredited entity is required to SARS rules
claim the section 12L energy efficiency
incentive. The use of the terminology in
The SARS rules providing for carbon tax
(licensing and payment) were finalised
We still believe
the context of carbon tax may indicate
National Treasury would require a
and gazetted on 23 December 2019.
The licensing period has opened from
that the
similar process to claim the benchmark 2 January 2020, and the first carbon tax regulations are
allowance, although no explanation payments are due between 1 and 30 July
for this term is provided in the draft 2020. The return forms have however not unnecessarily
regulation, and it may still be changed. been finalised.
wider in scope
The trade exposure regulations are
complicated by the possibility of a single
The most noteworthy change to the
revised SARS rules is that they provide for
than they need
taxpayer operating in multiple sectors. To
accommodate this, the regulations provide
a consolidated licensing approach. Rather
than having to license each individual
to be, dealing
a formula for determining a weighted facility that performs a GHG emitting with both the
average trade exposure. The regulations activity, a carbon taxpayer will apply for
also make provision for a company specific a consolidated license for all its activities generation of
trade exposure calculation, which is a
function based on the monetary value of a
over which it has operational control. This
should simplify the licensing process for offsets and the
taxpayers’ exports and imports compared
to the total sales values of the taxpayer.
entities that have a large number of small
emissions sources to consider.
use of offsets in
This would allow a company that is
uniquely trade exposed, in a sector which
the South African
is not, to obtain the allowance. However, carbon tax regime.
there are a number of technical challenges
in these regulations which may delay its
finalisation.
15Making an impact that matters | Budget 2020/21
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© 2020. For information, contact Deloitte Touche Tohmatsu Limited. Tax & Legal
16Making an impact that matters | Budget 2020/21
Illicit trade flows: The broader
impact on supply chains
By Riaan Smit, Associate Director: Global Business Tax Services, Deloitte
Africa Tax & Legal
Reporting on illicit trade flows often focus disastrous financial implications. Certain
on the fiscal losses that results from the
illicit trade flows, such as the amount of
members of this industry, in particular
the industrial bunkering industry and the
Our recommendation
excise revenue lost through the smuggling
of cigarettes or alcohol products. Other
non-refining fuel export industry, that are
subject to refund claims from SARS, can
is for SARS to
topics that are considered include have their working capital depleted while engage with
the proliferation of organised crime waiting for the refunds to be effected.
and health risks such as counterfeit legitimate industry
medicines. In reaction, some major international
bunkering suppliers stopped selling “duty to design a strict,
An important result from illicit trade flows
that is often neglected is the impact on
free” bunkering supplies to foreign going
vessels resulting in international shipping
but fair, transparent
the supply chain and related costs to
legitimate business.
lines bypassing South Africa as a refuelling
point. This in turn has a negative effect on
and predictable
related industries such as ship chandlers. compliance
In an attempt to curb the illicit trade
flows, the South African Revenue Service Our recommendation is for SARS to framework that
(SARS) introduced more and stringent
compliance requirements on the import,
engage with legitimate industry to
design a strict, but fair, transparent and balance the priorities
export and manufacture of “exposed”
industries, such as petroleum, liquor and
predictable compliance framework that
balance the priorities of legitimate traders
of legitimate traders
tobacco. while curbing illegitimate trade flows.
We would also recommend that SARS
while curbing
Certain of these compliance investigate and implement systems to illegitimate trade
requirements, such as the “track and not only control and verify the import
trace” initiative in the tobacco industry and export of certain products, but also flows.
are, with good reason, welcomed by the facilitate the submission and payment of
industry members. Other legislative refund claims.
amendments, or SARS policy changes,
results in an enormous administrative Another proposed solution is the
burden on legitimate business and may controlled but aggressive roll out of
become so complex that compliance internationally recognised programs like
becomes extremely difficult and costly. Approved Economic Operator (AEO) that
will allow SARS to focus its efforts where
In certain industries, particularly it is most needed and allow legitimate
petroleum, these ever changing, complex business to control its compliance cost
compliance requirements may have and working capital.
17Making an impact that matters | Budget 2020/21
Good faith does not
exempt taxpayers from
paying understatement
penalties to SARS
By Hermana Mausling, Senior Manager: Tax and Mia Heymann,
Assistant Manager: Legal, Deloitte Africa Tax & Legal
The Tax Administration Act contains an understatement
penalty regime which could, at times, result in severe
penalties for taxpayers.
The Tax Administration Act, 28 of 2011 “… the bona fide inadvertent lack of reasonable care by a taxpayer
(the TAA) contains an understatement error has to be an innocent in completing its return will not excuse
penalty regime which could, at times, a taxpayer from being liable to pay
misstatement by a taxpayer on
result in severe penalties for taxpayers. understatement penalties.
Broadly speaking, where a taxpayer has
his or her return, resulting in an
understated its tax liability (as a result of understatement, while acting Although the Guide is not binding on
a failure to submit a return, an omission in good faith and without the taxpayers, SARS or the courts, and is
from a return, an incorrect statement intention to deceive.” merely of persuasive value, SARS has
in a return or the failure to pay the recently started implementing the narrow
correct amount of tax if no return was In the Guide, SARS states that it disagrees interpretation of bona fide inadvertent
required) which lead to any prejudice with, and will not follow, the application error as set out in the Guide, as opposed
to the South African Revenue Service of the law in ABC Holdings (Pty) Ltd v to the tax court’s interpretation of the
(SARS) or the fiscus, it will be liable for an The Commissioner for the South African phrase in ABC Holdings (Pty) Ltd v The
understatement penalty as calculated Revenue Service (ITI13772), “which it is Commissioner for the South African
in terms of the understatement penalty entitled to do as tax court judgements, Revenue Service (ITI13772).
percentage table in section 223 of the TAA although often instructive, have no
(in addition to the underlying tax due). binding effect.” SARS is of the view that Accordingly, in the event that a taxpayer’s
However, relief from the understatement the tax court lost sight of the fact that an interpretation of a provision in a tax
penalty is provided if the understatement error cannot have good or bad faith and act is contrary to that of SARS’, and this
arose as a result of a bona fide cannot have the intention to deceive. interpretation leads to an understatement
inadvertent error made by the taxpayer. as defined in the TAA, it is expected that
SARS interprets the phrase in light of SARS will levy an understatement penalty
The TAA does not define the phrase bona the Supreme Court of Appeal’s (the SCA) notwithstanding that the taxpayer might
fide inadvertent error and, prior to SARS’ judgment in Natal Joint Municipal Pension have acted in good faith and without the
Guide to Understatement Penalties, which Fund v Endumeni Municipality, where intention to deceive.
was first issued by SARS’ legal counsel the SCA held that the proper approach
on 29 March 2018 (the Guide), taxpayers to the interpretation of documents is Although SARS’ interpretation of the
frequently relied on the judgment of to read the words used in the context phrase bona fide inadvertent error in the
the tax court in ABC Holdings (Pty) Ltd v of the document as a whole and in the Guide is, in our view, too restrictive, we
The Commissioner for the South African light of all relevant circumstances. Taking expect SARS to continue to only provide
Revenue Service (ITI13772) for the correct into account the purpose and context relief from understatement penalties if
interpretation of the phrase. The tax court of the understatement penalty regime, the understatement arose as a result of
held as follows at paragraph 45: SARS concludes that the only errors that an involuntary typographical mistake by
could constitute bona fide inadvertent the taxpayer in its return.
errors are involuntary typographical
mistakes. SARS further notes that a
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