Sowing seeds for renewal and growth Deloitte commentary on South Africa Budget 2019/20 - Making an impact that matters
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Sowing seeds for renewal and growth Deloitte commentary on South Africa Budget 2019/20 Making an impact that matters
Budget 2019/20 | Deloitte Commentary
Budget 2019/20
“If we look after what we sow, and what
we have ploughed and laboured over
so tirelessly, since the founding of our
democracy, it will grow and the seed will
bear fruit. However, if we abandon our
fields, the seeds we plant will wither.
Minister of Finance
Mr Tito Mboweni, 20 February 2019
2
Foreword
Delia Ndlovu, Managing Director,
Africa Tax & Legal
The 2019/20 Budget Speech delivered by (up by 11 percent), value-added tax of (R278.4 billion – up by 8 percent), health
Finance Minister Tito Mboweni did not R360.5 billion (up by 11 percent) and (R222.6 billion – up by 7 percent) and
include any unexpected announcements corporate income tax of R229.6 billion (up peace and security (R211 billion – up by
and is reflective of both the challenges and by 5 percent). Key tax proposals aimed 4 percent). Of particular concern should
constraints that government faces. at increasing revenue collection include be the increase in debt-service costs to
no inflationary adjustments to individual R202.2 billion (up by 11 percent).
The challenges include unemployment,
tax brackets or medical tax credits, with
the dire state of some of our state- The increase in debt-service costs together
minimal increases in personal income
owned enterprises and a commitment with the increased social bill significantly
tax rebates as well as increases in fuel
to fund tertiary education. In seeking to constrains government’s ability to redirect
levies and excise duties (“sin taxes”).
address these challenges, government is its efforts towards prioritising growth and
Rebuilding capacity at SARS as well as
constrained by factors such as suppressed investment and exacerbates the budget
improvements in its enforcement capacity
economic growth, the impact of perceived deficit which is now forecast to grow to
has also been highlighted as measures
corruption on tax morality, pressure from R243 billion or 4.5 percent of GDP. How-
to strengthen revenue collection. We
ratings agencies as well as an imminent ever, the undertaking to reduce the public
provide commentary on some of these tax
national election and the impact that sector wage bill and the exercising of great-
proposals in this publication.
unpopular fiscal decisions may have er control over state-owned enterprises
on voters. A more detailed economic Budgeted expenditure for 2019/20 is will hopefully create the environment to
overview is provided overleaf. It is against R1.826 trillion. Expenditure priorities plant the seeds for future growth.
this backdrop that the Finance Minister continue to be informed by the National
Other key themes reiterated by the
delivered the 2019/20 Budget Speech. Development Plan, with the largest
Minister include encouraging private sector
portion of the budget again being
Budgeted revenue for 2019/20 is R1.583 investment by ending policy uncertainty
allocated to education (R386.4 billion – up
trillion and will mainly be funded by and attracting highly skilled immigration.
by 9 percent) followed by social grants
personal income tax of R552.9 billionBudget 2019/20 | Deloitte Commentary
Economic overview: no quick fixes
South Africa is no doubt in a difficult GDP in 2018/19 to 4.5% in 2019/20. Gross The increasing debt burden is further
position, facing tough decisions and debt-to-GDP is estimated at 55.6% for exacerbated by the disappointing growth
unpleasant trade-offs. This was apparent 2018/19 and projected to peak at 60.2% outlook: GDP growth is forecast at 1.5% for
as the Minister of Finance, Tito Mboweni, in 2023/24, exceeding the 60% threshold 2019 (down from 1.7% in the 2018 MTBPS),
early on in his maiden Budget Speech in the medium term, albeit mostly in line 1.7% for 2020 (down from 2.1%) and 2.1%
stated that “there are no quick fixes”. The with the 2018 Medium Term Budget Policy for 2021 (down from 2.3%). A slower and
2019 Budget paints a poor state of the Statement (MTBPS). To stay in line with the only moderate recovery is thus expected,
economy, however with little detail on the MTBPS forecast, the 2019 Budget mostly given the backdrop of a weaker global
difficult path to recovery. reallocates expenditure, some of which is economy and key domestic risks to the
reshuffled to Eskom. country’s growth outlook.
The consolidated budget deficit is
expected to widen further from 4.2% of
Gross debt-to-GDP outlook, 2014/15-2026/27f
65
Gross debt as a % of GDP
60
55
50
45
3
5
4
6
7
1
2
20
15
19
16
17
8
/2
/2
/2
/2
/2
/2
/2
/1
/
/
/
/
/
17
16
15
18
20
21
25
14
23
26
24
19
22
20
20
20
20
20
20
20
20
20
20
20
20
20
2018 Budget 2018 MTBPS 2019 Budget
Source: National Treasury
Total revenue was revised to R1 455.2bn Notable expenditure remain Eskom and reserve has subsequently been revised
in 2018/19, down by R15.4bn compared the bloated public sector wage bill, both of upwards for possible financial support to
to the 2018 MTBPS estimate, partly due which continue to crowd more productive R13bn for 2019/20.
to larger than expected VAT refunds. spending areas. Positively though is
With limited policy space to stimulate
This equates to only 7.5% growth from the introduction of government service
growth from the demand side, supply-side
collections in 2017/18. early retirement, no annual increases for
structural reforms are vital. With little
Parliament and provincial legislatures
Total expenditure is revised to R1 665.44bn resources to tackle major obstacles, South
members, as well as the financial support
for 2018/19, and R1 826.5bn for 2019/20. Africa finds itself between a rock and a
conditions for state-owned enterprises
The fastest average growing expenditure hard place. The 2019 Budget paints a
(SOEs). Nevertheless, Eskom is a risk that
item is expected to remain debt-service difficult path to recovery with disappointing
materialised with R23bn per year being
cost at 10.7% over the 2018/19 to 2021/22 revenues, burdened expenditure and
provisionally allocated to support the
period. Moreover, debt-service cost was continuing high debt levels, yet aims
power utility.
revised upwards from the 2018 Budget by to set the foundation for an improved
R2.1bn in 2018/19, R4.5bn in 2019/20 and The risks to the economy and the fiscus medium-term economic outlook and fiscal
R10.2bn in 2020/21. remain substantial; the biggest of which consolidation, by “planting the seeds for
continues to be SOEs. The contingency renewal and growth”.
4Budget 2019/20 | Deloitte Commentary
Tax policy proposals
Tax Policy Proposals Diesel Refunds Tax Administration
The following tax policy proposals are The farming, forestry and mining industries The Budget Review indicated that in order
aimed at raising R15 billion in additional tax may currently claim a refund on RAF levies to raise the revenue needed to fund the
revenues in 2019/20: included in diesel purchases on the basis country’s social and economic policy
that their activities are primarily off-road. commitments South Africa requires a tax
•• No change will be made to personal However, it has been pointed out that administration that is efficient, effective
income tax brackets. these diesel users are not prevented from and impartial. The SARS Commission
submitting claims to the RAF for accidents report highlighted maladministration and
•• Fuel levies are to increase by 29c/litre
that may occur off-road. Accordingly it has abuse of tender procedures that stemmed
(30c/litre for diesel).
been proposed that these diesel users from “massive failure of governance and
•• Health promotion levy (sugary contribute towards the RAF. integrity” after the appointment of the
beverages) increase from 2.1c gram to entity’s previous Commissioner in 2014.
Oil and Gas
2.21c gram from 1 April 2019. Government has started implementing
Government has noted that it intends the most urgent recommendations of the
•• Excise duties on alcohol and tobacco
reviewing the Tenth Schedule to the Commission including:
products are to increase by between 7.4
Income Tax Act, 1962 which currently
and 9 percent.
governs the upstream oil and gas industry. •• the recruitment process for a new SARS
•• Increasing the income eligibility Government also recognises that to date Commissioner,
threshold from R4 000 to R4 500 for the it has not entered into any fiscal stability
•• the re-establishment of a division
employment tax incentive agreements (which seeks to guarantee
focusing on large businesses which
the fiscal framework) with any oil and gas
These and other tax proposals are includes the recruitment of specialists,
companies.
considered in further detail below.
•• the launching of an Illicit Economy Unit
Given the long-term and highly capital-
Individuals to investigate syndicated tax evasion
intensive nature of the oil and gas industry,
schemes in high-risk sectors, including
No inflationary adjustments will be made providing legislative certainty is a key
the tobacco trade,
to individual tax brackets and this is imperative to attracting investment and
expected to raise R12.8 billion in revenue. capitalising on the current optimism •• reviewing contracts that breached public
Furthermore, medical tax credits will not brought about by recent discoveries off procurement regulations and acting to
be increased while it is proposed that only our coastline. recover funds spent.
minimal increases be made to personal
Employment Tax Incentives •• In addition, consideration will be
income tax rebates (from R14 067 to R14
given in a discussion document to the
220). As a result of its success, government
creation of an Inspector General for tax
extended the employment tax incentive in
Fuel Levies administration.
2018. Effective 1 March 2019, the income
Fuel levies are set to increase by 29c/30c eligibility threshold for which employers It has emerged internationally that
per litre which includes a newly introduced may claim the maximum value (currently offshore structures and arrangements
carbon tax on fuel of 9c/10c per litre. This R1 000 per month) is to be increased to R4 are being designed in an attempt to
carbon tax will not be refundable in terms 500 (previously R4 000). circumvent financial account reporting
of the diesel rebate scheme. under the OECD’s Common Reporting
Carbon Tax
Standard. It is proposed that the OECD’s
It is proposed that the application of fuel
The effective date for implementation model mandatory disclosure rules be
levies be expanded to apply to other
of Carbon Tax has been confirmed as 1 implemented in South Africa to identify
fossil fuels (e.g. illuminating paraffin and
June 2019. In our opinion, many concerns and counter such structures and
aviation kerosene) as well as biofuels such
surrounding the implementation of arrangements. It is further proposed that
as bioethanol and biogas. The basis for
Carbon Tax remain. Regulations relating similar penalties be imposed to those
this proposal is that these fuels are also
to deductions or tax-free thresholds that currently in force for non-compliance with
used as transport fuels as inter alia, claims
reduce the carbon tax rate still need to be the reportable arrangements legislation.
could be made to the Road Accident Fund
finalised.
(RAF) for damages arising from accidents
involving motor vehicles that are powered
by these fuels.
5Budget 2019/20 | Deloitte Commentary
Base Erosion and Profit Shifting of companies if the services are supplied way anti-dividend stripping rules were
to a local company. The requirement for circumvented. It is proposed that the rules
In recent years, South Africa has taken
the exemption was a 100 percent holding. governing share buybacks and dividend
steps to protect its tax base by closing
It is proposed that this requirement be stripping be amended to curb this practice.
loopholes exploited by multinationals to
reviewed to take account of employee The proposed amendments will be
artificially shift profits and avoid paying
incentives or empowerment requirements. effective immediately i.e. from the date of
tax. Domestic legislation is already aligned
the budget speech (20 February 2019).
with many measures envisaged to combat The VAT rules regarding transactions in
base erosion and profit shifting. While terms of the corporate rules are to be Value-Shifting Rules
South Africa has measures in place to reviewed to clarify the VAT treatment,
Current anti-avoidance provisions target
curb excessive debt financing, these particularly where the transaction relates
value shifting through asset for share
rules are being reviewed against global to fixed property which may not be a going
transactions that apply when the market
best practice. Striking a balance between concern transfer.
value of the assets acquired differs from
attracting investment while adequately
Variable Remuneration the market value of the shares issued in
protecting the corporate tax base will
exchange for such assets. The current
remain an important yet difficult task. Section 7B of the Income Tax Act operates
provisions do not take cognizance of any
to match the timing of a deduction for the
Controlled foreign company rules will be potential deferred tax liability that may
payment of certain variable remuneration,
reviewed be inherent in the asset in question. It is
such as leave pay or bonuses, with the
proposed that the Act will be amended to
•• to reduce the rate of tax subject to the payment of such amount to employees.
clarify that the value of any asset for the
exemption threshold It is proposed to extend the scope of this
purpose of the provisions should take into
provision to include certain qualifying
•• to prevent the interposing of CFC’s in account the inherent deferred tax liability.
payments in the definition of “variable
the supply chain between South African
remuneration”. No further detail has Corporate Reorganisation Rules
connected persons and independent
been provided as to the nature of these
non-resident customers or suppliers The current corporate reorganisation
proposed “qualifying payments”.
rules allow for the tax neutral transfer of
VAT
Anti-Dividend Stripping Provisions assets between companies that are part of
To mitigate the effects of the one the same group. This tax neutral transfer
In 2017 and 2018 the rules governing share
percentage point increase in the VAT rate would typically also apply to exchange
buybacks and dividends stripping were
in 2018 the list of zero rated items is to be items and interest-bearing assets. It is
changed to prevent certain taxpayers from
expanded. From 1 April 2019, the list will proposed that the legislation be amended
avoiding taxation on share disposals by
include white bread flour, cake flour and to clarify that the transfer of these items
having companies declare dividends prior
sanitary pads in an attempt to provide should be excluded from the “rollover”
to the disposal of the shares in question.
some relief to middle and lower income rules.
However, certain schemes have arisen
households.
where the target company in question The intragroup corporate rollover
Unfortunately, no measures have been declares a large dividend to the existing provisions contain multiple anti-avoidance
announced to deal with crypto currencies. shareholder followed by a subscription measures. It is however not always clear
Therefore, uncertainty in this regard will for new shares by the intended acquirer. how these measures interact with each
continue to persist. Typically, the shares issued to the acquirer other which can result in potential double
would swamp the shares owned by the taxation. It has been proposed to refine
From 1 April 2019 regulations prescribing
existing shareholders such that economic and clarify these provisions, which is
electronic services will expand the range
ownership of the company passed to the welcomed.
of electronic services subject to VAT. The
acquirer without the existing shareholders
Regulations exclude electronic services
disposing of any of their shares. In this
supplied between companies in a group
6Budget 2019/20 | Deloitte Commentary
Collective Investment Schemes including the definition of rental income Definition of Permanent
as applied to foreign exchange differences Establishment
In 2018, amendments were proposed
and the interaction between the REIT tax
to tax the profits of some collective The current definition of permanent
regime and the corporate reorganisation
investment schemes as revenue instead establishment in the Income Tax Act is
rules. It is proposed that the legislation be
of capital. After receiving public comments based on the definition developed by
amended to clarify these inconsistencies.
on this proposal, government decided that the OECD which recently expanded the
In addition government undertakes to
more time was needed to work with the definition. When South Africa signed
review the efficacy of the current REIT
industry to find solutions to certain of the the OECD multilateral Convention, it
regime.
issues raised in relation to the proposed did not opt to expand the permanent
amendment. It is proposed that this will be Venture Capital Companies establishment definition in its treaties.
done for the 2019 legislative cycle. Consequently South African tax treaties
It has apparently come to the government’s
use the narrow definition of a permanent
Real Estate Investment Trusts (REITs) attention that some taxpayers are
establishment while the Income Tax Act
attempting to undermine certain aspects
It is proposed that consideration be given uses a broader definition. It is proposed
of the venture capital company tax regime
to the regulation and tax treatment of that the permanent establishment
to benefit from excessive deductions. It is
unlisted REITs that are held by institutional definition in the Income Tax Act be
proposed that these rules will be reviewed
investors in line with the commitments reviewed to determine whether a limitation
to prevent this perceived abuse. Given
given in the 2013 Budget Review. is warranted.
the fiscal constraints on government, any
It was indicated that the current REIT proposal to limit abuse is welcomed.
regime contains various inconsistencies,
7Budget 2019/20 | Deloitte Commentary
Contacts
For more information, contact your nearest Deloitte tax office.
Managing Director: Africa Tax & Legal Services:
Delia Ndlovu, Tel: +27 (0)11 806 6185, Email: delndlovu@deloitte.co.za
Cape Town: Anthea Scholtz, Regional Leader Western Cape & Namibia,
Tel: +27 (0)21 427 5504, Email: ascholtz@deloitte.co.za
Gauteng: Delia Ndlovu, Managing Director: Africa Tax & Legal Services,
Tel: +27 (0)11 806 6185, Email: delndlovu@deloitte.co.za
Kwa-Zulu Natal: Mark Freer, Regional Leader Kwa-Zulu Natal,
Tel: +27 (0)31 560 7079, Email: mfreer@deloitte.co.za
Editorial team
Hannah Edinger
Tel: +27 (0)11 304 5463, Email: hedinger@deloitte.co.za
Moray Wilson
Tel: +27 (0)21 427 5515, Email: morwilson@deloitte.co.za
Ruben Johannes
Tel: +27 (0)21 427 5516, Email: rjohannes@deloitte.co.za
Facebook: http://www.facebook.com/deloittesa
Twitter: http://www.twitter.com/deloittesa
Blog: http://www.deloitteblog.co.za or http://blog.deloitte.co.za
Website: http://www.deloitte.co.za
Linkedin: http://www.linkedin.com/company/deloitte-south-africa/
1This guide is based on the Budget proposals tabled in Parliament by the Minister of Finance on 20 February 2019. These proposals are, however, subject to approval by Parliament. The information contained in this guide is for general guidance only and is not intended as a substitute for specific advice in considering the tax effects of particular transactions. While every care has been taken in the compilation of the information contained herein, no liability is accepted for the consequences of any inaccuracies contained in this guide. © 2019 Deloitte & Touche. All rights reserved. Member of Deloitte Touche Tohmatsu Limited
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