Driving progress Budget 2018/19 - Consolidated Commentary South Africa - Deloitte
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Next >> Driving progress Budget 2018/19 Consolidated Commentary South Africa
> Preface The South African Minister of Finance, Malusi Gigaba, delivered his 2018 Budget Speech to Parliament on Wednesday, 21 February 2018. In this summary, we highlight some of the tax proposals mentioned in his speech and set out in the detailed Budget Review document. Please do not hesitate to contact us, should you require any additional information relating to any aspect covered in this summary.
> Contents Contacts......................................................................................1 Personal Income Tax..............................................................2 Company Tax............................................................................4 International Tax......................................................................7 Exchange Controls...................................................................9 Administrative Issues and Other Taxes..........................10 Value-Added Tax (VAT)........................................................11 Customs & Excise Duties and Levies..............................13 Investment and Innovation Incentives............................18 * Deloitte comments are indicated in Blue Italics
>
Contacts
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Managing Partner: Africa Tax & Legal Services
Nazrien Kader, Tel: +27 (0)11 209 6030, Email: nkader@deloitte.co.za
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Navigation
Contacts
Personal Income Tax
Company Tax
International Tax
Exchange Controls
Administrative Issues and
Other Taxes
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 1>
Personal Income Tax
General In addition, whilst the proposed change
to apportion the medical scheme fees tax
The marginal tax rates applicable to
credit seems fair, it will be administratively
individuals remain unchanged across all
difficult for employers to effect such
tax brackets.
an apportionment where the medical
However, the first three income tax scheme fees tax credit is claimed against
brackets (as well as the tax rebates) the employees’ tax payable, as employers
will see a below inflation adjustment would not be privy to the information
of 3.1%, whilst the top four income tax required for such an apportionment.
brackets will remain unchanged (see
Retirement reforms
tax tables in the Deloitte Quick Tax
Guide 2018/19). The following amendments are
proposed in relation to the retirement
Comment: There is little benefit all round:
reforms:
the new tax tables provide no relief for
higher income earners for fiscal drag,
Navigation whilst the lower than inflation increase to
the lower income tax brackets provide little
•• The interaction between the
Income Tax Act and the Double
Tax Agreements will be reviewed
respite to individuals who will utilise their
to ensure that a tax deduction is
net take-home cash salaries to fund basic
only allowed against pay-outs from
Contacts commodities (which will rise in cost due to
foreign retirement funds which are
inflation and the higher VAT rate).
taxable (and not against pay-outs
Changes to the medical scheme fees where an exemption applies).
Personal Income Tax tax credit
•• Retrospective legislative changes
In the prior year budget, it was will be made to correct unintended
cautioned that the medical scheme tax liabilities that arose in an
Company Tax fees tax credit may be reduced in employee’s hands, due to the
the future, as part of the funding current wording of legislation
framework for National Health in instances where funds were
Insurance. transferred between/within
International Tax retirement funds of the same
This year we see a below inflation
employer.
increase to the medical scheme fees
tax credit (see tax tables in the Deloitte •• When an individual formally
Exchange Controls Quick Tax Guide 2018/19) for these emigrates from South Africa, such
purposes. an individual may withdraw the full
lump sum benefit of a retirement
In addition, and in an attempt to curb
Administrative Issues and annuity. It is proposed that the
abuse by taxpayers, it is proposed that
tax treatment across the different
Other Taxes the medical scheme fees tax credit
retirement funds be aligned under
(the medical scheme fees tax credit
these circumstances.
allowed for contributions made to a
registered Medical Aid Scheme and the •• In 2017, amendments were made to
Value-Added Tax (VAT) additional medical expenses tax credit) permit the tax efficient transfer from
be apportioned in instances where a retirement fund to a retirement
multiple taxpayers contribute towards annuity fund, subject to the fund
Customs & Excise Duties the medical aid or medical expenses. rules, where individuals have
and Levies Comment: The below inflation elected to retire on a date other
adjustment to the medical scheme fees tax than normal retirement age. It is
credit is not matched with what is often now proposed that such tax-free
an inflationary/above inflation increase in transfers also apply to transfers
Investment and Innovation medical aid contributions. Taxpayers are to a pension preservation fund or
Incentives thus obtaining little real benefit from the provident preservation fund.
increase in the medical scheme fees tax
credit. Comment: The proposed alignment of the
tax implications across various retirement
funds is welcomed.
Budget 2018/19 Driving progress | Consolidated Commentary 2>
Employee housing – removing the Employment Tax Incentive
fringe benefit for low interest loans
It is proposed that the employment
In an attempt to promote the provision tax incentive will be reviewed before
of housing to employees, it is proposed it expires on 28 February 2019, as the
that no low interest/no interest loan impact of the incentive is currently
fringe benefit be accounted for in greater in smaller firms when
instances where loans (of less than compared to larger firms.
R450 000) are granted to employees
In addition, it is proposed that the
to fund the acquisition of housing.
six special economic zones, which
However, it should be noted that
the Finance Minister will approve,
the proposed amendment will only
will benefit from an employment tax
apply to lower income earners whose
incentive for workers of all ages.
remuneration proxy does not exceed
R250 000. Comment: The proposed amendments
are welcomed.
Navigation Comment: This proposed amendment is
welcomed.
Adjusting the official rate of interest
It is proposed that the definition to the
Contacts “official rate of interest” (which is, for
instance, utilised to calculate the value
of a low interest/no interest loan fringe
Personal Income Tax benefit) be amended to reflect a rate
closer to the prime rate of interest.
Comment: The proposed amendment will
Company Tax increase the fringe benefit on low interest
loans and will also affect the amount of
the deemed donation of individuals who
have interest-free loans to trusts, which is
International Tax also based on the official rate of interest.
Exchange Controls
Administrative Issues and
Other Taxes
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 3>
Company Tax
Business (General) addition, anti-avoidance rules dealing
with share buybacks and dividend
Amendments resulting from the
stripping regarding preference shares
application of debt relief rules
should be clarified.
In 2017, amendments were made to
Comment: We agree that an urgent
the Income Tax Act to address the tax
review of the 2017 tax changes are
consequences of applying debt relief
required as they are making it difficult, if
rules. Concerns have been raised about
not impossible, to rationalise and simplify
the unintended consequences which
corporate groups without triggering
may arise from the application of these
unwanted tax charges. For example, the
tax amendments and it is proposed
liquidation or deregistration of group
that further amendments be made to
companies is now often not possible
address these concerns.
without triggering tax charges. This
Comment: Further amendments undermines the very purpose of the
Navigation
are urgently needed to address the corporate reorganisation rules, which
ambiguities and uncertainties raised is to facilitate tax neutral corporate
by the 2017 tax amendments. For restructures.
example, the mere subordination of a
Refining rules for debt-financed
debt or a minor change to the terms of
Contacts a debt could now trigger a taxable debt
acquisitions of controlling interest in
an operating company
benefit in the hands of the debtor. This
is an undesirable situation and, apart Following the proposed suspension
Personal Income Tax from being inequitable, undermines tax of intra-group transactions in 2012,
certainty. a special interest deduction was
introduced instead of allowing
Refining anti-avoidance rules dealing
implementation of debt push-
Company Tax with share buybacks and dividend
down structures, applicable where
stripping
companies used debt funding to
Amendments to the dividend stripping acquire a qualifying controlling interest
and share buyback rules were
International Tax in an operating company.
brought about by the 2017 Taxation
For this purpose, section 24O defines
Laws Amendment Act, which have
an “operating company” as a company
significantly widened the ambit of the
Exchange Controls of which at least 80% of the receipts
anti-dividend stripping rules.
and accruals constitute income in the
The corporate reorganisation rules, hands of that company.
contained in sections 41 to 47 of the
It is proposed that the provisions of
Administrative Issues and Income Tax Act would, in the past, have
section 24O will be amended to clarify
Other Taxes provided some protection from the
when this test should be applied and
anti-dividend stripping rules but this is
whether this test should be applied
no longer the case as the anti-dividend
when an operating company transfers
stripping rules now override the
Value-Added Tax (VAT) corporate rule provisions.
its business as a going concern to a
company that forms part of the same
The amendments were made in order group of companies as that operating
to prevent taxpayers from stripping out company.
Customs & Excise Duties dividends of a target company resulting
and Levies in a devaluation of the company before
disposing of the company’s shares.
Government has noted concerns
Investment and Innovation that the above changes may affect
Incentives some legitimate transactions and
arrangements. As a result, it is
proposed that the interaction of these
anti-avoidance rules and the corporate
reorganisation rules be reviewed. In
Budget 2018/19 Driving progress | Consolidated Commentary 4>
Addressing the abuse of collateral Clarifying tax amendments relating
lending arrangement provisions to long-term insurers
There are no income tax and securities The Income Tax Act was amended to
transfer tax implications for a period introduce the risk policy fund for long-
of 24 months if a listed share is term insurers, effective from 2016. The
transferred as collateral in a lending tax treatment of long-term insurers was
arrangement. This means that if a also amended due to the introduction
foreign shareholder takes out a loan of the solvency assessment and
with a South African resident company management framework (SAM). Recent
using listed shares as collateral, the amendments affecting the risk policy
foreign shareholder can reduce its fund did not take effect when the fund
dividends tax rate to zero. was introduced.
Under this arrangement, the resident It is proposed that the effective date
company receives a tax-free dividend of the relevant amendments be so
Navigation and pays an amount (called a
manufactured dividend) based on
changed.
Review of the provisions of the
the dividend received by that resident
Income Tax Act referring only to the
company to that foreign company.
Johannesburg Stock Exchange
Contacts It is proposed that the legislation be
Certain provisions of the Income Tax
amended to prevent this form of abuse.
Act refer to the Johannesburg Stock
Business (financial sector) Exchange Limited or JSE Limited
Personal Income Tax listing requirements.
Clarifying the tax treatment of
doubtful debts Following the introduction of additional
stock exchanges in South Africa, it
In 2015, the Commissioner’s discretion
Company Tax is proposed that the relevant tax
in relation to the section 11(j) doubtful provisions be reviewed to include the
debts allowance was deleted with newly introduced stock exchanges,
effect from a date to be announced. subject to certain regulatory and
International Tax The Commissioner’s discretion was transparency criteria.
deleted to allow for the allowance to
be claimed according to criteria set
out in in a public notice issued by the
Exchange Controls Commissioner. No criteria have been
formulated for the claiming of the
allowance.
Administrative Issues and To provide certainty, it is proposed
Other Taxes that the criteria for determining the
allowance should instead be included in
the Income Tax Act.
Value-Added Tax (VAT) Comment: At present, different SARS
offices apply different criteria in the
amount that they will allow as a doubtful
debts allowance. We welcome the
Customs & Excise Duties
certainty that this will give taxpayers
and Levies on what would constitute a permissible
allowance, assuming that the proposed
criteria will be clear and unambiguous.
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 5>
Tax treatment of amounts Reviewing the write-off period for
received by portfolios of collective electronic communication cables
investment schemes
Companies providing
In 2009, the Income Tax Act was telecommunications infrastructure
amended to provide for collective have been moving from copper cabling
investment schemes operating on to fibre optic cables. In order to align
behalf of investors with participatory the write off periods with international
interests. Amounts (other than capital practice and technological advances, it
amounts) are taxable in the portfolio of is proposed to reduce the period over
a collective investment scheme unless which electronic communication lines
they are distributed to participatory and fibre optic cables are written off
interest holders within 12 months of for tax purposes. Further alignment
accrual. between taxpayers that own these
assets and those with the right to use
Some collective investment schemes
them will be considered.
Navigation are trading frequently and, according to
National Treasury, are arguing, contrary Increasing the distribution period for
to current case law, that the profits are small business funding entities
of a capital nature.
In order for the receipts and accruals
Contacts It is, therefore, proposed that the of small business funding entities to
current rules be clarified to provide be exempt from tax, these entities
certainty on the treatment of trading are required to distribute (or incur
profits in this context. an obligation to distribute) 25% of
Personal Income Tax all amounts received or accrued
Comment: It is not clear what form the
from assets held during the tax year,
proposed “clarity” will take. This could
excluding amounts from disposing of
be contentious should it result in income
Company Tax treatment for gains that, in terms of
any of the assets held during the same
tax year.
established precedent, should be taxed
on capital account. It could also lead Practical difficulties arise when a small
International Tax to ancillary tax amendments insofar as business funding entity receives an
the distribution of such income gains are amount on the last day of the tax
concerned. One hopes that any proposals year and is consequently required to
will be circulated in a timely fashion and distribute or incur an obligation to
Exchange Controls that National Treasury will consult widely distribute on the same day.
before enacting any changes.
It is, therefore, proposed that small
Business (Incentives) business funding entities be required to
Administrative Issues and distribute 25% of all amounts received
Other Taxes Review of venture capital company rules or accrued from assets held during the
There has been an increased utilisation tax year within 12 months of the end of
of the venture capital company the relevant tax year.
tax incentive regime. However,
Value-Added Tax (VAT)
administrative and technical issues are
hindering further uptake. It is proposed
that the legislation be amended to
Customs & Excise Duties address rules relating to the investment
and Levies income threshold limitations in the
qualifying company test, as well as
when the controlled company test
needs to be applied. The rules relating
Investment and Innovation to the connected person test also need
Incentives to be reviewed, specifically the rule
for retroactive withdrawal of venture
capital company status.
Budget 2018/19 Driving progress | Consolidated Commentary 6>
International tax
Transfer pricing return filing deadlines. The additional
administrative compliance in this regard
The Minister of Finance has pointed
should not be underestimated.
out that transfer pricing remains an
area of keen focus for Government and Regarding interest payments on cross-
SARS to ensure that the South African border loans between related parties,
tax base is not eroded as a result of taxpayers are looking forward to the long-
tax residents entering into non-arm’s awaited guidance on thin capitalisation
length arrangements with their foreign to be published by SARS. The Minister
related parties. announced that a discussion document
inviting comments will be published
He has specifically mentioned country-
soon. Certainty in this area is crucial
by-country reporting as part of the new
in attracting foreign investors to South
mandatory transfer pricing documents
Africa.
which certain taxpayers are required to
file with SARS. Lastly, the technical amendment above
Navigation Furthermore, the Minister has
highlighted that inflated interest
regarding the secondary transfer pricing
adjustment in the form of a deemed
dividend in specie only applying where
payments by local taxpayers to their
an amount does not already constitute a
related party lenders offshore should
“dividend”, as defined in section 1 of the
Contacts be prevented.
Act, is welcomed to avoid uncertainty in
A technical amendment is also the treatment thereof.
proposed relating to the secondary
Reversing exchange difference for
Personal Income Tax transfer pricing adjustment in the form
exchange items disposed of at a loss
of a deemed dividend in specie in terms
of section 31 of the Income Tax Act. Following a proposal in the 2016
Budget, the Income Tax Act was
Company Tax As background, such deemed non-
amended to make it clear that
cash dividend gives rise to a dividends
previously taxed foreign exchange gains
tax obligation in the hands of the
and losses on debts would be reversed
company which is deemed to be
International Tax paying the dividend. Technically, there
if such debts became bad. The
amendment did not extend to the case
is a potential overlap between the
where an exchange item, e.g. a foreign
treatment of an actual dividend, as
denominated debt, had to be disposed
Exchange Controls defined in section 1 of the Act, and the
of at a loss due to market forces.
deemed dividend in specie provision
under section 31 the Act. It is therefore proposed that the
application of the relief be clarified
Therefore, to prevent such overlap, it
Administrative Issues and further.
is proposed that an amount should
Other Taxes be treated as a dividend in specie Comment: It is to be welcomed that the
under section 31 of the Act, unless the legislation also provide clearly for the
amount already constitutes a dividend reversal of previously taxed exchange
Value-Added Tax (VAT) as defined in section 1 of the Act. differences on the disposal of an exchange
item at a loss as a result of market related
Comment: It was widely expected that
factors outside of the taxpayer’s control.
the Minister would focus on transfer
Customs & Excise Duties pricing given our active participation in
BEPS and all the regulations that have
and Levies
been issued around mandatory transfer
pricing documentation to be prepared
and filed with SARS, where applicable.
Investment and Innovation Affected taxpayers are advised to prepare
Incentives robust transfer pricing documentation
in the form of a master file, local file and
country-by-country reporting in order
to be well-positioned to meet the new
Budget 2018/19 Driving progress | Consolidated Commentary 7>
Review of the definition of Extension of the application
“international shipping income” of controlled foreign company
(CFC) rules to foreign companies
As background, a South African ship
held through foreign trusts and
has to be registered as South African in
foundations
terms of the above definition in order
for a local shipping operator to qualify With effect from tax years commencing
for the income exemption applying to on or after 1 January 2018, the CFC
international shipping. rules have been extended to foreign
companies held by foreign trusts and
However, in practice, the South African
foundations, interposed between the
ship may at times not be operational
foreign companies and South African
temporarily and the local shipping
residents. The draft legislation also
company may only be able to find a
contained related rules to classify
foreign registered replacement ship on
distributions by discretionary foreign
short notice.
trusts or foreign foundations to
Navigation Based on the current legislation,
the operator will not qualify for
resident individuals or trusts as income
in their hands.
the tax exemption while using the
These draft rules did not come into
foreign registered replacement ship.
effect and will be considered further in
Contacts Accordingly, it is proposed that the
2018.
definition of “international shipping
income” be extended to address the Comment: The aim of the draft rules in
above scenario. question is to discourage the use of foreign
Personal Income Tax trusts by local taxpayers to defer a tax
Comment: Shipping companies will
liability or to recharacterise the nature of
welcome the proposed widening of
their income. For the final legislation in
the ambit of the tax exemption to
Company Tax circumstances where they have to use
this regard to be effective, it should not be
too complex or broad in its application.
a foreign registered replacement ship
temporarily due to unintended operational Interest paid to the non-resident
International Tax issues. beneficiary of a trust
Taxation of short-term insurers Based on current legislation, it is not
clear who bears the obligation for
The current tax legislation on short-
Exchange Controls the withholding tax on interest where
term insurance only applies to those
interest is paid to a non-resident
resident in South Africa. However, the
beneficiary of a trust. The related
Insurance Act allows non-resident
rules do not deem the trust to have
reinsurers to operate in South Africa
Administrative Issues and paid the interest to the non-resident
through branches.
Other Taxes beneficiaries. It is proposed that this
Accordingly, it is proposed that the tax anomaly should be addressed.
legislation should be extended to apply
Comment: It is advisable for the
similarly to foreign entities operating
Value-Added Tax (VAT) short-term insurance businesses
legislation to be amended for it to be
applied effectively in this regard.
through permanent establishments
locally. Controlled foreign company comparable
Customs & Excise Duties Comment: The alignment of the tax
tax exemption
and Levies legislation on short-term insurance with South African investors with controlled
the provisions of the Insurance Act on companies operating in countries
foreign reinsurers will be welcomed. where tax payable is less than 75%
of the tax that would be payable in
Investment and Innovation South Africa are required to include
Incentives the foreign net income in their South
African income. This limit is to be
reviewed in the light of lower corporate
tax rates globally to determine whether
a reduction is warranted.
Budget 2018/19 Driving progress | Consolidated Commentary 8>
Exchange Controls
The 2018 budget speech contained This has now been relaxed and the
no dramatic exchange control minimum holding of 10% is abolished,
announcements but the following whilst the maximum of 20% has been
three items were included and are of increased to 40%.
importance:
Comment: The abolishment of the
1) Increasing the prudential limit for minimum 10% holding in foreign
institutional investors companies will probably be more
appreciated by South African investors
The term “institutional investors”
than the increase in the “loop” limit to
is a collective name for investment
40%. This has been a stumbling block for
managers/fund managers, collective
many a South African company wishing
investment scheme management
to take up a small percentage holding in
companies, the investment linked
very large foreign companies in the past.
business of long-term insurers and
The inclusion of private equity funds in
retirement funds.
this dispensation is a further welcome
Navigation Institutions registered with the
Financial Surveillance Department
relaxation of the foreign investment policy.
3) Relaxations pertaining to the
of the Reserve Bank as institutional
Holding Company regime (also known
investors have been able to make
as Domestic Treasury Management
Contacts offshore investments in the past within
Company)
a prudential limit.
The current limits applicable to
The limit imposed on retirement funds
transfers into holding companies are
Personal Income Tax and the underwritten policy business
R2 billion for JSE-listed companies and
of long-term insurers has been 25%,
R1 billion for unlisted entities. These
whilst the institutional investors other
limits have now been increased to R3
than the aforementioned had a limit
Company Tax of 35%. In addition, these institutions
billion and R2 billion respectively, and
the concession will be expanded to also
could invest an additional 5% in the so-
include financial service companies.
called African allowance, which enabled
International Tax and restricted them to investments in Comment: Whether the increase in the
Africa. limits now announced will have a material
effect on the interest shown in this
These limits have now been increased
dispensation by local companies remains
Exchange Controls by a further 5%.
to be seen. The addition of financial
Comment: This development will certainly service entities may, however, increase the
be welcomed by institutional investors as number of interested parties.
it provides them with additional capacity
Administrative Issues and
for foreign investment.
Other Taxes
2) Relaxation of “loop structure” policy
pertaining to companies and private
equity funds
Value-Added Tax (VAT)
A loop structure is where a South
African resident invests in South Africa
via an entity outside South Africa.
Customs & Excise Duties
To date, the only concession with
and Levies regards to loop structures has been
for South African companies investing
abroad. Companies are permitted to
Investment and Innovation invest in a foreign entity which holds
Incentives an investment in South Africa provided
that the South African investor holds
a minimum of 10% and a maximum
of 20% of the voting securities in the
foreign company.
Budget 2018/19 Driving progress | Consolidated Commentary 9>
Administrative Issues and Other Taxes
Strengthening tax morality Notification of commencement of audit
As announced in the State of the Nation In an effort to keep all parties informed,
Address, a commission of inquiry it is proposed that taxpayers be
is to be established to examine the notified of the start of an audit.
functioning and governance of SARS,
Deregistration of non-compliant tax
with steps being taken to improve
practitioners
governance and accountability at
this organisation. Government has It is proposed that amendments
also undertaken to strengthen the be introduced that allow for the
operational independence of the Tax deregistration by SARS of habitual
Ombud, as recommended by the Davis non-compliant tax practitioners that do
Tax Committee. not correct their behaviour after being
notified thereof.
Furthermore, to ensure proper
governance and accountability at public Obligations of funds managed by
Navigation entities, government proposes that
fruitless and wasteful expenditure will
bargaining councils
The correct tax treatment of employee
not qualify for a tax deduction.
and employer contributions to, and
Comment: The above proposed measures payments from bargaining council
Contacts will go a long way towards restoring tax funds has been the subject of
morality, impacting tax compliance levels consultations with bargaining councils.
and revenue collection.
While it is felt that the majority of
Personal Income Tax Estate duty and donations tax existing funds can be accommodated
by withholding taxes at the employer
Government proposes to increase
level, transitory arrangements will
the estate duty from 20% to 25% for
be considered for a small minority of
Company Tax estates worth R30 million and above. To
more complicated fund types to ensure
limit abuse, any donations above R30
smooth implementation.
million in one tax year will also be taxed
at 25%. Both measures will be effective
International Tax from 1 March 2018.
Comment: The proposed amendment is
in keeping with the approach of imposing
Exchange Controls a greater tax burden on the wealthy.
Repeal of requirement to submit
dividends tax returns by persons
Administrative Issues and receiving exempt dividends
Other Taxes The administrative burden for persons
receiving exempt dividends is to be
alleviated through the repeal of the
Value-Added Tax (VAT) requirement for such persons to
submit dividends tax returns.
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 10>
Value-Added Tax (VAT)
Increase in the VAT rate rating on low cost housing subsidies.
Amendments introduced in 2017,
The VAT rate has finally been increased,
however, sought to postpone the
with effect from 1 April 2018, from 14%
abolition of such zero rating until 1 April
to 15%. This increase is expected to
2019. It would now appear that, due to
generate an additional R22.9 billion
budgetary constraints, the abolition of
revenue over the 12 month period. The
the zero rating will take effect from an
previous increase was from 10% to 14%
earlier date, which will be announced by
on 7 April 1993.
the Minister.
The new rate of 15% is still relatively low
Correction of tax invoices
in comparison to African and European
countries, and is now equivalent to the It is intended that legislation will be
New Zealand VAT rate. The Minister introduced which clarifies the process
indicated that the regressive nature of in respect of cancelling incorrect tax
the increased rate would be alleviated invoices and re-issuing tax invoices
Navigation by increased social grants and the
existing zero-rated basic foodstuffs.
containing the correct information.
Joint Venture – members jointly and
Although no additional zero-rated severally liable
foodstuffs were proposed, there is an
An amendment is proposed to clarify
Contacts intention to remove products such as
that members of a joint venture
rye or low-GI bread from the existing
may be held jointly and severally
list of zero-rated foodstuffs.
liable for the VAT liabilities of that
Personal Income Tax The increase in the VAT rate will result venture. In view of the interpretational
in additional administration for vendors difficulties surrounding the nature of
in revised pricing, bearing in mind that a “joint venture”, it is hoped that the
any price advertised or quoted by a amendments will include a concise
Company Tax vendor is deemed to include any tax description of the term.
payable.
Electronic Services
The VAT Act (sections 67 and 67A)
International Tax contains transitionary provisions in
In the 2017 Budget Speech, it was
announced that in order to expand
respect of existing contracts, statutory
the tax base and to address base
tariffs and fees, the supply of goods
erosion and profit shifting, the scope
Exchange Controls and services which straddle the period
of electronic services supplied by
and the sale of fixed property. Anti-
non-residents to residents, which were
avoidance measures, which seek to
subject to VAT, would be expanded to
prevent vendors manipulating the
include “cloud computing and services
Administrative Issues and time of supply in order to avoid the
provided using online applications”.
Other Taxes increased VAT rate, are also included in
these provisions. In his 2018 Budget speech, the
Minister has now announced that such
Potential double deduction on written
amendments have been drafted.
Value-Added Tax (VAT) off debts
The draft Regulation widens the
Vendors acquiring debts (which have
definition of electronic services to
previously been written off by the
include any services supplied by means
Customs & Excise Duties seller) on a non-recourse basis, have
of an electronic agent, electronic
been seeking to claim a further input
and Levies communication or the internet, other
tax deduction, when they write off all
than –
or part of that debt. It is proposed that
legislation will be introduced in order a) Educational services supplied by a
Investment and Innovation to prevent the claiming of such double person regulated by an educational
Incentives deductions. authority in an export country; or
Housing subsidies b) Telecommunication services.
During 2015, amendments were
introduced to remove the zero
Budget 2018/19 Driving progress | Consolidated Commentary 11>
VAT debts of branches and divisions A financial service also includes a “debt
security” which in turn includes “an
The VAT Act permits the separate
interest in or right to be paid money”.
registration of branches and divisions
Although a typical cryptocurrency does
within a single juristic person. An
not provide its owner with any inherent
amendment is proposed in order to
right to property or another currency,
clarify that any VAT debt incurred by
it may be said to include an “interest”
a branch or division may be collected
in being paid money. On this broad
by SARS across all the branches or
interpretation, the acquisition of the
divisions.
cryptocurrency would not attract VAT.
Credit notes issued by a purchaser of a
The sale of goods or services by a
going concern
vendor in return for a cryptocurrency
It is intended that legislation will would attract VAT but there could be
be introduced which permits the issues around the time and value of the
purchaser of a going concern to issue supply.
Navigation credit notes in respect of goods sold
by the seller of the going concern and
In any event, the Minister has
recognised the difficulties surrounding
returned to the purchaser of such going
cryptocurrencies and stated his
concern.
intention to introduce amendments
Contacts Cryptocurrency transactions which would seek to clarify the
tax treatment of cryptocurrency
Digital currencies do not fall within
transactions. This follows a global
the ambit of the definition of “money”
Personal Income Tax contained in the VAT Act nor do they fall
trend of legislative bodies seeking to
regulate these transactions.
within the definition of “goods” as they
are not “corporeal” things. They may
Company Tax fall within the definition of a “service”,
which is extremely broad and includes
“anything done or to be done”.
International Tax The issue then is whether they
constitute “financial services” and
are thus exempt from VAT. Although
the definition of a financial service
Exchange Controls includes the exchange of currency, the
definition of “currency” is restricted to
“any banknote or other currency of any
country”. Cryptocurrency would not
Administrative Issues and
appear to fall within this definition of
Other Taxes currency.
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 12>
Customs & Excise Duties and Levies
The Minister of Finance announced specific changes, and proposed others, to the
current South African Customs and Excise legislation. These changes, discussed
below, became effective immediately (unless specified otherwise).
Please note that simplified product descriptions and dutiable quantities are used
below, and readers are advised to refer to the official product classifications and
rates, as published by SARS, when actually classifying products and applying rates.
Specific Excise Duties
Alcoholic Beverages
The amended rates of excise duty on alcoholic beverages result in an increase in
the duty-cost for the final consumer as follows:
From: To: % Increase
Navigation Malt beer
Unfortified wine
R 1.47
R 2.71
R 1.62 per 340ml
R 2.93 per 750ml
10.2
8.1
Fortified wine R 4.63 R 4.91 per 750ml 6.0
Sparkling wine R 8.60 R 9.32 per 750ml 8.4
Contacts
Other fermented beverages R 1.47 R 1.62 per 340ml 10.2
Spirituous beverages R 56.50 R61.30 per 750ml 8.5
Personal Income Tax The new rates of excise duty are effective immediately.
Tobacco Products
Company Tax
The amended rates of excise duty on tobacco products result in an increase in the
duty-cost for the final consumer as follows:
International Tax From: To: % Increase
Cigarettes R 14.30 R 15.52 per 20 8.5
Cigarette tobacco R 16.07 R 17.48 per 50g 8.8
Exchange Controls
Pipe tobacco R 4.56 R 4.94 per 25g net 8.3
Cigars R 75.86 R 82.32 per 23g net 8.5
Administrative Issues and The new rates of excise duty are effective immediately.
Other Taxes
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 13>
Fuel Taxes
General Fuel Levy The diesel refund administration system
The general fuel levy will increase by It was announced in the 2015 budget
22 cents per litre. Based on historic that the diesel refund administration
figures, the bio-diesel fuel levy stood system would be given a holistic
at 50% of the diesel fuel levy and we reform, which would result in its
have based the below figures on the separation from the Value-Added Tax
assumption that the same percentage (VAT) system under which it is currently
increase will occur in the 2018/19 administered. In February 2017, a
financial year. This is, however, subject discussion document was published
to confirmation as no reference has for public comment which commentary
been made to this specific levy. has now been processed.
This will increase the general fuel levy In 2018, National Treasury and SARS
Navigation
rate to the following figures: shall engage with industry and affected
role players to further the reform
•• Petrol R3.37 per litre process, the outcome of which will
•• Diesel R3.22 per litre inform the design of the new system.
This outcome will be announced within
Contacts •• Bio-diesel R1.61 per litre the 2019 Budget.
The introduction of a separate diesel
The new fuel levy rates are effective on
refund system will supersede the
Personal Income Tax 4 April 2018.
provisions of the VAT Act specifically
Road Accident Fund (RAF) Levy dealing with the diesel refund system.
The RAF levy will increase by 30 cents It is proposed that section 16(3)(l) of
Company Tax per litre, resulting in a levy of R1.93 per the VAT Act be repealed with effect
litre. from the date on which the new diesel
refund system commences.
The new RAF levy rates are effective on
International Tax 4 April 2018.
Fuel Prices
The latest increase in fuel taxes shall
Exchange Controls lead to the following portion of tax
forming part of the fuel price:
Administrative Issues and •• Petrol R5.34 (Portion of tax based on
Other Taxes current pump price: 38,4%)
•• Diesel R5.19 (Portion of tax based on
current pump price: 41,3%)
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 14>
Health and Environmental It is unlikely that such process will be
Levies completed before the current effective
date of 1 April 2018 and, should the levy
Health Promotion Levy still be implemented, then it may have
serious implications for industry’s ability
Government Gazette No. 41323, of 14
to comply as there is still uncertainty, in
December 2017, confirmed that the
many areas, regarding the compliance
Health Promotion Levy (Sugar Tax) will
requirements. Whilst a number of
be implemented in South Africa on 1
transitional requirements have to be
April 2018.
complied with, the details of these
The sugar tax / levy will apply to requirements are still uncertain.
specified non-alcoholic beverages,
Plastic Bag Levy
and specified preparations for making
such beverages, containing intrinsic or The plastic bag levy will increase by
added sweeteners, imported into or 50% (to 12 cents per bag) with effect
Navigation manufactured in South Africa. from 1 April 2018.
Incandescent Light Bulb Levy
•• Soft drinks (excluding un-flavored
water); The environmental levy on
incandescent (non-energy saving) light
Contacts •• Diluted fruit and vegetable juices;
bulbs will increase by 33% (to R8 per
•• Flavored milk; and bulb) with effect from 1 April 2018.
•• Cocoa and other powders, as well as Motor Vehicle CO2 Emissions Levy
Personal Income Tax syrups and other concentrates, for
The vehicle emissions tax will increase
making sweet beverages.
to R110 for every gram above 120
gCO2/km for passenger vehicles, and to
Company Tax The levy will be assessed at a rate of 2.1
R150 for every gram above 175 gCO2/
cents per gram of sugar / sweetener
km for double cab vehicles, with effect
content above 4 grams per 100ml of
from 1 April 2018.
the final beverage, and paid ‘at source’
International Tax (i.e. upon direct import or upon Carbon Tax
removal from a licensed import storage
Cabinet adopted the Carbon Tax
or local manufacturing warehouse)
Bill in August 2017. Parliament has
Exchange Controls on the specified products intended to
convened hearings following the
be consumed as a beverage in South
release of the draft bill in December
Africa.
2017. It is expected that the bill will be
Certain deductions from the assessed enacted before the end of 2018 and
Administrative Issues and
or paid levy-amount (e.g. the levy Government proposes to implement
Other Taxes assessed or paid on such specified the tax from 1 January 2019 in order to
exported product) will be allowed meet its commitments under the 2015
in order to ensure that the levy is Paris Agreement of the United Nations
Value-Added Tax (VAT) effectively paid only on product actually Framework Convention on Climate
consumed in South Africa. Change.
Comment: We are of the view that if SARS
Customs & Excise Duties adheres to the accepted ‘tax-neutrality’
principle, which prescribes that the
and Levies
administration of taxes should cause little
disruption to business (and in order to
achieve that, compliance requirements
Investment and Innovation should consider and facilitate industry
Incentives operational requirements), SARS will
have to make further amendments to the
current proposed regime for this levy.
Budget 2018/19 Driving progress | Consolidated Commentary 15>
Acid mine drainage levy
Government will publish a discussion document outlining design options for
the proposed acid mine drainage levy to make polluters pay for the cost of
environmental damages, and to help fund treatment of acid mine water.
An environmental fiscal reform policy brief will be published in the near future.
The paper will examine fiscal and regulatory options to improve water resource
management, mitigate the emission of pollutants and reduce waste.
Ad Valorem duties on luxury goods
Government proposes to increase the current ad valorem excise rate on luxury
goods (as a substitute to applying a higher VAT rate to these products) which are
consumed mainly by wealthier households.
Examples of luxury products listed comprise cosmetics, electronics and golf balls.
Navigation
It has been noted that the associated tax revenue potential is not significant, but
aligns with the current progressive tax structure.
The tariff classification of cellular telephones will be updated to include smart
phones to ensure ad valorem duties are paid thereon. Government intends
Contacts commencing with a consultation process to replace the current flat rate on
cellphones to that of a progressive rate structure based on the value of the phone.
The following ad valorem rate changes will take effect on 1 April 2018:
Personal Income Tax
From: To: % increase:
Motor vehicles 25% 30% 20%
Company Tax
Other Luxury products (current rate 5% 7% 40%
of 5%) Examples: fireworks, eye and lip
makeup preparations
International Tax Other luxury products (current rate of 7% 9% 29%
7%) Examples: Perfumes, cellphones,
yachts, golf balls.
Exchange Controls
Administrative Issues and
Other Taxes
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 16>
Diamond Export Levy Measures to enhance tax administration
Amendments to the Customs and
The Diamond Export Levy Act, No. 15
Excise Act will be considered to prevent
of 2007 distinguishes between large,
“forestalling” – a practice through
medium and small producers, based
which abnormal volumes of products
on turnover thresholds. The larger
are moved from warehouses into the
the producer, the more stringent the
market to avoid increases in excise duty
requirements for sales to local cutters
rates.
and polishers. To avoid penalties,
specified percentages of the value of Legislative changes will be made to
the various producers must be sold to extend the use of “fiscal markers”,
diamond beneficiation licence holders which are required under the tracking
(local cutters and polishers). and tracing obligations of the World
As a result of diamonds being Health Organisation’s Protocol to
traded solely in US dollars, the rand Eliminate Illicit Trade in Tobacco
Navigation depreciation against the dollar
has effectively halved the turnover
Products. The extension will enable
fiscal marking of other products
thresholds in US dollar terms since
2007.
Contacts It was proposed that the thresholds be
adjusted in order to reflect the original
US dollar equivalents to retain the
policy intent.
Personal Income Tax
Customs General
Customs Modernisation
Company Tax
Government aims to take steps to
implement the customs modernisation
programme (as implemented under
International Tax current legislation) in order to give
effect to the new customs and excise
legislation passed in 2014.
Exchange Controls
Administrative Issues and
Other Taxes
Value-Added Tax (VAT)
Customs & Excise Duties
and Levies
Investment and Innovation
Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 17>
Investment and Innovation Incentives
Incentives Regime Comment: In our opinion, there are
still many practical problems that have
A review of the incentive ecosystem
not been resolved in the second draft
was announced during the Medium
Carbon Tax Bill. In addition, a lot of the
Term Budget Policy Statement and this
regulations and rules surrounding the
was intended to assess performance,
tax are still outstanding. Of significant
determine value for money, and analyse
concern is the large number of entities
how the system as a whole supports
that have been caught in the Carbon Tax
the economy and job creation. In line
net in the new draft, which would not
with this, no significant change was
originally have been taxed. This includes
expected in the current budget and the
most companies that are liable for the
funds allocated to incentives confirm
Department of Environmental Affairs’
this.
Mandatory Greenhouse Gas reporting.
Three key incentive reviews have been We do not believe the full extent of this
announced – scope change has been explored yet,
Navigation •• a review of business incentives by the
Department of Planning, Monitoring
and there is the potential of significant
unintended consequences.
and Evaluation; Venture Capital Incentive
•• a review of section 12I by the The Venture Capital Incentive has been
Contacts
Department of Trade and Industry in place since 2008 and provides a tax
and National Treasury; and deduction for buying shares in venture
capital companies. These venture
•• a review of the Automotive
Personal Income Tax Production Development Programme
capital companies need to invest the
funds in qualifying small businesses
(this is the largest tax expenditure
in order to enable small businesses to
item).
expand and contribute to economic
Company Tax growth and job creation.
These reviews will inform the structure,
scale and focus of all future incentives. Following recent amendments, there
has been a substantial increase in the
International Tax Carbon Tax
use of the Venture Capital Incentive.
Although the Bill has not yet passed The window for establishing new
through Parliament, government Venture Capital Companies terminates
Exchange Controls intends to start the Carbon Tax from 1 on 30 June 2021.
January 2019. The second Draft Carbon
Changes in the legislation are expected
Tax Bill was submitted to Parliament on
in order to address rules relating to
12 February 2018 although comments
Administrative Issues and the investment income threshold
can still be made on the draft bill
limitations in the qualifying company
Other Taxes until 9 March 2018. It is expected that
test, as well as when the controlled
Parliament will hold public hearings
company test needs to be applied.
and make a decision on the Carbon Tax
during 2018.
Value-Added Tax (VAT)
The Carbon Tax will, effectively, levy a
tax of between R6 and R48 per tonne of
Carbon Dioxide equivalent emissions.
Customs & Excise Duties
and Levies
Investment and
Innovation Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 18>
Research & Development Government’s aim is to stimulate
investment growth by supporting
South Africa aspires to be a preferred
infrastructure projects that are critical,
destination for foreign investment
thereby lowering costs of doing
in research and development (R&D)
business in South Africa.
although it faces tough competition.
South Africa’s 150% super deduction is In 2018 budget speech, the Minister
matched by most developed countries. allocated R4.9 billion, a 17% increase
from prior year, over the medium term
From a BRICS perspective, Russia
for industrial infrastructure projects.
and China also offer a 150% super
Of this, R4.2 billion has been allocated
deduction. India offers a 200%
to SEZ, increasing the SEZ budget
deduction and Brazil 175%. Singapore
significantly by 56%.
and the United Kingdom, both
established markets where global R&D The Minister of Finance has approved
takes place, offer a 400% and 350% a 15% reduced corporate tax rate for
Navigation deduction respectively.
Given the country’s inability to achieve
qualifying companies in the six special
economic zones (Coega, Dube Trade
Port, East London, Maluti-a-Phofung,
a 1% of GDP spend on R&D and to
Richards Bay and Saldanha Bay). Over
ensure that at least 1.5% of GDP is
the next medium term, three additional
Contacts spent on R&D in the future, the Minister
SEZ sites (the proposed sites are
of Science and Technology appointed
Nkomazi, Atlantis and Mogwase) will be
a task team in 2016 to advise on the
approved. These SEZs will benefit from
improvement of R&D incentives.
Personal Income Tax Various changes were proposed to ease
additional tax incentives, including an
employment tax incentive for workers
the administrative burden of claiming
of all ages.
the incentive, to simplify the incentive
Company Tax and to provide clarity on what type of Manufacturing Investment
R&D will be incentivised.
In the State of the Nation Address,
The Minister of Science and Technology government committed to tackle the
International Tax is hosting a breakfast on 2 March 2018 decline in manufacturing capacity
to discuss enhancements made to by promoting greater investment in
the R&D tax incentive, which is a clear key manufacturing sectors through
indication that there will indeed be strategic use of incentives. A total of
Exchange Controls changes to the incentive programme. R3.6 billion has been allocated to the
manufacturing sector in 2018/19.
Additionally, a new incentive to support
small and medium business in the It is expected that the majority of this
Administrative Issues and start-up phase has been announced. will be targeted at the automotive
Other Taxes A budget of R2.1 billion has been sector, agro-processing sector as well
allocated over the medium term. as a program targeted at promoting
the economic competitiveness of
Infrastructure Investment
manufacturers.
Value-Added Tax (VAT) Infrastructure Investment Support
Despite the stated focus on
provides grants for two industrial
manufacturing, there has been a
infrastructure initiatives:
steep decline in support for the
Customs & Excise Duties manufacturing sector since 2016. The
•• The Special Economic Zones (SEZ)
and Levies current allocation is less than budgets
•• The Critical Infrastructure that were made available in the sector
Programme in 2014/2015.
Investment and These are aimed at enhancing
Innovation Incentives infrastructure and industrial
development, and increasing
investment and exports of value-added
commodities.
Budget 2018/19 Driving progress | Consolidated Commentary 19>
Agriculture Tourism
Agriculture is seen as one of the key In the 2018 State of the Nation Address,
sectors that has the opportunity to Tourism was identified as another
create the greatest number of jobs. area which provides South Africa
It is one of the few sectors where with incredible growth opportunities.
grant-funding support shows a growth Tourism currently sustains 700 000
trajectory. direct jobs and is performing better
than most other growth sectors.
An estimated R581.7 million has been
budgeted for the reprioritisation of The focus is to support key tourism
the black producer commercialisation markets, reduce regulatory barriers
programme thereby creating and develop emerging tourism
opportunities for black agricultural businesses. R198 million has been
producers. allocated to tourism incentive
programmes for the 2018/19 year. The
Furthermore, the Comprehensive
Navigation Agricultural Support Programme
aims to support newly established
tourism incentive programmes are
aimed at developing an all-inclusive
economy of tourism enterprises.
and emerging farmers, particularly
subsistence, smallholder and previously Jobs Fund
Contacts disadvantaged farmers.
With government’s focus on job
Over the next three years, government creation other than the Expanded
expects to spend more than Public Works Program, the only
Personal Income Tax R4 024 million on infrastructure under existing job creation focused incentive
the Comprehensive Agricultural programme is the Jobs Fund.
Support Programme. In addition, the
It was allocated R9 billion in June 2011.
Department of Agriculture, Forestry
Company Tax and Fisheries will over the next five
R2.9 billion of this is available and we
are expecting the 8th round of the Jobs
years focus on creating and supporting
Fund to open at the end of February
450 profitable black commercial
/ beginning of March this year. The
International Tax producers enabling the participation in
50% grant ranges from R10 million up
prioritised value chains as one of the
to R100 million and it will continue to
key outcomes from Operation Phakisa.
focus on supporting initiatives that
Exchange Controls Black Industrialisation create jobs at scale i.e. any project that
creates jobs at a low cost per job.
The 2018 State of the Nation Address
reiterated the importance of transformation
as part of the process of industrialisation.
Administrative Issues and
The funding for the Black Industrialists
Other Taxes Scheme is provided under the DTI’s
manufacturing incentives and is an
important measure towards developing a
Value-Added Tax (VAT) new generation of black industrialists that
can produce at scale.
The Financial Sector Codes have been
Customs & Excise Duties gazetted and a R100 billion Black Business
Growth Fund has been created through
and Levies
the code. The fund will assist black
entrepreneurs to finance big deals, an
intervention that is crucial to transforming
Investment and capital allocation in the economy.
Innovation Incentives
Budget 2018/19 Driving progress | Consolidated Commentary 20You can also read
