Making an impact that matters - Budget 2019/2020 Pre-budget commentary South Africa - Deloitte
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Making an impact that matters Budget 2019/2020 Pre-budget commentary South Africa
Contents An interesting Budget for an interesting year........................................................................................1 Growing South Africa inclusively - Is there room to manoeuvre in the tax system?................... 2 Optimising tax recovery through digital innovation..............................................................................4 Transfer Pricing: Taxpayers should brace for attention from SARS................................................. 5 Unpacking our import activity.....................................................................................................................6 National Health Insurance predictions.....................................................................................................7 Mergers and acquisitions in South Africa – No light at the end of the tunnel for now.............. 8 Update: Carbon Tax Bill................................................................................................................................9 Oil and gas industry – tax considerations..............................................................................................11 The tax compliance burden for small and medium term enterprises (SMEs) ...........................12
Making an impact that matters | Budget 2019/2020
An interesting Budget
for an interesting year Article written by
Delia Ndlovu,
Managing Director,
Deloitte Africa
Tax & Legal
Finance Minister Tito We expect that the long-term priority South Africa’s economy has seen low
areas of the National Development Plan growth over the past few years and
Mboweni has a tough task will continue to guide this year’s Budget. ordinary consumers are feeling the pinch.
ahead of him as he seeks to With the economy still weak, we hope that Since raising taxes will be difficult, one
present a Budget which will Minister Mboweni and his colleagues at the way of bringing in additional revenue is by
meet with public approval National Treasury will be prioritising growth increasing collections and building capacity
and investment. at SARS. We expect that this will be a
ahead of the national priority, as the MTBPS already allocated
election, while also coming Eskom has asked for a R100-billion bailout R1.4 billion to this task in October.
to terms with the pressing from government so that it can stabilise
need to grow South Africa’s its finances, and is being pushed to deliver While government will find it difficult to
a turnaround plan ahead of the Budget raise taxes so close to an election period,
economy. presentation on 20 February, according to and with local taxes already relatively high,
reports. Eskom’s role in the economy is a we can expect to see some adjustment
At last year’s Medium Term Budget Policy
critical one, with the World Bank warning of tax brackets so as to tax high income
Statement, delivered in October, the
recently that it is too big to fail. It’s likely, earners more and give relief to lower-
minister spoke of the need to reform and
then, that funding Eskom will occupy a income taxpayers.
stabilise state-owned enterprises. The
central position in the Budget.
state faced a R27.4 billion revenue shortfall
We also do not expect another VAT
for 2018/2019, and an R85 billion shortfall
In addition, former President Jacob Zuma increase, particularly so close to the
over three years. Debt service costs are
last year committed government to funding elections, but further clarity and guidance
expected to grow by almost 11% every
tertiary education for students with a is needed on certain aspects of VAT
year, from R181 billion in 2018 / 2019, to
household income of R350 000 or less, regulations, for example the treatment of
R247 billion in 2021 / 2022, according to the
costing the fiscus R57 billion – a decision educational services, electronic services,
MTBPS.
which will continue to impact this year’s and VAT deductions and crypto-currency.
Budget despite concerns that this is not
South Africa’s GDP is expected to grow
sustainable.
1.3% this year, higher than last year, but
still a concerning rate. There are also fears
In this climate, it is hard to see how National
that Moody’s, the only agency to rate
Treasury will be able to prioritise the
South Africa above junk status, may drop
National Health Insurance (NHI) scheme,
its rating and the Budget speech will be a
despite the years of planning and political
key factor Moody’s will weigh up, as it gives
will which have gone into this initiative.
direction on government priorities and
spending plans.
1
Making an impact that matters | Budget 2019/2020
Growing South Africa Article written by Anthea
Scholtz (Partner) and
inclusively - Is there room to
Claudia Gravenorst
(Senior Manager),
Deloitte Africa Tax
manoeuvre in the tax system? & Legal
On 20 February 2019 all eyes will be on improve tax collections and broaden Alternative avenues for generating
the Minister of Finance Tito Mboweni as the tax base (admittedly, some of these additional revenues
he presents the 2019/20 annual National changes, such as the increase in the VAT SARS, when announcing its preliminary
Budget in Parliament. rate have received notable backlash). results in April 2018, noted that “revenue
collection is driven by the state of the
The National Budget speech has over the Thus, given our growth expectations, economy, the fiscal policy choices,
years given South Africans a credible sense one of the key questions is: What further administrative efficiency and taxpayer
of the economic outlook of the country and measures could be introduced by the compliance or tax morality.”
this year, once again, it will be presented Minster to generate the required additional
against a challenging global and South revenues? The Medium-Term Budget Policy Statement
African fiscal and economic backdrop. (MTBPS) which was presented in October
South African taxpayers – Who is last year, the President’s stimulus package
During a year in which South Africans head currently paying what? and the outcomes of the recent Job and
to the polls, Minister Mboweni will need to Tax is one of the main source of revenue Investment summits, provide us with slight
articulate a careful balancing act between collection for the government. The 2018 hints as to the areas which could potentially
both “spending” and “revenue-generating” Tax Statistics report (which was published be used to contribute additional revenue
activities to ensure fiscal growth in the during December 2018), noted that tax to the fiscus. We explore some of these
country whilst at the same time ensuring collections in SA have increased to R1 below:
that our critical social and economic 216.5 billion in the 2017/18 fiscal year (this
programmes are protected. This year’s represents a 6.3% increase (R72.4 billion) Returning SARS to its former glory
budget will need to ensure that spending over the prior fiscal year). SARS was once the crown jewel of revenue
and policy formation is aligned to the authorities on the continent. However, due
president’s stimulus package, which seeks In SA, personal income taxes, value-added to the tax administration and governance
to revive our ailing economy, while also tax (VAT) and corporate income taxes issues at SARS in recent years, revenue
ensuring that the South African citizens are collectively account for approximately collections were below targets and
not unduly burdened with further tax hikes. 80.7% of the total tax revenues of the inefficiencies crept in. SARS is now on a
country. Of the R1 216.5 billion revenue mission to restore itself to its former glory.
In the recent “Global Economic Prospects” collected during the 2017/18 fiscal year,
report issued earlier this month by the personal income taxes continue to be SARS has re-established its Large Business
World Bank Group, it was noted that the main contributor to our country’s tax Centre (LBC) unit which seeks to achieve,
South Africa’s growth is likely to expand by coffers, contributing a total of 38.1% of amongst others, an enhanced customer
1.3% in 2019 (a downward revision from the the total tax revenues. VAT contributed experience, compliance and revenue focus
previous projected amount of 1.8%), which 24.5% and CIT contributed approximately for large businesses and high net worth
is lower than the 3.4% projected average 18.1% to the total tax revenue (this has not individuals. Increasing the ease with which
for Sub-Saharan countries. Key reasons for increased from the prior fiscal year). Other taxpayers can liaise with SARS, targeting
this modest growth include continued high taxes (e.g. transfer duty, capital gains tax specific sectors, freeing up capacity in
unemployment levels, policy uncertainty etc.) account for the balance of the revenue other divisions (such as Enforcements) to
and low business confidence. collected in 2017/18 fiscal year. focus on service delivery, will go a long way
in increasing revenue generation and tax
Thus, whilst South Africa (SA) is growing, we It is clear from these statistics, that the man morality.
are not growing fast enough; importantly, on the street is paying a significant amount
we are also not growing inclusively enough of tax (both direct taxes such as personal In addition, SARS’ recent announcement
and as a result poverty and income income tax and indirect taxes, such as VAT). to impose administrative non-compliance
inequality remain key challenges on SA’s A revenue budget that supports SA’s future penalties for non-compliant corporate
agenda. We thus need a buoyant revenue should therefore go further than just tax taxpayers will encourage tax compliance
base to address these and other key increases and alternative avenues should and result in increased revenue collections
challenges in SA. Over the last few years, be considered to generate additional and also sends a clear message that SARS
various legislative changes and initiatives revenues. is adopting a “no nonsense” attitude to
have been introduced to sustain and non-compliance.
2Making an impact that matters | Budget 2019/2020
Increasing revenue through policy than the poor. In other words, the more Funding the NHI and medical scheme
decisions that encourage investment you earn, the higher tax you should pay. fees tax credits?
As announced by Minister Mboweni Government is seeking to address
during the MTBPS, the Mineral and In line with this premise, we saw an the urgent matters in our health care
Petroleum Resources Development increase in the maximum marginal tax system and has indicated that it will be
Amendment Bill will be withdrawn. This rate from 41% to 45% for the 2018 tax working with the National Department
should provide more certainty to the year and annual tax deductions in respect of Health to ensure that the phasing in
energy industry and should encourage of retirement contributions being capped of the National Health Insurance (NHI) is
investment and increased activity, which at R350 000 per annum. adequately financed.
in turn will result in additional taxes from
taxpayers operating in this sector. Whilst it is unlikely, given the current It has been mooted that the medical
economic environment, that the scheme fees tax credits will be utilised
Increasing revenue through a clamp maximum marginal tax rate would be to fund the NHI in part. Whilst we do not
down on profit-shifting and the misuse further increased, we do anticipate that anticipate a complete withdrawal of the
of transfer pricing the tax brackets at the higher marginal medical scheme fees tax credits regime,
A continuing debate is how to effectively tax rates will have lower than inflationary we anticipate lower than inflationary
combat the significant financial leakages adjustments, whilst continued tax relief adjustments to the amounts taxpayers
in the South African economy through will still be granted for low income may claim as a credit against their normal
the erosion of the tax base, profit-shifting earners. tax liability.
and illicit money outflows. The use of tax
havens by taxpayers whereby profits are Increasing revenue through other Infrastructure spending
shifted to no-tax or low tax jurisdictions sources of personal income tax? Infrastructure spending is one of
where the taxpayer has no or very little An analysis of the 2017 tax assessments the main components of President
economic presence, remains a significant raised by SARS as detailed in the “2018 Ramaphosa’s stimulus package.
concern to the fiscus. It is however also Tax Statistics” report reveals the following
a significant potential pool of revenue, if key information: In the MTBPS, Minister Mboweni
SA manages to get its fair share of these indicated that R15.9 billion will be
•• Income from salaries, wages and
taxes. allocated towards infrastructure
remuneration accounted for 76.0% of
programmes. This allocation may be used
total taxable income assessed;
Judge Dennis Davis has called for (in part) to fund the various grants and
further investigations into this matter •• Travel allowances amounting to R27.4 incentive applications which have come
as the country is losing an estimate of billion in total was assessed and this to a halt due to the lack of funding. Since
R7 billion annually, due to base-erosion allowance remains the largest of the this is a critical focus of the government,
and profit shifting. He has also called total allowances assessed, comprising we would hope that we see some tax
for the transfer pricing unit at SARS to 24.5% of the total allowances assessed; reforms and incentives to encourage
be reconstituted in order to increase infrastructure spend in the private sector.
•• Share options exercised amounting
enforcement.
to R11.9 billion in total was assessed,
comprising 10.7% of the total
The re-building of the transfer pricing unit Conclusion
allowances assessed;
at SARS will ensure that targeted audits Whilst the main component of our
are conducted and that shifting profits •• Contributions to retirement funding revenue base will as always be tax
through transfer pricing schemes is amounting to R182.6 billion (85.7%) revenues, tax is certainly not the only
clamped down. constituted the largest tax deduction solution to raise additional revenues.
claimed by taxpayers, whilst travel Key parts of the solution must also
It appears that steps are underway at expenses constituted 9.7% of tax include expenditure cuts, curbing
SARS to focus on this matter as part of deductions claimed. the size of the civil service, reducing
the LBC’s enforcement role is to focus policy uncertainty, restore investor
on to base-erosion and profit shifting. The above statistics do provide Treasury confidence,
Attempts to stop this leakage will add with guidance on what the “high” ticket creating jobs etc.
significantly to the revenue collection items are in our personal tax system and
efforts. hence, where collection efforts could It is clear is that there are tough times
potentially be focused to increase tax ahead and South Africans need to start
Increasing revenue through an increase revenues, without increasing the tax tightening their fiscal belts, come
in personal tax rates? rates. 1 March 2019.
SA has a progressive income tax system
which is based on the premise that the
wealthy should contribute a greater
proportion towards supporting the state
3Making an impact that matters | Budget 2019/2020
Optimising tax recovery Article written by
Tumi Malgas,
through digital innovation Associate Director,
Deloitte Africa
Tax & Legal
The South African Revenue Service (“SARS”) •• Brazil - disclose full invoice details before
was once recognised not only as the best obtaining valid invoice number,
working state organ but also as one of
•• Hungary - online connection established
the best revenue authorities in the world
between invoice invoicing software and
in terms of adopting guidance from the
the tax authorities’ system,
OECD on tax matters and in being at the
forefront of technology advances. We saw •• Tanzania, Malawi, Zambia, etc. – use of
this through the introduction of a world fiscal device which transmit data real-
class e-filing system, requests for detailed time to revenue authority at point of sale.
reconciliations of various taxes to financial
•• Various European countries - requests
statements and analytics audits, among
for standard audit file for tax (SAF-T)
others. In my opinion one of the key factors
that propelled SARS to greatness was its
These are examples of how tax authorities
embrace of technology.
are trying to introduce more efficient
processes for tax collection, gain greater
If we look at the example of the e-filing
visibility and more real-time access to
system, SARS was able to improve the
taxpayer data. One of the items for SARS to
user experience of taxpayers in filing
take into account, which multinationals are
returns and improve communication with
certainly already considering, is obtaining
them. These are fundamental aspects
better data granularity, that is standardised
to consider in any changes SARS makes.
across various taxes and accessible
If it reduces the administration burden
more easily and quickly to respond to
carried by taxpayers, by providing a better
the greater demands of data being put
experience, SARS can expect greater
on them by revenue authorities. This
responsiveness from taxpayers and in
single source of truth approach which can
turn it will improve compliance to increase
leverage technologies such as blockchain is
revenue collection. What emerging
definitely a must for consideration.
technologies it is exploring to improve its
operations and how it interacts with
Our revenue authority now has a great
taxpayers?
opportunity to leapfrog ahead by being
bold in how it uses digital innovation to
The fourth industrial revolution (Industry
change how it enforces the tax regulation
4.0) is upon us, forcing us to adopt or be
and collects revenue. We hope that in the
left behind. This revolution appears to be
upcoming budget speech there will be an
changing the way businesses function and,
announcement around how it will invest in
by extension, the stakes by which they are
these digital advances.
forced to compete. For business leaders
accustomed to traditional linear data and
communications, the shift to real-time
access to data and intelligence enabled
by Industry 4.0 would fundamentally
transform the way they conduct business.
This inadvertently will change how tax
authorities administer regulation of this
changing business landscape. We are
already seeing the introduction of real-time
reporting to tax authorities:
4Making an impact that matters | Budget 2019/2020
Transfer Pricing: Article written by
Billy Joubert,
Taxpayers should brace Director,
Deloitte Africa
Tax & Legal
for attention from SARS
In recent years South African taxpayers authority in that country with all the There are clearly considerable challenges
which form part of multi-national other revenue authorities in countries for SARS associated with processing this
enterprises (MNE’s) have been burdened where the group has operations. vast volume of information. Like taxpayers,
with a significantly increased compliance SARS is faced with capacity constraints
•• Tier 2: A masterfile – consistent for the
obligation in relation to transfer pricing as TP specialists are in short supply. It
whole group. This document, which
(TP). For many years South Africa had therefore seems likely that SARS will
describes various aspects of the group’s
TP rules but their actual enforcement by invest heavily in technology to help with
operations, is prepared centrally but
SARS was somehow inconsistent. For one processing and analysing TP information.
submitted separately by the various
thing, TP adjustments previously could Such technology might, for example,
group operating companies together with
only be made by SARS and SARS could not enable SARS to do initial risk profiling of
their respective local files.
get to all affected taxpayers. In addition, taxpayers based on information received.
the preparation of TP documentation was •• Tier 3: Local file – a document which is The taxpayers identified as a result of this
optional for taxpayers. specific to the operations of the relevant step might be subject to further analysis
operating company. The preparation of and even targeted for audits.
The landscape has since changed local files is usually co-ordinated centrally
dramatically. The first fundamental shift by the group (with significant input from Therefore, while many taxpayers are
occurred in 2012, when the onus to make the center) but the local file is specific to sighing with relief having succeeded in
TP adjustments was shifted to taxpayers each operating company. submitting their TP documentation for
themselves. This means that, if such the first time, this feeling of wellbeing is
adjustments are not made by a taxpayer at In addition to the OECD documentation likely to be short lived. It is likely that TP will
year-end, the taxpayer is potentially liable requirements, SARS also issued continue to be an area of focus for SARS
for interest plus the full range of penalties certain transfer pricing record keeping going into the future.
imposed by the Tax Administration Act requirements of its own.
(including secondary TP adjustments). It is important for taxpayers to remain
The second key change was that the annual The result of these new rules is that: as close as possible to the ongoing
submission of TP documentation has developments in this area. Specifically,
•• SARS will have received numerous CbC
become compulsory for many taxpayers. taxpayers should try to understand
reports from other revenue authorities
SA’s documentation rules follow those of the approach taken by SARS (and the
relating to SA subsidiaries of foreign
the OECD, and include the preparation of technological tools used) in processing the
based MNE’s.
the following – in terms of the OECD’s so- information received.
called 3 tier approach: •• SARS will also have received CbC reports
submitted by SA-based MNE’s. Since TP documentation now needs to
•• Tier 1: The preparation and submission of
be submitted annually there also needs
a country-by-country (CbC) report by: 1) •• In addition, SARS is now receiving a
to be a robust process to ensure that it
a South African based MNE (i.e. a South deluge of master files and local files,
is updated timeously and with a view to
African ultimate holding entity) with an which are required to be submitted via
mitigating risks which are identified.
annual consolidated turnover exceeding e-filing (CbC01 form) by no later than
R10 billion; and 2) a South African 12 months after the financial year-end
taxpayer that is part of a MNE group (provided that taxpayers meet certain
(i.e. ultimate holding entity is in a foreign thresholds with respect to the value of
jurisdiction) with an annual consolidated their foreign related party transactions).
turnover exceeding EUR750 million
•• Taxpayers are holding additional
and specific exceptions do not apply.
information available to be reviewed by
This report is usually submitted by the
SARS in terms of its additional TP record
ultimate holding company in the group
keeping requirements.
and is then exchanged by the revenue
5Making an impact that matters | Budget 2019/2020
Unpacking our import Article written by
Peter Maxwell,
activity Director,
Deloitte Africa
Tax & Legal
The 2018 Tax Statistics publication is the ‘free-on-board’ price and includes the The Port of Durban, which is the largest and
compiled from the latest available data from actual transaction value (the price actually busiest shipping terminal in sub-saharan
National Treasury and the South African paid or payable) plus all costs, charges and Africa, contributed R88.1 billion of the
Revenue Service (SARS) and was published expenses up to the point where the goods total import tax by customs port of entry
in December 2018. Apart from providing are loaded onto a ship (or other vehicle) at (mainly from mineral products, machinery
valuable insight into tax collections across the port of export. and electronics, and vehicles, aircraft
the three main types, Personal Income Tax, and vessels) to the economy followed by
Corporate Income Tax and Value-Added VAT is levied in accordance with the Value- O.R. Tambo International Airport with a
Tax the publication also provides valuable Added Tax Act, 1991 at either the standard contribution of R33.1 billion (mainly from
information on customs collections and rate or, in certain instances, the zero rate. machinery and electronics).
emerging trade patterns. Increased levels The statistics above do not reflect the
of import activity are also a good sign of a impact of the increase in the standard Looking forward, the estimated collections
flourishing economy. rate from 14% to 15% with effect from 1 for the 2019 fiscal year, after the mid-term
April 2018. The import VAT is based on revision, are as follows:
In summary, the publication reveals the the customs value of the imported goods •• Total tax revenue – R1 317.6 billion i.e. an
following for the 2017/2018 fiscal year: plus an upliftment of 10% thereof to cover increase of some 8.31%
•• Total tax revenue collected – R1 216.5 assumed costs such as insurance and
•• Customs duties – R54.025 billion i.e. an
billion (6.33% increase) freight (the upliftment does not apply to
increase of some 9.81%
goods imported from Botswana, Lesotho,
•• Number of registered importers - 310 784 •• Import VAT – R170.712 billion i.e. an
Namibia and Eswatini).
(3% increase) increase of some 11.723%.
•• Import VAT contribution to total revenue – Main import suppliers and contributors to
R152.8 billion or 12.6% (2.36% increase) the customs value of imported goods by Considering that the 1% increase in the
•• Customs duties contribution to total trade zone were as follows: VAT rate could yield an additional 7% in VAT
revenue – R49.2 billion or 4.0% (7.84% collections, it would seem that the import
•• Asia - 37.1%
increase) VAT collections might be realised. However,
•• Africa – 26.2% the low growth in our domestic economy
•• Main contributor to import VAT –
•• Europe – 25.8% and depressed demand from consumers
machinery and electronics 26.6%
and businesses for imported goods will
•• Main contributor to customs duties – The European Union, as a trade bloc, place this year’s collections of import taxes
vehicles, aircrafts and vessels 26.8% remained South Africa’s main supplier of under significant pressure.
•• Main contributor by world trade zone imported goods contributing 24.5% of the
to total import tax – Asia R96.7 billion or customs value followed by the African Union In conclusion, the above statistics are
47.2% and BRICS contributing 24.3% and 20.6% a useful measure of how our country
•• Main contributor by Port of Entry to total respectively. has performed from an import trade
import tax – Durban harbour R88.1 billion perspective. No doubt, our 2019
or 43.0% The main contributors to total import tax by performance will be judged in a similar way.
country of origin were as follows: We should, however, remain mindful of the
Customs duties are imposed in accordance •• China – R52.9 billion (mainly machinery following comment made by the Minister of
with the Customs and Excise Act, 1964 with and electronics, textile and clothing, and Finance in his October 2018 Medium Term
the aim of raising revenue and providing a footwear and accessories) Budget Policy Statement:
level of protection to the domestic market. •• Germany – R24.8 billion (mainly
The term ‘customs duties’ as reflected in automotive parts and vehicles, aircraft
‘However, it is more than a set of
the above statistics comprises the general and vessels) numbers, reams of data, charts,
customs duties imposed on imported goods
•• United States – R14.1 billion (mainly
graphs or words. Our performance
as well as any specific excise duties and ad should be measured by whether
machinery and electronics, and chemical
valorem duties collected on such goods.
products) people are gainfully employed,
General customs duties are either levied on
•• United Kingdom – R8.8 billion whether our children are learning
an ad valorem basis (i.e. as a percentage of
the customs value of the imported goods) or •• India – R8.7 billion
in decent schools, and whether we
on a specific duty basis (i.e. at a rate of cents have health care facilities that are
•• Japan - R7.8 billion.
per unit for example per kilogram, metre up to standard’.
or litre). The customs value is based on
6Making an impact that matters | Budget 2019/2020
Article written by
Ashleigh Theophanides,
National Health Director,
Actuarial and Analytics
Insurance predictions Solutions, Deloitte
In a year of elections and economic uncertainty, is National Health Insurance a priority for National Treasury?
The February 2019 Budget speech is again Treasury in 2017 that “the phasing-out of Both the proposals of the Presidential
likely to be underpinned by the long-term the medical tax credits can only happen Health Summit as well as the Medical
priority areas outlined in the National once the NHI is fully operational” due to Schemes Amendment Bill continue to
Development Plan. With the country its impact on the poorest medical scheme build on the proposed Hybrid NHI model,
moving out of a technical recession but still members. wherein advantage is taken of existing
forecasting weak growth, it is uncertain infrastructure, skills and systems within
whether Finance Minister Tito Mboweni will Further, the need for a complementary and the current healthcare system. This
prioritise the funding and implementation supplementary role of private insurance approach suggests that the employed and
of the NHI. as well as cooperation between the public wealthy continue to fund themselves, with
and private health systems was raised at minimal support from the taxpayer and
Due to the forthcoming national elections, the summit. This was illustrated by example therefore directs more funding to poor and
any meaningful reforms and budget cuts of the major under-utilisation of capacity in unemployed.
are likely be postponed to after May. While the private sector that could accommodate
the ruling party’s election manifesto states the needs of an additional 7.7 million The consideration of the hybrid model
that the implementation of NHI remains people. will serve to reduce anticipated costs
a central priority, much of the budget is of implementing NHI as it leverages off
expected to focus on economic stimulus The Medical Schemes Amendment Bill existing infrastructure. This may support
as outlined in the October medium term was published and presented by Health government in balancing the need to
budget policy statement. Minister Dr Aaron Motsoaledi in June focus on NHI while also meeting additional
2018. Proposed changes include the budgetary requirements.
This is in addition to the focus on education abolishment of co-payments, meaning
and the growing cost of free higher that medical schemes pay in full for
education, while the efforts to support health services. According to Motsoaledi,
infrastructure development, the growing members paid R29 billion in co-payments
debt burden of state-owned enterprises in the last financial year. Further, the cross-
and the 2018 tax shortfall of R27.4 billion subsidisation of high-claiming members
are likely to limit the allocation of funds for with low-claiming members is also
NHI. proposed. This parallels NHI in which young
and healthy members will subsidise the old
Updates on sugar tax collections, as well as and sick.
projected revenue of the incoming carbon
emissions tax which will begin collection on The Bill also aims to create a central
1 June 2019 could be provided. However, it beneficiary register which will be used by
is unclear as to the use of these funds and government to identify trends and assess
extent of their allocation to NHI. risks within medical schemes. Furthermore,
it proposes to replace prescribed minimum
At the Presidential Health Summit in benefits with comprehensive service
October, the removal of medical aid tax benefits which include vaccinations,
credits and the use of the resulting tax screening and family planning.
proceeds to fund NHI was proposed again.
This was not reiterated in the October While the Bill is unlikely to heavily impact
budget speech following the summit, and the budget allocation to NHI, it represents
it appears unlikely that it will materialise an alignment of the private medical
in the upcoming budget. This follows the schemes industry with NHI.
Davis Tax Committee’s finding to National
7Making an impact that matters | Budget 2019/2020
Mergers and acquisitions Article written by
Lance Collop,
in South Africa – No light Associate Director,
Deloitte Africa
at the end of the tunnel
Tax & Legal
for now
The landscape for mergers and acquisitions Another option is also to provide greater
has been bleak in South Africa in the recent tax incentives to businesses looking to
past. A weak economy offering with low invest and expand their operations. For
growth, coupled with political and policy example, the rules around deductibility
uncertainty has provided little incentive for of interest incurred on loan funding used
prospective buyers in the market. to acquire shares could be relaxed so as
to decrease the after-tax cost of equity
Finance Minister Tito Mboweni has a investments. The complex tax rules that
difficult juggling act to perform in the currently prevent certain forms of funding
upcoming Budget speech, as on the from being guaranteed or secured by a
one hand, a more prosperous economic third party could also be relaxed, and thus
environment needs to be created within create easier access to sources of funding
which businesses can invest, whilst at for potential buyers. Such tweaks to the tax
the same time, various other expenditure laws could be small steps in contributing
mandates need to be taken into to creating the scale of investment activity
consideration. Given this context, it is that our economy so urgently needs.
not likely that the Budget will propose any
major changes in respect of tax policies Whilst the 2019 Budget is unlikely to
that are specifically aimed at attracting contain significant tax incentives/changes
investment and expanding the economy. to tax laws to promote investment and
expansion by businesses in our economy,
However, it would be reasonable to expect some minor changes would go a long way.
that even given the difficult situation,
some initiatives need to be put in place to
foster growth in the economy and increase
business confidence.
Globally, the trend recently has been
for countries to reduce its corporate
tax rates. In South Africa, this rate has
remained constant at 28% for some time
now, and is out of sync with the global
trend. A decrease in the corporate tax
rate may provide companies with greater
cash resources with which to expand
their business and could also enhance
profitability for the economy as a whole,
eventually with more taxes flowing into the
State’s coffers as a consequence.
8Making an impact that matters | Budget 2019/2020
Update: Carbon Tax Bill Article written by
Izak Swart (Director) and
Gerhard Bolt (Senior
Manager),
Who is liable? Deloitte Africa
Tax & Legal
• Threshold determined at entity level
Combustion emissions: 10 (i.e. the sum of all controlled facilities)
MW (th) input*
• Based on installed capacity of fuel input
Fuel Approximate threshold (annual)
Other bituminous coal 16 400 tonnes
Natural gas 8 300 000 Nm3
Paraffin 9 100 000 liters
Heavy fuel oil 8 100 000 liters
• No threshold for fugitive and
Fugitive and process
process emissions
emissions: None**
• All emitters will pay
• Carbon Tax will not apply to emissions for
Agriculture, forestry and other agriculture, forestry and land use, except
land use, waste: NA for stationary combustion emissions
* Except for aviation, rail and naval fuel use (100 000 liters/year) and brick-making (4 million bricks a month)
** Except for CO2 transport and storage (10 000 tCO2 /year) and Other Carbonate use (100 t/year)
Design of Carbon Tax
• Carbon Tax base of R120 per tonne of Carbon Dioxide equivalent (tCO2e) emissions, based on fuel
combustion, process and fugitive emission sources
• Basic 60% allowance (70% for process and fugitive emissions and 75% for transport emissions)
• Additional allowance mechanisms:
− Trade exposure (up to 10%)
− Performance (up to 5%)
− Carbon Budget participation (5%)
− Offsets (Up to either 5% or 10%)
• Effective Carbon Tax rate will fall between R6 and R48 per tCO2e depending on allowances
• A Carbon Tax for petrol and diesel will be incorporated into the fuel levy system, and not be taxed
directly
• Annual payment must be done by 30 June and will be administered through the Customs and Excise
Act
Highlights of the Carbon Tax Bill
• Scope and thresholds have been aligned with the Department of Environmental Affairs’ mandatory
Greenhouse Gas Emissions Reporting
• Tax rate will increase by CPI + 2% annually until 2022, and CPI thereafter
• Trade exposure allowance now determined by ratio between production and imports and exports in
sector
• DEA responsible for approval of emission factors, sequestration and Carbon Budget system
participation
• Carbon Tax liability for fossil fuel based electricity producers will be reduced by environmental levy
payments (3.5 c/kWh), as well as a renewable energy premium to be announced by the Minister of
Finance
• Sectors covered that may previously not have expected to pay Carbon Tax: food, beverages,
tobacco, clothing, machine manufacturers, domestic aviation and navigation
• Persons subject to the tax is expanded to include municipalities and public entities
9Making an impact that matters | Budget 2019/2020
The honourable Minister of Finance, Mr Tito Mboweni, introduced the Carbon Tax Bill to the National Assembly on 20 November 2018.
This brings the carbon tax closer to being enacted, with an anticipated start date being 1 June 2019
Carbon tax will be levied on the sum of greenhouse gases from fuel combustion, industrial processes and fugitive emissions in
accordance with a reporting methodology approved by the Department of Environmental Affairs
Utilisation of allowances for combustion emissions
R120
R100
Taxpayers can reduce their effective Carbon Tax rate to R12 tCO2e
R80
through allowances (or R6 tCO2e for fugitive and process emissions)
R60 R120
R40
R20 R48
R36 R30 R24
R12 R12
R0
Tax Basic Trade Exposure Performance Carbon Budget Carbon Minimum
Rate Allowance Allowance Allowance Allowance Offsets Carbon Tax Rate
The regulations surrounding the following parts of the Carbon Tax are still outstanding:
• Performance allowance
• Trade exposure allowance
• Licencing and rules from SARS
Carbon offsets Calculation of tax payable
•• Carbon offsets involve specific projects X = x R
or activities that reduce,
avoid, or sequester emissions, and are
developed and evaluated Where:
under specific methodologies and •• X = Carbon tax payable
standards, which enable the issuance of
•• E = Combustion emissions
carbon credits
•• S = Sequestrated emissions
•• Demand for carbon offsets is anticipated
to exceed the supply thereof •• C = Sum of allowances for combustions emissions
•• The expected value is in the region of •• D = Diesel and petrol emissions
R80 per offset •• M = Sum of allowances for diesel and petrol emissions
Eligible project activities •• P = Process emissions
•• Renewable energy projects with generation capacity •• J = Sum of allowances for process emissions
less than 50MW •• F = Fugitive emissions
•• REIPPPP bids signed after 9 May 2013 •• K = Sum of allowances for fugitive emissions
•• Energy efficiency outside the carbon tax net and not
•• R = Rate of tax
claiming 12L
•• Transport energy efficiency and municipal waste
projects Proposed that entities exceeding their carbon budget
•• AFOLU e.g. restoration of forests and grasslands, small will pay R600/tCO2e
scale afforestation and anaerobic biogas digesters
How we can help you get ready
Determine Implement Determine a Facilitate Investigate Evaluation and
your liability verifiable GHG performance participation Tier 3 registration of
for mandatory reporting allowance in the emission carbon offsets
GHG reporting structures benchmark for Carbon Budget factors through CDM,
and Carbon Tax (different your sector to programme for your VCS and GS
from regular submit to National low emission
sustainability, CDP Treasury technologies
or GRI reporting)
10Making an impact that matters | Budget 2019/2020
Oil and gas industry – Article written by
Moray Wilson,
Associate Director,
tax considerations Deloitte Africa
Tax & Legal
The health of the energy sector in South or post-exploration in terms of an O&G applications being processed. It is hoped
Africa is critical to the local and wider right. The additional tax deduction is 100% that this will be will be addressed by
regional economy. during exploration and 50% during post- government soon as a matter of extreme
exploration. importance.
The oil and gas (O&G)
However, it is not entirely clear what Other matters which warrant attention
industry has a particularly qualifies as expenditure of a capital from government include the following:
important role to play in nature that will benefit from the special • It is imperative that amendments to
ensuring that, in line with tax deduction. Uncertainty on this issue the overriding legislative framework for
key government objectives is currently having a negative impact on extractive industries, the Mineral and
investment decisions. We hope that an Petroleum Resources Development Act,
set out in the National appropriate interpretation as to what including provisions in this Act that are
Development Plan and constitutes “capital” will be agreed to with specifically applicable to the O&G sector, or
elsewhere, there is energy the tax authorities in the near future, taking the carve-out of rules for the O&G sector
security, and growth in into account the imperative to incentivize into a separate piece of legislation, be
exploration activity in South Africa and that finalised soon after many years of delays.
economic activity and the term “capital” should accordingly be
employment opportunities. interpreted broadly.
•• Government support (for example, by
way of grants and/or tax incentives)
It is essential that South Africa give for the upgrades that our oil refineries
The Tenth Schedule to Income Tax Act
renewed focus to encouraging investment have to make in order to meet new fuel
and the Mineral and Petroleum Resources
in all spheres of the O&G industry, taking specification standards has long been a
Royalty Act provide that an O&G company
in the entire O&G value chain from matter of contention. Some progress on
may enter into fiscal stability agreements
upstream exploration and extraction this is needed.
with government, which guarantee that
and oilfield services, through refining and the terms of the respective pieces of •• The draft Integrated Resource Plan (IRP)
petrochemical production, to transport legislation as at the date that the relevant 2018 envisages a much greater role
and infrastructure and marketing and fiscal stability agreement was entered into for gas in our future energy mix. This
distribution. will apply, regardless of any subsequent will require significant resources being
change to that legislation. The purpose of spent on infrastructure, and a suitable
Some areas which we believe require a fiscal stability agreement is to ‘stabilize’ regulatory and tax incentive framework
attention from government are mentioned the tax regime applicable at a certain to encourage investment in this area is
below. point in time and hence to create certainty required.
for the taxpayer entity as to what its tax
The Tenth Schedule to our Income Tax •• There are currently inconsistencies
consequences will be for the foreseeable
Act was introduced in 2006 as part of an in the rules contained in tax laws and
future.
attempt to provide a set of clear tax rules other pieces of legislation that regulate
and incentives that would encourage O&G environmental rehabilitation and
In addition to there being potential
companies to invest in exploration for provisioning. The alignment of these
deficiencies in the manner in which the
hydrocarbons on land and off the coast of provisions to function as a consistent
fiscal stability provisions are worded in the
South Africa, taking into account that the rule-set would be most welcome.
Mineral and Petroleum Resources Royalty
country had very limited O&G exploration Act (only the provisions of section 4 of
to date and that exploration is typically There are many challenges that the
that Act are stabilized and no other inputs
very expensive and has a high risk of O&G industry is facing both locally and
into the calculation of the royalty), which
failure. One of the tax incentives provided globally. What is clear, is that a stable and
warrant amendment to ensure that the
in the Tenth Schedule is an additional fair regulatory (including tax) framework,
provisions operate as intended, there is
tax deduction (or uplift) that an O&G with appropriate incentives, is needed in
currently an urgent need for government
exploration company may claim in relation order to ensure continued investment and
to re-commence the processing of
to expenditure that is of a “capital” nature growth in the sector.
fiscal stability agreement applications
and is incurred in respect of exploration for approval after a long period of no
11Making an impact that matters | Budget 2019/2020
The tax compliance burden Article written by
for small and medium term Anthea Scholtz (Tax
Partner) and Claudia
enterprises (SMEs)
Gravenorst (Senior
Manager), Deloitte Africa
Tax & Legal
SMEs have long been recognized as a Property Commission (“CIPC”), will be able
priority sector for growth and development to easily obtain a list of non-complaint
in South Africa as they play a critical role in SMEs. Given the cost of the tax compliance
achieving our country’s targeted rates for burden on SMEs and how key this sector
economic growth and employment figures. is to the South African economy, SARS
could encourage non-compliant SMEs
Over the years, South Africa has achieved to regularize their affairs by encouraging
steady successes in broadening its tax base voluntary disclosure applications for a
amongst small businesses and various limited timeframe before it imposes non-
legislative measures were enacted to compliance penalties.
provide preferential tax treatment to them.
It remains imperative that government
In the South African “2018 Tax Statistics” continues to commit to tax incentives that
report, an annual report which is issued benefit this small business sector. This
jointly by National Treasury and the South could include reducing the tax compliance
African Revenue Service (SARS) and which burden for these entities, simplified tax
was published in December 2018, it was laws, granting tax incentives, and easier
noted that as at 30 June 2018, 768 687 access to finance. When this is done, the
companies (714 422 as at 30 June 2017) contribution SMEs will make towards our
were assessed for tax, of which 143 768 country’s economic prosperity could be
companies (129 867 as at 30 June 2017) significant.
assessed were small business corporations
who paid tax at the preferential graduated As many of these small businesses operate
income tax rate, instead of the fixed within the informal sector, incentives and
corporate tax rate of 28%. This does seem regulatory changes are critical to ensure
to indicate that an increased amount of the transition from the informal sector to
small businesses are making use of the the formal. The 2018 Medium Term Budget
preferential tax regime available to them. Policy Statement (MTBPS) citied barriers to
entry as being one of the key reasons why
However, despite this progress, taxpayer small businesses find it difficult to compete
education and the cost of tax compliance in SA and indicated that the Small Business
remains a significant challenge for SMEs and Innovation Fund would assist small
as they often simply do not have the businesses to “navigate the pre-start-up
necessary staff resources and skills to phase and provide support as they scale up
timeously and fully comply with all their their enterprises”. It is expected that R500
tax obligations. The cost of tax compliance million will be committed for the debt and
can add significantly to the cost of doing equity investments of SMEs in the first
business for SMEs (e.g. additional resources quarter. It will however be interesting to
that have to be employed to comply with see whether the application process for
tax rules, significant penalties imposed for SMEs to obtain this funding will not in itself
non-compliance with tax rules etc.). be too onerous.
SARS has also recently announced that it
will impose administrative non-compliance
penalties for non-compliant corporates
(including SMEs) whose tax returns are long
outstanding. This could potentially impact
a number of SMEs as SARS, in collaboration
with the Companies and Intellectual
12Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms. Deloitte provides audit, consulting, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 245 000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2019. For information, contact Deloitte Touche Tohmatsu Limited Designed and produced by Creative Services at Deloitte, Johannesburg. (Budget_19/vee)
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