DECEMBER 2012 – ISSUE 159

CONTENTS

COMPANIES

2134. Tax rate for foreign companies

2135. Disposal of foreign shares

2136. Statutory interpretation of small

business corporation

REAL ESTATE INVESTMENT TRUSTS

2142. New regime

INTERNATIONAL TAX

2137. CFC tainted income

PUBLIC BENEFIT ORGANISATIONS

2143. Forms of ownership

SECURITIES TRANSFER TAX

2138. Refunds

VALUE-ADDED TAX

2144. Foreign donor funded projects.

TRANSFER PRICING

2139. Planning for transfer pricing in

Africa

2140. Formalising transfer pricing-in

Africa

2141. Pricing policy comparison

SARS NEWS

2145. Interpretation notes, media releases

and other documents

COMPANIES

2134. Tax rate for foreign companies

(Published December 2012)

The Taxation Laws Amendment Bill No 34, 2012 (TLAB), contains a proposed amendment

to harmonise the income tax rate applicable to resident and non-resident companies.

 

 

Under the former secondary tax on companies (STC) regime (which was deleted with effect

from 1 April 2012 when the new dividends tax regime came into operation) a resident

company was, in addition to tax on its income at a rate of 28%, also liable for secondary tax

on companies at the rate of 10% of dividends declared by the company to its shareholders.

With income tax and STC combined, a resident company was thus subject to an effective tax

rate of 34,5%.

As non-resident companies were not subject to STC, the income tax rate of non-resident

companies was increased to 33% following the introduction of STC, so as to place non-

resident companies on par with resident companies.

Following the introduction of dividends tax on 1 April 2012 resident companies pay tax at a

lower rate than non-resident companies. The reason is that insofar as cash dividends are

concerned, the person liable for dividends tax is the beneficial owner of the dividend and not

the company declaring the dividend. As the company is not liable for dividends tax its

effective rate of tax is 28%.

The result is that following the introduction of dividends tax, non-resident companies are

subject to tax at an additional 5%, being the difference between the rate at which it is taxed

(33%) and the rate applicable to resident companies (28%). As with STC, dividends tax is not

payable in respect of dividends paid or declared by non-resident companies except if the

dividend is a cash dividend and is paid in respect of a share listed on the JSE.

The question that arises is whether it is viable or justifiable to tax non-resident companies at

the higher rate. In its explanatory memorandum on the TLAB, the National Treasury states

that there are arguments that retaining the additional 5% rate on non-resident companies will

be in contravention of tax treaty non-discrimination provisions and that in the absence of STC

the retention of the additional 5% will be a violation of the bona fide undertakings made to

South African treaty partners during tax treaty negotiations. On this basis, it is proposed that

the rate at which non-resident companies is taxed be reduced to align it with the rate

applicable to resident companies.

The reduction of the rate of income tax applicable to non-resident companies from 33% to

28% means that it is more tax efficient for a foreign company to conduct its South African

operations through a branch located in South Africa, than to establish a South African

subsidiary. The reason is that dividends paid by a resident subsidiary to a non-resident

company will be subject to dividends tax, although the rate of dividends tax may be reduced

in terms of an applicable treaty.

 

 

In closing, it is noted that the amendment takes effect from years of assessment beginning on

or after 1 April 2012, being the same effective date applicable to the new dividends tax

regime.

Cliffe Dekker Hofmeyr

The Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2012

2135. Disposal of foreign shares

(Published December 2012)

The South African Revenue Service’s Comprehensive Guide to Capital Gains Tax (Issue 4)

observes that in the 2003 Budget Review, the then Minister of Finance announced his

intention to allow the tax-free repatriation of foreign dividends back to South Africa (i.e.

through the dividend “participation exemption” contemplated in section 10(1)(k)(ii)(dd) of

the Income Tax Act No. 58 of 1962 (the Act)). As profits from the sale of shares merely

represent retained dividends, a similar exclusion was introduced in paragraph 64B of the

Eighth Schedule to the Act which allowed the tax-free sale of shares in a foreign company to

non-residents in particular circumstances.

A major concern was raised by the National Treasury in the Draft Explanatory Memorandum

(EM) on the Draft Taxation Laws Amendment Bill, 2012 (the Draft Bill) that the

participation exemption is being used in ways that was never intended. The EM provides

examples that taxpayers have sought to use the exemption as a means of achieving an indirect

company migration or divesture of core business operations outside the cash or cash-

equivalent paradigm (i.e. without a repatriation of cash to South Africa). In the process,

taxpayers were able to achieve a step-up in the base cost of the foreign shares disposed of

without firstly triggering the attendant capital gains tax consequences in South Africa.

In response to this concern, it has been proposed to limit the participation exemption in

paragraph 64B of the Eighth Schedule to disposals of foreign shares to independent foreign

persons.

Under the revised participation exemption, the following qualification requirements must be

satisfied –

The transferor (including group members) must hold a participation interest of at least

10% of the equity shares and voting rights of the transferred foreign company.

The abovementioned interest must have been held for at least 18 months prior to the

disposal.

 

 

The transferred foreign equity shares must be disposed of to a foreign person other

than a controlled foreign company (CFC). It is noted that if the shares are disposed of

to another CFC, one could achieve this within the revised corporate restructuring rules

in section 41 to 47 of the Act.

Importantly, the transferor must receive full consideration for the foreign equity

shares transferred (i.e. consideration must have a market value equal to or greater than

the market value of the foreign equity shares transferred.) The intention according to

the EM is that the receipt of shares should not be taken into account as consideration.

In comparing the above requirements to pre-existing law, two major differences exist. Firstly,

CFCs can no longer be used as a qualifying transferee in the context of a group

reorganisation. In other words, the exemption has been deliberately narrowed in lieu of the

group reorganisation rules being revised to take this transaction type into account. Secondly,

the full value consideration requirement has been added to ensure that the participation

exemption will not be used as a migration or divestiture technique, addressing the concern

raised in the EM. Thus, as mentioned in the EM, an unbundling will no longer fall within the

participation exclusion (but could potentially fall within section 46 of the Act). Similarly,

share-for-share reorganisations will also fall outside the participation exclusion as the

consideration is not in cash (but may fall within section 42 of the Act). In addition, certain of

the previous anti-avoidance provisions are no longer required as the disposal of the foreign

shares must be for market value cash or cash equivalent consideration.

A concern arises with the proposed amendments, not only to paragraph 64B, but also the

extension of the corporate rules, in that international tax free reorganisations may not be

available in certain instances (for example, a 51% interest in a CFC is sold for the issue of

shares to another CFC in which a 60% interest will be held after the disposal).

In light of the proposed amendments, before entering into any international restructurings,

taxpayers will have to carefully consider the relationship between the various taxing sections

in the Act, including, section 9D, the group restructuring provisions in section 41 to 47 and

the participation exclusion in paragraph 64B of the Eighth Schedule. Taxpayers must also be

mindful of the different effective dates of the proposed amendments.

Ernst & Young

IT Act: Sections 9D, 41-47, par 64B of the 8th Schedule

(Editorial Comment: Should foreign dividends not be exempt, the effective rate of tax on

such dividends will be 15%)

 

 

2136. Statutory interpretation of small business corporations

(Published December 2012)

The interpretation of definitions that are found in statutes may be a difficult issue. Words are

capable of wide or narrow interpretation and the degree of latitude applied in the process of

interpretation may have a profound effect. For this reason principles have been developed to

assist in identifying the most apt interpretation that should be applied. The golden rule,

naturally, is that, wherever possible, the words should be given the meaning that they have in

ordinary usage. It follows that the use to which a word is put derives from the context in

which it is used. Context would identify, for instance, whether a word is used as a noun or a

verb (e.g. “work”). It would also assist in identifying the manner in which the noun or verb is

intended to be understood (e.g. “work of nature” or “work of art”). Our law relies on long

established principles to assist it in interpretation, and the application of these principles is

well demonstrated in a recent decision of the South Gauteng Tax Court in Case No. 12860

(judgment given on 22 June 2012).

A close corporation (CC) had claimed to be liable to income tax as a small business

corporation subject to the provisions of section 12E of the Income Tax Act, No. 58 of 1962.

SARS challenged the status of the CC as a small business corporation, alleging that it derived

more than the permitted minimum proportion of 20% of its revenues from investments and

the rendering of “personal service”.

The dispute centred on whether the income-earning activities of the CC fell within the

definition of “personal service” as defined. Section 12E(4)(d) defines “personal service” in

the following terms:

“‘personal service’, in relation to a company, co-operative or close corporation, means any

service in the field of accounting, actuarial science, architecture, auctioneering, auditing,

broadcasting, consulting, draftsmanship, education, engineering, financial service broking,

health, information technology, journalism, law, management, real estate broking, research,

sport, surveying, translation, valuation or veterinary science, if ...”

The activities of the CC which were performed by the member, aided by a personal assistant,

and by subcontractors in certain areas of the country. They involved the listing and sale of

products - mainly imported by its principals - with major retail organisations in South Africa.

In addition ancillary services in relation to its clients’ products were also performed from

time to time. These included promotional activities both in-store and out of store, advice on

trade details (pricing, incentives, etc.), negotiating placement of products in store and the

provision of advice to and training to the clients’ sales staff .

 

 

SARS seized on three of the words found in the definition of personal service, namely

broking, consultancy and management. They took the position that the terms should be

interpreted widely and that the nature of the activities of the CC fell within the scope of these

wide interpretations. It relied on its own Interpretation Note No. 9, dated 13 December 2002,

paragraph 2.3(b):

“The definition of ‘personal service’ is very broad and does not define the meaning of each

activity. It is, therefore, necessary to analyse each activity within its ordinary meaning.”

Tax Court not convinced

The Tax Court was not persuaded that SARS’ interpretation was appropriate. It sought rather

to apply the well-established approach that has developed over centuries of jurisprudence.

Thus, Mbha J stated at [21] of this judgment:

“If there is any doubt about the ordinary meaning of a word used in a particular context,

certain rules must be applied. There are two rules relevant to this matter: A word included in

the group of words must be regarded as being of the same type as the other words in that

group (eiusdem generis); on the other hand, if a word is not included in the group, it must not

be regarded as subject to the same prescriptions as that group (exclusion alteris).”

In order to establish the meaning of the word “consultancy”, the Court consulted the standard

dictionaries and found that the word “consult” is used in three contexts, namely:

having reference to a source of information (e.g. consult a dictionary);

offering advice, typically in a professional capacity; and·

discussing a matter widely, as in consulting with interested parties. The Court found

that the context in which the term “consulting” was to be interpreted fell within the

second category, and, at [24], was of the view that:

“It is necessary to establish the intention of the legislature when passing the relevant

provision. The legislature’s intention embodied in section 12E of the Act can clearly be seen

from the contents of SARS’ Interpretation Note 9 (supra),which was issued at the time of the

introduction of that section, and which states (at p 5) that:

‘Section 12E was enacted for the specific purpose of encouraging new ventures and

employment creation, i.e. active small businesses. The provisions relating to SBC’s

are therefore not intended to benefit any professional person such as, for example, an

architect or a lawyer who renders his/her service by means of a company or close

corporation.’[emphasis added]

Accordingly, in interpreting the term “consulting”, as applicable to a personal service

provided by a small business corporation for the purposes of section 12E(4), the term

“professional person” is crucial in defining that term.”

 

 

If any support for this approach was necessary, Mbha J considered that this was found in the

application of the eiusdem generis principle. The Court thus held at [25]-[26]:

“The fields of activity listed as personal services in section 12E(4)(d) fall into two categories,

the first of which is accounting, actuarial science, architecture, auctioneering, auditing,

broking, draftsmanship, education, engineering, health, information technology, law,

management, real estate, research, secretarial service, surveying, translation, valuation and

veterinary service which are all professional or quasi-professional activities, requiring a

particular qualification and, in many cases, a licence, certificate, or membership of a

professional body before the person concerned can participate in that activity. The second

category comprises broadcasting, commercial arts, entertainment and sport, none of which

are relevant to the activity carried out by the appellant.

[26] Since the term “consulting” is the least defined of all the terms, the rules of

interpretation that I have referred to, must be strictly applied. The dictionary definition of the

term must be applied and it must be regarded as the offering of advice by a professional or

qualified person. I am fortified in adopting this approach, by the specific reference to a

“professional person” in Interpretation Note 9 explaining the legislature’s basis of section

12E, as 1 have alluded to in para [24] above.”

Door finally shut

The door was finally shut on SARS in [28] of the judgment, where it was held:

“In any event, even if no definite conclusion as to the interpretation of the term ‘consulting’

can be arrived at by the application of any of the rules of statutory interpretation I have

referred to, then the contra fiscum rule must be applied and the statute interpreted in favour

of the appellant. In terms of this rule, where a taxing statute reveals an ambiguity and the

ambiguous provision is capable of two constructions, the court will place a construction on

the one that imposes a smaller burden on the taxpayer.”

The terms “broking” and “management” were also found not to be of application by reference

to their dictionary definition and the context, and having regard to the nature of the activities

performed by the member on behalf of the CC.

It was therefore found that the services rendered by the CC to its clients were not of the

nature of “personal service” and that the CC was entitled to claim the benefit of classification

as a small business corporation.

This decision highlights yet again that interpretation notes issued by SARS do not have force

of law, and may be open to question. These are the statement to the public of the manner in

 

 

which SARS will apply the legislation, and taxpayers are at risk of adverse assessment if they

file returns that conflict with the interpretation as published.

“Personal service” unchanged

Interpretation Note No. 9 is currently in its fifth iteration. However, the interpretation of the

term “personal service” has not changed, as evidenced by the following extract from 4.5 on

page 8:

“In general terms, a personal service refers to a service rendered and for which the income

derived is mainly a reward for the personal efforts or skills of an individual. However, the

term is capable of expansion or limitation depending on the scope of the specific law in which

it is used. Section 12E(4)(d) (as quoted below) defines “personal service” which merely lists

a class of activities that would be regarded as a personal service. For the sake of clarity, the

ordinary, grammatical meaning is to be ascribed to each word. Accordingly, each of these

entries is to be construed in their widest possible sense.” (Decisions of the Tax Court are not

binding legal authority. However, the approach of Mbha J in this matter is a pragmatic

demonstration that interpretation is a process that requires careful and detailed analysis of a

word or words found in a statute, having regard not only to the very word itself but also to

those with which it may be associated.

In relation to the item 'broking', the court considered a number of alternative dictionary

meanings of the term 'broking' or 'broker'. It was not necessary, on the facts of the case, for

the Court to decide which of the meanings to apply. The following meanings of 'broker' were

considered: 'a person who buys and sells goods or assets for others', or 'a person or

organisation that buys and sells securities, currencies, properties, insurance etc on behalf of

another'. A dictionary definition of 'broking' was 'the business or service of buying and

selling goods or assets for others'. In relation to the item 'management', the court found that

the meaning of the term is 'the activity or skill of directing and controlling the work of a

company or organisation or part of it'. 'Management' will therefore not disqualify a

corporation that does not control or direct the activities of its clients in circumstances where

the management function rests with the clients.

The current definition includes 'financial service broking' and 'real estate broking' in place of

'broking'. The items 'commercial arts' and 'secretarial services' have been deleted. Now also

included are 'information technology', 'journalism' and 'research'.

pwc /BDO

IT Act: Section 12E,

Interpretation Note 9

 

 

INTERNATIONAL TAX

2137. CFC tainted income

(Published December 2012)

Controlled Foreign Companies

Section 9D of the Income Tax Act, 58 of 1962 (the Act) is an anti-avoidance provision aimed

at preventing South African residents from excluding tainted forms of taxable income from

the South African taxing jurisdiction through investment in controlled foreign companies

(CFCs). One of the main targets of the provision is diversionary foreign business income

earned through suspect structures designed to avoid South African tax. However, CFCs are

often used for legitimate business purposes and the changes to section 9D suggest that this

has been recognized.

National Treasury has amended the CFC legislation numerous times over the past ten years in

an attempt to close all perceived loopholes. Unfortunately, the amendments have led to

overly complex legislative provisions with unintended consequences which impact on normal

business transactions and create unwanted anomalies and uncertainties. Amendments in the

Taxation Laws Amendment Act, 2011 (the Amendment Act), seek to remedy the position and

came into operation on 1 April 2012.

A CFC is any foreign company where more than 50% of the total participation rights in that

foreign company are directly or indirectly held, or more than 50% of the voting rights in that

foreign company are directly or indirectly exercisable, by one or more residents of South

Africa. However, there are certain exceptions and exemptions to the definition.

The fundamental principle underlying the CFC attribution rules is that the net income of a

CFC shall be included in the income of a South African resident in the proportion of such

resident's participation rights to the total participation rights of the company. Net income is

essentially determined as if the CFC is a South African taxpayer, and is determined at the end

of the CFC's year of assessment.

However, certain exempt amounts must not be taken into account when calculating the net

income of the CFC. The most widely used exemption is contained in section 9D(9)(b), which

provides that amounts attributable to a foreign business establishment ("FBE") as defined are

ignored for South African tax purposes.

 

 

Foreign Business Establishment Exemption

The current FBE exemption assumes that only the income relating to a substantive business

can be "attributable to" a FBE. The amendment expands on this assumption by expressly

providing that income will only be attributable to a FBE once arm's length transfer pricing

principles are considered. Therefore, in order to attribute income to a FBE, the CFC must

account for the functions performed, assets used and the various risks of the FBE. Mere legal

agreements and similar pretences will be insufficient to link income to an FBE.

In essence, taxpayers claiming the FBE exemption are required to demonstrate that transfer

pricing principles have been taken into account for every income stream connected to the

FBE. This amendment is in line with modern transfer pricing and international tax principles,

where multinational companies are expected to demonstrate that offshore companies are

underscored by sufficient commercial substance.

From a policy perspective, the exemptions to the attribution rules are part of a framework that

seeks to strike a fair balance between protecting the tax base and the need for South African

multinationals to be internationally competitive.

It is notable that the existence of an FBE will not automatically protect all of the CFC's

income from potential inclusion in the taxable income of the South African shareholder(s).

Certain types of income are excluded from the exemption, specifically income sourced from

so called "diversionary transactions".

Diversionary Transaction Rules

The diversionary transaction rules target tax avoidance, in that they deter South African

taxpayers from entering into transactions which shift income which ought to be taxable in

South Africa to a jurisdiction with a more beneficial taxing regime.

The Amendment Act has greatly simplified the rules governing diversionary income, which

are currently very complex. The current provisions are very broad in their scope and

unfortunately often catch transactions entered into on an arm's length basis which would not

be considered problematic from a transfer pricing perspective.

Under current law, three sets of diversionary rules exist, relating to the import of goods, the

export of goods and the import of services. In terms of the current rules, diversionary income

is always viewed as tainted CFC income even if attributable to a FBE.

According to the Explanatory Memorandum on the Amendment Bill, the overly mechanical

nature of these diversionary rules has caused problems for both legitimate commercial

 

 

activities and for the meaningful protection of the fiscus. This is due to the fact that non-tax

motivated commercial activities often become trapped by the mechanical rules, while their

overly rigid nature allow for tax avoidance in the case of more flexible non-tax motivated

activities.

Under the new rules, the imported goods diversionary rules will only be triggered if three

simplified conditions exist: firstly, the CFC must be disposing of goods directly or indirectly

to a connected South African resident; secondly, the CFC must be located in a low tax

jurisdiction, in that the sales income of a CFC must be subject to a foreign rate of tax that

falls below 50% of the South African company rate (i.e. 14%) after taking tax credits into

account; and thirdly, the sales income must not be attributable to the activities of a permanent

establishment located in the CFC's country of residence. In other words, the CFC sale

destined for South African import will be triggered if sales income is simply associated with

various forms of "preparatory and auxiliary activities" or with activities outside the CFC's

country of residence. It is clear that the amendments are aimed at ensuring that multinationals

demonstrate genuine commercial reasons for importing through a CFC, otherwise there could

be an imputation.

A potentially significant benefit to some South African multinationals is that the diversionary

rules associated with South African exports to a CFC will be completely removed on the

basis that transfer pricing principles will be used to manage these transactions. Additional

protection is not required because the value-adding activities largely occur on-shore - all of

which make the task of enforcing arm's length transfer pricing principles more manageable.

This amendment is welcomed as transfer pricing will attack simulated transactions which

take advantage of low tax jurisdictions without sufficient attention being given to the

substance of the agreements. However, for multinationals such as mining companies who

have established an offshore buying and selling company to be closer to international markets

and for legitimate business reasons, this development will be welcomed.

The current diversionary rules associated with services imported from a CFC will be retained

in their current form. Under these rules, CFC income relating to services rendered by a CFC

to a South African connected party are taxable, unless the CFC meets a higher business

activity test as measured by objective criterion.

Conclusion

While the amendments may not be sufficient to simplify the legislation which has evolved

over the course of a decade, the changes will provide some relief to taxpayers, especially

those who can evidence a genuine commercial reason for transacting with a CFC. The

 

 

amendments will lead to a vast improvement for exporters, as the trading income of a foreign

sales subsidiary will no longer be excluded from the FBE, as under current law.

Bowman Gilfillan

IT Act: Section 9D

SECURITIES TRANSFER TAX

2138. Refunds

(Published December 2012)

Where Securities Transfer Tax (STT) has been overpaid, taxpayers are entitled to a refund of

the amount overpaid.

Section 4(1) of the Securities Transfer Tax Administration Act, 2007 (the STTA Act), states

that "[t]he Commissioner must refund the amount of any overpayment of tax or of any

interest or penalty properly chargeable in respect of the transfer of any security, if

application for the refund is made within two years after the date of that overpayment."

Although the wording of section 4(1) of the STTA Act makes it clear that the SARS has no

discretion and is obliged to refund STT if the request for a refund is made within two years

from the actual date of overpayment, this does not mean that SARS are prohibited from

making a refund if the request for the refund is late.

While section 4(1) expressly sets out what the Commissioner must do if the stated time

period is complied with, it does not state what the Commissioner must do if the stated time

period is not complied with. In our opinion, by implication the Commissioner has discretion

to make a refund even if it is submitted outside of the stated time period, presumably after

representations have been made to him and he is of the view that he should make the refund.

There are no statutory guidelines in the STTA Act as to how the discretion should be

exercised. The Commissioner's decision must comply with the requirements for

administrative justice which are contained in section 33 of the Constitution read with the

Promotion of Administrative Justice Act, 2000 (Act No. 3 of 2000). In particular, the

Commissioner's decision must be reasonable. For this purpose, the Commissioner is required

to consider all relevant matters such as the

the reasons for the delay;

the length of the delay; and

any other relevant factor.

 

 

Bowman Gilfillan

IT Act: Section 9D

Securities Transfer Tax Administration Act: Section 4

Promotion of Administrative Justice Act: Section 5

TRANSFER PRICING

2139. Planning for transfer pricing in Africa

(Published December 2012)

Many players in the South African consumer business sector have as a key strategy or

mandate the expansion of their business operations into other African countries.

Some businesses are vying to tap into African markets to sell their goods to new consumer

groups. Others are keenly sourcing products abroad for, hopefully, profitable retailing in

South Africa.

In this context, South African groups frequently set up or acquire foreign subsidiary

companies in other African countries to conduct their business activities and enter into cross-

border transactions with such companies. These include buy-sell arrangements, agency

contracts, loan funding, the licensing of intellectual property required to conduct the business

abroad, the provision of management and support services, etc.

Typically, these contracts between resident companies and their non-resident related parties

are subject to South Africa’s sophisticated international tax legislation, including the new

expanded transfer pricing laws, the controlled foreign company (CFC) regime and detailed

foreign tax credit/deduction relief mechanisms, to high-light only a few.

From a transfer pricing perspective, it is absolutely crucial for companies to consider

carefully all the various tax implications from the very start of the contracting phase when

entering into transactions with their African related parties. Draft contracts must be

considered in detail from a transfer pricing perspective before they are finalised in order to

avoid future complications and exposure for the parties involved.

As the general arm’s length test that is applied for transfer pricing purposes is performed

based on an analysis of functions and risks involved, any written agreements should clearly

spell out the contractual rights and obligations of the respective parties, the relevant risks to

be borne by each party and exactly when/if such risks in respect of products pass from one

 

 

entity to another. The exposure involved in imprecise contracts and written pricing

arrangements should not be underestimated.

From the start, pricing arrangements should be concluded carefully with transfer pricing

legislation in mind. In terms of new transfer pricing legislation that is effective in South

Africa for tax years commencing on or after 1 April 2012, the onus is squarely on the

taxpayer to ensure that its South African taxable income is calculated as if all transactions

subject to transfer pricing had been entered into based on terms and conditions that would

have been agreed upon by independent parties dealing at arm’s length.

Accordingly, South African taxpayers are now automatically obliged to perform this test in

determining their taxable income for purposes of their income tax returns. It is clear that a

business would be in a much better position from a risk management point of view if it

determined its cross-border pricing arrangements based on properly considered, well-

documented transfer pricing policies from the beginning. Paying careful attention to transfer

pricing issues from the draft contracting phase should go great lengths to avoid nasty

surprises at a later stage.

Taxpayers should not postpone a consideration of the effect of transfer pricing on their

transactions with African related entities until it is time to complete their income tax returns,

which is often well after year-end.

Companies should know upfront that they will have to answer specific transfer pricing-

related questions in their corporate tax returns.

For example, the following question is posed to taxpayers in the latest tax return:

“Has the company provided goods, services or anything of value (including transactions on

capital accounts) to a non-resident connected person for less than the arm’s length

consideration? (Please note that goods and services include a loan.)”

This question in the tax return should not be treated lightly as a “No” answer to this question

that is incorrect may comprise misrepresentation. This could prevent the 3-year prescription

period applying to the income tax return and SARS would be entitled to re-assess such return

even after the expiry of 3 years after the initial assessment in order to test whether often

costly transfer pricing adjustments should be made.

For a number of years now, SARS has been expanding its transfer pricing team and this area

of tax is now officially considered to be a source of high risk to the fiscus. It therefore comes

 

 

as no surprise that SARS announced in its Strategic Plan for tax years 2012/13 to 2016/17

that transfer pricing is going to be a main focus area.

The following is stated in the presentation document of SARS’ Strategic Plan:

“We have detected an increase in the use of cross-border structuring and transfer pricing

manipulations by businesses to unfairly and illegally reduce their local tax liabilities. Part of

this is due to pressures on profits due to the economic climate and part of it is due to the

growth in multinationals which account for nearly 70% of all world trade.

Developing economies especially in Africa are at higher risk of revenue loss through such

practices in part because they frequently lack the knowledge and skill to detect, investigate

and prosecute these types of tax crimes.”

SARS is addressing these shortfalls in South Africa.

By way of concessions, National Treasury has identified the need to provide relief from the

transfer pricing rules to “headquarter companies” in cases where they provide certain

financial assistance to qualifying foreign companies. Additionally, in draft legislation that has

recently been released, it is proposed that relief will be provided in circumstances where

South African taxpayers provide financial assistance and the use of certain intellectual

property to high-taxed CFCs with foreign business establishments.

In conclusion, we are most likely to see a sharp increase in SARS’ activities in testing and

challenging the pricing of transactions that are subject to transfer pricing.

As always, the best way for a taxpayer to be prepared for a SARS query or audit is to have a

sound transfer pricing policy in place that is properly documented in line with the OECD

guidelines. The transfer pricing policy documentation should clearly and methodically

describe why the terms and conditions of the tested transactions should be regarded as being

at arm’s length. In any event, this is now also required for taxpayers under recently

introduced legislation in order to perform a proper computation of taxable income for

purposes of income tax returns.

The above considerations should be at the forefront of thinking when consumer groups plan

their transactions with potential related party enterprises in Africa.

Deloitte

IT Act: Section 31

 

 

2140. Formalising transfer pricing in Africa awakens

(Published December 2012)

Nigeria and Ghana, the leading economies in West Africa, are on the brink of joining the

band of countries that have developed formal transfer pricing (TP) rules across the African

continent. The motivation for this appears to be the tireless drive by the respective

governments to safeguard and increase their tax revenue bases as well as align with global

practices.

A multinational company may unintentionally or intentionally shift profits by the pricing of

transactions with related entities especially where they exercise control. Wrong pricing

(mispricing) occurs where goods or services are supplied at prices which are materially

different from prices obtainable from an independent and unconnected party for similar

supplies. Typical transactions include management and technical fees, royalties,

intercompany loans, supply contracts etc.

Formal TP rules

Given the trend of the adoption of formal TP rules across the continent, companies with

investments in certain African countries will have to reconsider transfer of goods, services or

intangibles to their related parties in order to establish appropriate prices which are

commercial and acceptable to the tax authorities. Consequently, multinational organisations

and their members or related entities would now be required to prepare comprehensive

documentation to demonstrate their application of the arm’s length principle and the

procedures followed to determine their pricing of related party transactions. If this is not

done, the tax authorities could adjust the transactions to reflect arm’s length and demand

additional tax, including penalties.

Cooperation

Expectedly, there is increasing collaboration among tax administrators in Africa to foster

cooperation and implement TP rules among other initiatives. Under the aegis of the Africa

Tax Administrators Forum (ATAF) formed in 2009, the administrators aim to provide a

platform to enhance collaboration, establish best practices and build capacity in Africa tax

policy and administration through peer learning and knowledge development. Currently, the

members of the ATAF comprise 34 (out of 54) tax administrations in Africa. In its attempt to

preserve the tax bases and facilitate increased tax revenues of its members, the ATAF

initiated ‘The TP Project’ in 2009 to assist in building capacity amongst its members, to

identify and address areas of tax leakages from transfer mispricing.

 

 

Most of the countries in Africa already have general anti-avoidance rules which are a broad

set of principles/rules aimed at counteracting the avoidance of tax. A few years ago, it was

only a handful of countries, including South Africa that had formal TP regulations. Some

member countries of the ATAF e.g. Kenya and Uganda have now incorporated TP

regulations into their tax laws while others such as Ghana, Nigeria and Tanzania are on the

verge of introducing TP rules. It is only a matter of time before many others catch the buzz.

Lack of know-how

The implementation of TP regulations is not without its peculiar challenges, chief of which is

lack of technical know-how, relevant technology and a skilled workforce. In advanced

economies, numerous databases are used for establishing comparability of transactions and

determining arm’s length prices. Such robust databases that provide industry and peer

comparisons are not yet readily available in Africa; hence it is difficult to use these foreign

databases for establishing comparables in Africa without incorporating some fundamental

and often subjective assumptions. This very act creates huge uncertainties for both the

African tax administrators and taxpayers.

TP here to stay

The burden of proof and onus of ensuring that the supplies of goods and services have not

been mispriced rests largely with the taxpayer. Sufficient documentation that provides a valid

basis for the pricing of goods or services supplied must therefore be put in place in order to

anticipate and sufficiently cope with the impending scrutiny of the tax authorities. Assuredly,

TP has come to stay in Africa but its effectiveness will depend largely on the capacity of the

tax authorities to implement the rules and enforce compliance in a business friendly manner.

How well the delicate balance will be achieved, only time will tell.

pwc

IT Act: Sections 30 and 31

2141. Pricing policy comparison

(Published December 2012)

Transfer pricing relies on the application of the arm’s length principle. In broad terms this is

applied by testing the pricing policy used for transactions between associated enterprises

against the pricing policy between unrelated third parties. Where the taxpayer enters into

substantively similar transactions between associated enterprises and unrelated entities, it can

be possible to directly compare the prices applied (provided all the comparability criteria are

met), however this is very rare and the incidence of using this basis of comparability is low.

 

 

In the majority of cases taxpayers are left relying on the use of external databases such as

Bureau Van Dyk’s product, OneSource and the like. These are databases containing financial

and non-financial data of companies which have a regulatory requirement to submit financial

accounts. Once the financial accounts become public, the information can be sourced and

collated onto the database. Coupled with this are broad company descriptions enabling

comparative search criteria to be used in selecting the comparable companies to be used to

support the pricing policy.

Thus it is understandable why a comparison of the actual pricing policy is problematic. The

OECD provides for the most appropriate method to be used to support a pricing policy. The

methods endorsed are:

Comparable Uncontrolled Price method(CUP);

Resale Price (Margin) method (RPM);

Cost Plus method (CPM);

Transactional Net Margin method (TNMM); and

Transactional Profit Split Method (TPSM).

Of the above, only the CUP method seeks to compare the actual price charged. The

remaining methods are generally outcome testing methods in that they seek to compare the

profit achieved as a result of the policy. The two traditional transactional profit methods,

being the CPM and the RPM are often used to set prices in that they apply a profit mark up,

or a profit discount to a cost base or price. The remaining two are pure profit methods, the

TNMM being favoured the world over by Revenue Authorities as it has the most direct

bearing on the tax take.

The problem is that all the above methods are transactional. That is they are applied to a

specific transaction. The comparable data obtained from a database are entity outcome

results. Therein lies the first challenge. Is it correct to compare the outcome of one single

transaction in a business with the overall profit of a company? Perhaps there is an argument

that this can be done at a gross margin level where company data is segmented into business

units, but even then there is some doubt. Certainly at the operating level this is problematic.

A company may have a number of profit drivers all impacting the mix and thus the overall

profit. For instance take the example of automotives, one of Revenue Authorities around the

world’s favourite industries to audit. Typically a motor manufacturer in a group in a certain

jurisdiction will only manufacture one or two types of vehicles. The portfolio for the dealers

is then complemented by fully imported units. Thus the profitability of the company is driven

by a mix of manufactured products as well as imported products that are subsequently

 

 

distributed. The Revenue Authority would look at this as two separate business lines and

judge the profitability of each against independent companies operating as (1) manufacturers

and (2) distributors in the same industry. An independent company, however, is not likely to

operate in this way. It would not have to consider both sides of its business and vehicle mix

as it is only concerned with one part of the business. To compare the net trading profit of the

associated enterprise operating across both businesses with an independent company only

operating in one business is likely to lead to absurd outcomes.

So how is this resolved? The OECD does accept the need for aggregation across business

sectors where this can be commercially supported. But practically how is this achieved in our

scenario above? Should the associated enterprise use a combination of distribution and

manufacturing data? Does the OECD’s view on aggregation actually extend to the

aggregation across functional activities?

The other key problem is that in comparing an associated enterprise’s outcome from a

specific transaction against independent company data does not always account for variances

in risk profiles. For instance, the associated enterprise may operate as a low risk contract

manufacturer for a group company. To compare this against a company which is truly

independent could yield inappropriate results. Contract manufacturers do exist but rarely are

they remunerated in the same way as an associated enterprise contract manufacturer. The

independent will still seek to gain a return on its assets and costs and will be affected by

market influences. A group contract manufacturer is often rewarded on a guaranteed basis

which means it is completely sheltered from external influences. Thus the comparison is

flawed.

There are a number of proposed adjustments which can be used to account for such variances

in risk. Working capital adjustments are common. These seek to adjust for the cost of

carrying inventory risk, debtor risk and creditor risk and require an adjustment to the

comparable data set to match the working capital position of the taxpayer. This typically

results in a reduced profit range in the comparables as a result of eliminating the impact of

these risks.

Other adjustment mechanisms have also been tabled such as regression analysis to adjust an

entity which bears risk to one which does not, and capital asset pricing adjustments to take

into account the impact on profits of market variances between an entity directly affected by

movements in the market and one sheltered from the impact by means of the intra-group

pricing policy.

 

 

All the above provide some improved level of comparability when using the results of an

entity to test the outcome of a specific transaction undertaken between associated enterprises.

The real issue for developing countries, such as countries in Africa seeking to implement

comprehensive transfer pricing, is the lack of comparable financial information of companies

within the region. The above adjustments only make sense when one is at least starting with

comparable data from the same country or geographical region. In some areas we have seen

the use of country risk adjustments to account for these market variances. This approach can

work but as it relies on the CPI and Bond yield rates for countries it is not always applicable

to all industries. It assumes a developing state across the board. Certainly some level of

analysis is required when depending on comparable data from sources outside of the country

in which the taxpayer is situated.

So is a comparable comparable? The discussion above suggests that using database sets to

source comparables is only the very start of the analysis. Where no local comparables exist, it

is necessary to take into account potential market differences. It would then be necessary to

consider whether any further adjustments are required to account for risk variances.

Ernst & Young

IT Act: Section 31

REAL ESTATE INVESTMENT TRUSTS

2142. New regime

(Published December 2012)

A significant proposal of the Taxation Laws Amendment Bill, Bill 34 of 2012 (“TLAB”) is

the introduction of a South African tax dispensation for Real Estate Investment Trusts

(“REITs”), proposed to come into operation on 1 April 2013 and to apply to years of

assessment commencing on or after that date. Such dispensation aims to provide certainty in

respect of the taxation of certain current South African property investment structures.

Common property investment vehicles

As opposed to obtaining rental streams from investing directly in immovable property,

property investors generally obtain investment exposure to immovable property through

property funds with a diversified portfolio of properties for purposes of earning regular

distributions and capital growth.

Ordinarily, property investment vehicles of this nature are internationally referred to as

REITs and may exist in the forms of companies or trusts. International REITs commonly

have the following features:

 

 

- minimum annual distribution requirements which guarantee investors a steady income

stream without depleting the underlying capital;

- the purpose of holding property on a long-term basis in order to derive rental income

and ensure capital growth; and

- investment largely in commercial and industrial property, but also residential

property.

The Property Unit Trust (“PUT”) and Property Loan Stock (“PLS”) structures are currently

the two main types of listed property investment schemes in South Africa. The PUT is

regulated by the Financial Services Board (“FSB”) and has been the traditional stakeholder

for property investment schemes in South Africa. However, recent years have seen a decline

in the popularity of the PUT due to regulatory constraints. The PLS, the newer entrant, is

governed by the provisions of the Companies Act 71 of 2008 and, if listed, is also regulated

by the JSE Limited Listings Requirements (“Listings Requirements”). There are currently

over 20 listed entities operating as a PLS and less than 10 listed entities that operate as a

PUT, which entities are subject to the Listings Requirements. There are many unlisted PLS

companies.

The PUT and PLS structures typically provide a commitment to distribute a majority of their

net rental income to investors. In a PUT, investors acquire participatory units in a portfolio of

investment properties which are held in the form of a trust and are managed by an external

manager. The distribution of rental income from the PUT is tax-neutral in the hands of the

PUT if the rental income flows through to investors during the same tax year in which such

income was earned. PLS companies appear to achieve roughly the same result, but often

without the official sanctioning and restrictions regarding their gearing and payout ratios.

PLS investors acquire a linked unit comprising a debenture linked to a share, with a

“distribution” by the PLS in the form of tax deductible interest which results in the PLS

reducing its taxable income. A PLS may be managed internally or externally, although there

is a clear trend towards internal management.

Generally, a REIT structure is a tax regime that provides “flow through” on a pre-tax basis of

the net property income of a REIT (after expenses and interest to third party funders, such as

banks) to investors. The PUT and PLS therefore operate in the same space as a REIT. The

REIT structure exists in countries like the US, the UK, Australia, Japan and Singapore and is

becoming an international standard as property investment globalises.

Rationale for proposed changes

The PUT and PLS structures are currently subject to uneven regulation as, although both the

PUT and the PLS are subject to the Listings Requirements, only the PUT is subject to FSB

 

 

regulation. Accordingly, the PUT is less flexible in nature in comparison to the PLS and the

PLS lacks tax certainty.

Furthermore, as discussed above, the net effect of the PUT and PLS is that rental income

received or accrued by the vehicle is effectively only taxed in the hands of the investor.

However, although the South African property sector has delivered favourable forward yields

compared to global standards in recent years, neither the PLS or PUT offers international

investors the uniformity and simplicity to facilitate international investment. For this reason

the Property Loan Stock Association (“PLSA”) has spearheaded the establishment of a “best-

of-breed” REIT vehicle to encourage foreign investments into the South African property

sector.

An issue which also came under the scrutiny of the National Treasury is the tax deductibility

of the interest paid by the PLS to its debenture holders. In this regard the Explanatory

Memorandum notes that from a substance-over-form point of view an “excessive level of

interest (along with the profit-like yield)” makes this form of interest questionable in tax

terms and “to accept this practice is to essentially abdicate the question of debt versus

equity.” According to the Explanatory Memorandum the yield in respect of these debentures

should rather be viewed as dividends. The proposed provisions regarding REIT structures

will therefore give rise to greater certainty regarding the tax implications in this regard.

Proposed insertion of section 25BB

In terms of the TLAB a new section 25BB will be introduced to the Income Tax Act No. 58

of 1962 (“the Act”). The section essentially aims to provide certainty to investors in REITs (a

defined term) with respect to the tax position of the REIT and the investor.

The proposed definitions of an “associated property company”, a “property company”, a

“qualifying distribution” and “REIT” should be considered to better understand the workings

of section 25BB.

- An “associated property company” is a company in which 20% or more of the equity

shares or linked units are held by a REIT or a controlled property company (whether

alone or together with other group companies).

- A “controlled property company” is a company that is a subsidiary of a REIT;

- A “qualifying distribution” is defined in section 25BB as any dividend (other than as

respect a buy-back transaction) declared, or interest incurred in respect of a debenture

forming part of a property linked unit during any year of assessment if, broadly

speaking, more than 75% of the gross income received by a REIT, controlled property

 

 

company or an associated property company during the preceding year of assessment

consists of rental income. The 75% test is measured with reference to the current year

(i.e. the year of declaration or incurral) up until date of declaration/incurral in respect

of a new company.

- A “REIT” is defined in the TLAB as a company that is a resident and the shares of

which are listed on an exchange (as defined in the Securities Services Act, 2004) as

shares in a REIT as defined in the Listings Requirements. In this regard it is

understood that the Listings Requirements are currently being amended to create a

category for the listing of REIT securities. The REIT regime will furthermore treat a

PUT as a company and accordingly place a PUT on the same footing as a PLS.

In terms of the proposed section 25BB(2), a REIT or a controlled property company may

claim deductions in respect of “qualifying distributions” (as defined above) – subject to

limitations.

From an investor perspective, regardless of whether the REIT makes qualifying distributions

during a year of assessment, dividends distributed by a REIT to its resident shareholders are

subject to normal tax and exempt from dividends tax. Dividends distributed to foreign

shareholders of a REIT will be subject to dividends tax and this will apply equally in respect

of deemed dividends from dual-linked units (i.e. interest on debentures forming part of a

linked unit). However, in order to allow time for intermediaries such as central securities

depository participants and other parties to adjust their internal systems, this treatment will be

deferred until 1 January 2014. Accordingly, any dividend paid by a REIT or a controlled

property company and received before 1 January 2014, is exempt from dividends tax to the

extent that it does not constitute a dividend in specie.

A significant benefit granted to property funds that qualify as REIT’s is that capital gains or

losses determined in respect of the disposal by a REIT or a controlled property company of

immovable property, a share in a REIT and a share in a controlled property, will not be taken

into account when determining the aggregate capital gain or loss of that company.

Essentially, REIT’s are exempt from capital gains tax meaning that any capital gains made on

the disposal of assets can be fully reinvested in order to generate further returns.

Furthermore, any amount received or accrued during a year of assessment by a REIT or a

controlled property company in respect of a financial instrument (other than a share in a

REIT, a controlled property company or an associated property company) is deemed to not be

of a capital nature and must be included in the income of the REIT or that controlled property

company. In accordance with the Explanatory Memorandum to the TLAB, the purpose of this

 

 

treatment is to deter REITs from holding other forms of investments (e.g. portfolio shares),

giving rise to REITs coming into conflict with the mandate of a collective investment in

securities.

REITs may not claim depreciation allowances in respect of immovable property. Such

prohibition prevents recoupments from arising in respect of the sale of immovable property.

It should be noted that roll-over relief may apply if a property linked unit is converted to

equity shares in a REIT in accordance with the newly proposed “substitutive share-for-share

transactions” in the proposed new section 43 of the Act which is contained in the TLAB.

Considerations going forward

The proposed REIT regime is the result of an ongoing negotiation process between the

National Treasury, the South African Revenue Service, the PLSA, JSE and various lawyers

and tax advisors. One particular proposal by the PLSA was that both listed and unlisted

REITs should be accommodated. The proposed section 25BB does, however, not

accommodate unlisted entities. Accordingly, on the basis of the proposed section 25BB, we

expect that numerous unlisted companies will give serious consideration to listing in the near

future unless proposed REIT legislation for unlisted property companies, incorporating

pension funds and long-term insurance companies is released next year.

On the face of it, the REIT legislation does not seem too complicated. Following a lengthy

consultative process a number of practical and technical issues were ironed out. However, we

suspect that a number of tax issues will arise when the legislation comes into operation and

listed property companies are well advised to consider the detailed implications of the

legislation forthwith in order to identify any specific issues.

Edward Nathan Sonnenbergs

IT Act: Section 25BB

Taxation Laws Amendment Bill, No. 34 of 2012

Companies Act 71 of 2008

PUBLIC BENEFIT ORGANISATIONS

2143. Forms of ownership

(Published December 2012)

In order to register as a Public Benefit Organisation (PBO) with the South African Revenue

Service (SARS), an organisation must comply with a number of provisions, set out in section

30 of the Income Tax Act No 58 of 1962 (the Act). Preferential tax treatment is conferred on

 

 

a non-profit organization which has obtained PBO status and such compliant organisation’s

receipts and accruals are exempt from certain South African taxes.

One of the first administrative requirements to satisfy relates to the manner in which the non-

profit organisation is constituted and in order to qualify as a PBO, a non-profit organisation

must be constituted in one of the following ways: a non-profit company (NPC), a trust, a

voluntary association of persons or as a branch of a foreign charitable organisation which is

exempt from income tax in its country of origin.

In this regard, the vehicle used most often is a NPC. In South Africa, all companies are

regulated in terms of the new Companies Act, 71 of 2008 (the new Companies Act). A

variety of statutes govern the abovementioned vehicles and as a consequence thereof, each

requires adherence to different rules and procedures. With this in mind, it is of the utmost

importance to take note of any legislative changes relevant to the specific vehicle utilised in

incorporating a particular non-profit organisation.

In terms of the previous Companies Act, 61 of 1973, a NPC was known as a section 21

company (association not for gain). The new Companies Act came into operation on 1 May

2011 and on such effective date essentially, all existing section 21 companies were required

to convert to NPCs.

This conversion included the conversion of the company’s founding documents, which in the

case of a section 21 company resulted in the adoption of a Memorandum of Incorporation

(MOI). The MOI wholly replaced the company’s existing Memorandum and Articles of

Association.

In an attempt to alleviate the financial and administrative burden for companies being

required to convert, provision has been made for a “transitional period”. This is a period of

two years from the effective date of 1 May 2011 and during this time all existing companies

are required to amend their MOIs in order to bring same in line with the new Companies Act.

Where a NPC is required to amend its MOI, the company is presented with an ideal

opportunity to update and streamline its founding documents as well as its governance

structures. This is of particular relevance for any qualifying NPCs which are not yet

registered as PBOs.

As mentioned above, various compliance procedures are prescribed in the Income Tax Act,

which are to be adhered to, in order for a non-profit organisation to formally apply to SARS

 

 

for tax exempt status. In this regard, it is important to note that registration as a NPC does not

automatically result in the organisation qualifying for tax exemption.

It is imperative for any NPC, which carries on any one of several public benefit activities

(PBA) (provided for in Part I and Part II of the Ninth Schedule to the Act) and which is not

currently registered by SARS as a PBO, to be adequately informed of the immeasurable

benefits available to such an organisation, in the event of it being able to successfully register

as a PBO.

The benefits do not exclusively relate to exemption from income tax, but in certain instances,

may be extended to donor deductibility. Provided certain additional requirements are

complied with, namely that the NPC conducts any of the specific public benefit activities

listed in Part II of the Ninth Schedule; such a NPC will also qualify for section 18A donor

deductibility status. In other words, where donors donate funds to a PBO having section 18A

approval, the donors will be permitted to deduct the value of their donation from their taxable

income, limited to 10% of the donor’s taxable income. This is a benefit which could

significantly assist a non-profit organisation in attracting donations and funding in general.

In conclusion, it is important for qualifying non-profit organisations to note that both the

conversion of the founding documents as well as the application for PBO status can be a cost

effective and efficient process. The benefits of attaining PBO status are infinite and may

ultimately allow a PBO to significantly expand the reach of its activities and thus provide

greater assistance to its community.

Edward Nathan Sonnenbergs

IT Act: Sections 18A, 30, Ninth Schedule to the Act

Companies Act: Section 30

VALUE-ADDED TAX

2144. Foreign donor funded projects

(Published December 2012)

If foreign funding is received by a South African registered VAT vendor, it may be able to

benefit from a special dispensation for approved "foreign donor funded projects" (FDFP). If a

VAT vendor is registered as a FDFP, it will be allowed to zero rate all its supplies. The

benefit of zero rating is that the VAT vendor is still entitled to claim VAT input tax credits

even though it charges VAT on its supplies at 0%.

 

 

So, what is a FDFP? A FDFP is a development project which is funded by a foreign

government or other International Development Agency under an international agreement

with the South African government. These international agreements are referred to as Official

Development Agreements (ODAs) and normally provide that the funds donated should only

be used for specific, mutually agreed upon programmes and activities, and cannot be utilised

for any taxes imposed under domestic law.

Where the ODA is one which is binding in the Republic in terms of section 231(3) of the

Constitution of the Republic of South Africa, 1996 and also contains a requirement that the

funds may not be used to pay any South African taxes, the recipient of the funding will

qualify as a FDFP and can apply to be registered as such by SARS.

Section 8(5B) of the Value-Added Tax Act, 89 of 1991 (the Act) states that a FDFP which

has been registered as such, is deemed to supply services to the international donor to the

extent of the international donor funding received from the donor. The deeming mechanism

means that when the foreign donor makes payment to the recipient of the funding, the

recipient is deemed to have made a "supply" to the foreign donor, which is subject to VAT at

0% (instead of the standard rate of 14%) in terms of section 11(2)(q) of the Act.

This deeming mechanism, allows the foreign donor to give funds to a FDFP in South Africa

without having to also pay VAT on the amount donated.

However, because the vendor is registered as a FDFP, it can claim from SARS all input tax

paid in respect of supplies made to it i.e. it will be entitled to a refund from SARS as the input

tax will exceed the output tax on its VAT 201 return. Refunds must be paid by SARS within

21 working days of receiving the correctly completed refund return, otherwise interest at the

prescribed rate is payable by SARS to the vendor.

The benefits of zero-rating will only be available if the recipient of the foreign donor funding

is registered as a FDFP. However, a vendor will only be registered as a FDFP in respect of

the services which it supplies and the funds received in respect of the FDFP. In respect of its

other, unrelated activities it will operate in terms of its normal VAT registration.

Bowman Gilfillan

VAT Act: Sections 8(5) and 11(2)(q)

Constitution of the Republic of South Africa, Act 108 of 1996: Section 231(3)

SARS AND NEWS

 

 

2145. Interpretation notes, media releases and other documents

Readers are reminded that the latest developments at SARS can be accessed on their website

http://www.sars.gov.za

Editor: Mr P Nel

Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI

Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees.

The Integritax Newsletter is published as a service to members and associates of The South

African Institute of Chartered Accountants (SAICA) and includes items selected from the

newsletters of firms in public practice and commerce and industry, as well as other

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