Revenue Laws Amendments 2007

Select Committee on Finance

20 November 2007

2

RLAB Process

• Time for Public Comment:– Bill published on website on 11 September 2007– Comments were due on 8 October 2007

• Informal Hearings:– Opening NT/SARS informal PCOF brief on 18 of

September– Taxpayer hearings will occurred the week of the 15th

of October– The NT/SARS made significant changes based on

taxpayer comments

• Tabling:– Scheduled for 30 October 2007

3

Basic STC Proposals: Background

• Rate Reduction:– The proposed amendments decrease the STC rate

from 12,5% to 10% (Section 64B)

– Effective as of 1 October 2007• Conceptual Base Broadening:

– The STC does not apply to all company distributions, only those distributions qualifying as “dividends”

– In order to have dividends, a company must make the distribution out of profits

– Distributions of pure share capital (and share premium) are free from STC

4

Disguised Sales:Contributions/Distributions

• Shareholders are seeking to avoid the tax on the sale of Target Company shares to independent purchasers by entering into two-step transactions

• Step #1: The Contribution Leg:– The purchaser contributes cash to the Target Company in exchange

for newly issued Target Company shares (no tax)

• Step #2: The Distribution Leg:– The Target Company distributes roughly the same amount to the

selling shareholder– No tax results because the parties ensure capital distribution treatment– The selling shareholders somehow forego their rights in the shares

they continue to hold

Target CompanyRoughly same

cash

(Step #2)

Purchaser

Cash

(Step #1)

Seller

5

Capital Distributions: Proposal

• Proposal: – Each capital distribution will be treated as a part-disposal of the

share (triggering immediate gain/loss)– 1 October 2007 Effective date (with a 2011 effective date for

gain on prior distributions)– Also a ceiling is added on the amount of share capital that can

be allocated to a particular class• Example:

– Facts: Taxpayer has shares with a market value of R150 in Company X, and Taxpayer has a base cost of R75 in the shares. Company X makes a R100 capital distribution in respect of the shares.

– Result: The R100 distribution is viewed as a part disposal. The distribution amounts to 2/3rds the total value (100/150), triggering 2/3rds of the share gain. In this case, the total possible gain is R75 with R50 triggered from the part–disposal.

(Section 1; Paragraphs 76 & 76A of the 8th Schedule)

6

Capital vs. Ordinary Shares:Background

• Current law– Ordinary revenue is taxed at higher rates than capital gain– The difference in treatment of proceeds received on disposal is

based on case law focus on intent as to whether the shares are held for sale or investment

– However, a 5-year election allows taxpayers to treat all 5-year listed shares as capital gain (section 9B)

• Problem– Case law is uncertain– Informal practices give certain industries a hidden presumption

in favour of capital

7

Capital vs. Ordinary Shares:General Proposal

• Basic rule:– Automatic capital gain treatment for shares held for

at least 3 years– Effective date: shares sold on or after 1 October

2007– Old 5-year of election (section 9B) no longer applies

• Shares covered: – Listed shares (all domestic and foreign shares on the

JSE)– Unlisted shares (domestic only)– Member’s interests in close corporations – Units in collective investment schemes

(Section 9C)

8

Intellectual Property Arbitrage: Nature of the Problem

• Taxpayer holds intellectual property in SA.• Taxpayer transfers the property to another

party (usually associated with Taxpayer) located within a low (or no) tax jurisdiction

• Little or no tax arises out of this transfer.• Taxpayer then pays the other party royalties for

the right to use the intellectual property• The royalties paid by Taxpayer are deductible

but the receipts are subject to low (or no) tax.• The royalty receipts are then returned tax-free

to Taxpayer (usually as dividends)

9

Intellectual Property Arbitrage: Proposal

• General Rule: The payor cannot take any deductions when paying for the use of intellectual property if that property—– Was previously owned by a resident; or – Was developed by payor or any closely related (i.e. connected)

person.

• Limit: The deduction is denied only to the extent the recipient of the payment is not subject to SA taxes (after taking tax treaties into account)

• Arm’s Length Standard:– The threshold to apply the arm’s length standard is reduced to

a 20% connected person threshold(Section 23I)

10

Rolling Stock Depreciation

• Current Law:– Rolling stock (trains and carriages) are only entitled to a tax

depreciation write-off over 14-15 years• Problem:

– Depreciation write-offs exist for transport such as trucks, aircraft and ships but not for rolling stock (except in limited mining situations)

– South Africa’s transportation infrastructure is key to South Africa’s economic growth (due to the cost productivity impact)

• Proposal:– Rolling stock (and improvements) will receive a tax write-off

over 5 years at a straight-line rate (i.e., 20% per annum)– The rolling stock (and improvements) must be new or unused– Note: Railways are currently depreciable at 5% per annum

over 20 years. The proposal extends this regime to railway refurbishments

(Section 12DA)

11

Port Infrastructure Depreciation• Current Law

– Port infrastructure is not entitled to any tax depreciation

• Problem– Aircraft receive a 20% per annum tax write off, and

airport infrastructure receives a 5% per annum tax write off

– Ships receive a 20% per annum tax write off, but port infrastructure receives no tax write offs

• Proposal– Port infrastructure (new and unused) will be eligible

for a 5% per annum write off (Section 12F)

12

Commercial Building Depreciation

• Current Law– Commercial buildings (e.g. retail, restaurants,

financial) are not entitled to any tax depreciation• Problem

– Depreciation relief exists for manufacturing, mining, hotels and certain residential buildings

– No reason exists to exclude commercial buildings• Proposal:

– Commercial buildings (new and unused) as well as improvements will be eligible for a 5% per annum write off

– This rate is roughly comparable to the rate for other buildings

(Section 13quin)

13

Depreciation of Environmental Manufacturing Assets

• Current Law:– Unlike manufacturing plant or machinery, environmental

manufacturing fixed assets are sometimes eligible for 40:20:20:20 depreciation only by happenstance

• Problem– Environmental manufacturing fixed assets should be given the

same status as other manufacturing fixed assets– Unfortunately, these assets are often not viewed technically as

part of the plant or directly part of the process of manufacture

• Basic Proposal– Environmental treatment and recycling manufacturing fixed

assets will be eligible for the 40:20:20:20 rate or a 5% per annum rate (waste disposal assets will receive 5% per annum)

– All of these assets must be new and unused– Improvements receive similar coverage

14

Co-operative Banks: Taxation

• Current treatment:– Co-operative banks are taxed at the corporate flat rate of 29% without

relief– They possibly cannot access the small business relief because:

• Of their high investment income percentage (i.e. the bulk of their income stems from interest); and/or

• Their members may own interests in other companies or co-ops• Proposal:

– Co-operative Banks will be eligible for small business relief (i.e. their first R43 000 of income will be exempt and up to R300 000 will be taxable at a 10% rate)

– Their large interest earnings will not prevent small business relief (because interest is an active form of income to a co-operative bank)

– Members may have limited cross-shareholdings(Section 12E)

15

Amalgamation of Sporting Bodies: Proposal

• Problem:– The same sports body cannot claim a tax deduction for the

development and promotion of amateur sport that will serve as its feeder for future fans and professional players

• Proposal– The professional and amateur sports arms can be recombined

tax-free (like any other amalgamation)– The unified body will be taxable, but the proposal creates a

special deduction to make it clear that the unified body may deduct from its income:

• Expenditure on the development and promotion of qualifying amateur sport

• in respect of amateur sport under the same code of sport as its professional sport

– Payments to other entities do not qualify for the special deduction

(Section 11E)

16

Exemption of “Top-Up” Occupational Death Benefits

• Current Law:– “Compensation for Occupational Injury and Death Act”

(COIDA) payments are tax-exempt – However, additional “top-up” benefits based on the same event

are taxable• Problem:

– Taxation of the “top-up” benefits is seemingly unfair because the families receiving these benefits are never made whole (not even in terms of future salary streams)

• Proposal:– Up to R300 000 of “top-up” benefits will be exempt –

• if the benefit is due to occupational death and paid the employer; and

- If the benefit is over and above COIDA (Section 10(1)(gB))

17

Company Reorganisations:Repeal of Financial Instrument Limits

• Current Law:– Prohibits reorganisations that mainly rely on financial

instruments or financial instrument companies– This prohibition ensures only active companies are given relief

• Problem:– Taxpayers view compliance with this prohibition as overly

burdensome– The prohibition serves little benefit in deterring tax avoidance

• Proposal:– Repeal all financial instrument limits from all domestic

reorganisation provisions (Part III)– Retain for foreign-related tax rules– Share-for-share relief merged into company formation relief as

a simplifying measure(Sections 41 - 47)

18

Company Reorganisations:Intra-Group Definition

• Current Law:– All (section 1) companies can be part of a group– 70% of shares must be group held– Group relief allows for greater freedom from tax when moving

assets or funds among group members• Problem:

– Not all companies are subject to a 29% rate on all worldwide income

– Some shares in the group are not held for long-term investment• Proposal:

– Only domestic companies and corporations fully subject to tax are part of a group

– Trading stock shares (or shares subject to certain rights of acquisition by outsiders) don’t count towards 70% ownership

– 1 January 2009 effective date(Section 45)

19

Company Reorganisations:De-Grouping Charge

• Current Law:– The de-grouping charge applies if:

• Group company members previously received the benefit of intra-group rollover relief when transferring assets to one another; and

• One of the company members later leaves the group

• Problem:– The de-grouping charge has no time limit

• Proposal:– The de-grouping charge will apply only if the de-

grouping occurs within 6-years of the intra-group rollover (similar to the U.K. rule)

– 1 January 2009 effective date(Section 45(4))

20

Overview of Securities Tax Merger

• The Uncertificated Securities Tax (“UST”) Act caters for listed securities, and the Stamp Duties Act caters for unlisted securities (and leases).

• The dual application of these Acts creates unintended distortions

• It is proposed that the two Acts be merged insofar as marketable securities are concerned into a new tax called the Securities Transfer Tax (“STT”)– The rates and tax base will be essentially the same– Some definitional issues will be clarified– Some exemptions will be modernised for existing practice

• The UST acts as the starting point for the new regime

21

Definition of “Security”

• The security definition essentially acts as the base for the new STT• The securities definition will cover:

– all shares in a company (not just equity share capital), – all members’ interests in a close corporation and – depository receipts

• Other items included in the STT net:– Partial rights in shares (to the extent those rights represent a right to

receive operating or liquidating distributiuons);– A cession of dividend rights (as opposed to manufactured dividends);– Only the share portion (i.e. the non-debt portion) of linked units; and

• Exclusions from STT net:– Interests in collective investment schemes in the form of unit trusts (a

unit trust interest is not a share); and– The right to vote (separate taxation is not readily quantifiable)

(Section 1 (“Securities” Definition))

22

Imposition of STT

• The new STT applies to listed and unlisted securities

• In terms of listed securities, the charge applies to:– All South African companies listed on any exchange;

and– Foreign companies listed on an exchange in the

Republic (i.e. JSE)

• In terms of unlisted securities, the charge applies to all South African companies

(Section 2)

23

Exemptions

• Most of the exemptions will be roughly the same as those already contained in the UST (or within the Stamp Duty)

• However, two wholly new exemptions have been added to the STT:– Acquisition by a spouse in community of property

and– Acquisition by surviving or divorced spouse– These exemptions are in line with the Transfer Duty

Act exemptions

(Section 8)

24

Definitions of Customs and Excise Duties

• Customs duties/import duties are imposed on the import of some goods

• The main objective of import duties is to protect local industries• Excise duties are imposed on both domestic produced goods and

imported goods. • Some of the main objectives of excise duties are:

– To raise revenue for the fiscus; and– To internalise negative externalities and to influence behaviour (e.g.

discourage smoking)• The current definition of customs duties includes excise duties on

imported goods, but the definition of excise duties is restricted to locally manufactured goods. The proposal clarifies that excise duties are also imposed on imported goods

• The proposal enhances the revenue estimation process

(Section 1)

25

Improved Control Over Counterfeit Goods

• Current Law:– Section 15 of the Counterfeit Goods Act empowers Customs officials

to seize and detain counterfeit goods entering the Republic– Section 113A of the Customs and Excise Act currently supplements

these powers• Problem:

– A need exists to provide legal certainty and address confusion relating to conflicting provisions in the Counterfeit Goods and Customs and Excise Acts

• Proposal:– It is proposed that section 113A be deleted and a new Chapter XB be

inserted to provide for the following:• SARS will now act as a filter for all possible counterfeit goods only while

goods are under Customs control• All provisions relating to the exercise of any power relating to counterfeit

goods by Customs officers will be contained in the Customs and Excise Act in order to provide certainty regarding which legislation governs the actions of a Customs officer in connection with counterfeit goods

26

Transfer Pricing

• Current Law:– An international agreement must be entered into between a

resident and a non-resident (or similarly for resident and non-resident branches) for the transfer pricing rules to apply

• Problem:– The question arises as to what happens if both parties are

resident or non-resident when the agreement is entered into but one later changes residence status

• Proposal:– In order to ensure that the transfer rules apply in this case, the

concept of an international agreement is done away with and the focus is instead placed on the cross-border supply of goods or services

(Section 31)

27

Employment Abroad

• Current Law:– Employees working abroad for more than 183 days in 12 months (at

least 60 days continuously) are exempt on their foreign remuneration• Problem:

– The exemption does not apply if the remuneration accrues after the person has returned to the Republic (e.g. a bonus)

• Proposal:– Remuneration earned during any 12 month period where the 183 day

and 60 day test are met will qualify for the exemption irrespective of when it accrues

– Remuneration must accrue in respect of services rendered outside the Republic (e.g. remuneration accruing for loss of office (para (d) of the definition of “gross income”) does not qualify)

– In order to cater for remuneration that accrues over periods longer than 12 months (e.g. share options), it is proposed that the remuneration be deemed to accrue evenly over the period that the services are rendered

(Section 10(1)(o))

28

Accommodation andExpatriate Employees

• Current Law:– Expatriate employees, who are not “ordinarily resident” in South Africa,

are only taxed on their South African source income until they have met the physical presence test over a five year period

– As a general principle, fringe benefits, including accommodation, provided to expatriate employees are taxable with the exception for short-term stays away from home

• Problem:– SARS’s position that a short-term stay for a non-resident could not

exceed one year is overturned by Tax Court in 2006– However Waglay J noted that; “I acknowledge that there may be a

need to restrict the period of time for when the benefit applies but this cannot be randomly determined by the respondent. I would suggest that this may require Legislative intervention.”

• Proposal:– The proposed allows for a housing exemption up to 1-year

(Paragraph 9 of the 7th Schedule)

29

Dried Maize

• Current Law: – The local supply of dried maize for human

consumption is zero-rated

• Problem:– The VAT treatment is dependent on how the dried

maize will ultimately be consumed, but suppliers lack this information

• Proposal:– To zero rate the supply of all dried maize locally

(regardless of end consumption)

(Schedules 1 & 2)

30

ICC Twenty 20

• Current Law:– The PBO hosting the ICC Twenty 20 World Championship is

subject to VAT on amounts received for staging the event

• Proposal:– A special zero-rating is proposed for the consideration paid by

the International Cricket Council to the PBO staging the ICC’s 2007 Twenty 20 World Championship

– Consideration from other sources for the staging of the Championship will be subject to VAT at the standard rate (e.g. ticket sales, parking and hospitality)

– [Probable application of the concession will be for the period from 1 November 2006 to 31 December 2007; to be added]

(Clause 139)