Standing Committee on Finance

Submission on the

Draft Taxation Laws Amendment Bills, 2010

June 1, 2010

JAMES AITCHISON

Page 2 of 6June 1, 2010

1. Employee share schemes

2. Limitation of interest deduction

3. International aspectsRestriction of cross border interest exemptionThin capitalisation of branches

4. Other Retrospective change to dividend definitionAbility to offset foreign losses

Contents

Page 3 of 6June 1, 2010

Proposed Taxation of Dividends

Scope – should only be to “restricted equity shares”

Only equitable to give company a deduction (also for distributions taxed by reason of s8C(1A))

General anti-avoidance provisions require SARS to apply consistency across parties

Vast majority of share schemes are not avoidance driven so should not be treated less favourably than avoidance transactions

STC relief per explanatory memorandum, not present in Bill

Should be subject to PAYE to avoid nasty surprise for smaller taxpayers later (also for s8C(1A))

PAYE calculation currently includes gains under s8C – should also include losses

Double tax not addressed where employee share trust used

Issue remains avoidance provisions are drafted too widely

Employee Share Schemes

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Unduly broad scope

Understood to be targeted at avoidance by sophisticated taxpayers

Applies to all taxpayers

Likely only sophisticated players such as the “modern financial institutions” referred to in the explanatory memorandum that can escape the effect with their tracing ability

Unduly harsh basis, even in the example used in the explanatory memorandum

Total income of R15m, R10m of taxable interest and R5m of exempt dividends

Expenses of R6m

Denial of deduction of R5m (equal to exempt income) and not R2m (R6m x 5/15)

Suggests that exempt income is not profitable whereas taxable income is very profitable – not commercially valid

No provision made for extraordinary events such as unbundlings / reorganisations

Issue with escape clause requiring income generating asset to be funded “solely” from non-deductible sources

“solely” is too restrictive

Assets acquired many years ago and requirement to keep records has passed

Lack of clarity as to interaction with purpose test

Limitation of interest deduction

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Restriction of cross border interest exemption

Question as to wisdom in current global environment

Multinationals with investments in South Africa

Impact on South Africa as competitive destintation

Foreign banks lending to South African corporates

Subject to SARB approval

Gross up clauses and early redemption clauses

Ability to pay / refinance in existing market

Would appear to be at odds to introduction of favourable headquarters company regime

No removal of s10(1)(h)

Thin capitalisation of branches

Lack of “connected” or similar requirement (again provision cast too widely)

Has cognisance been taken of double taxation treaty provisions?

International aspects

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Retrospective change to dividend definition

Conversion of exempt dividend (with company paying STC) to taxable proceeds (revenue or capital)

Intended to be taxpayer friendly and avoid double tax in the case of open market purchases where buyer and seller are not aware of other’s identity

Need to carve out transactions where parties are known to each other

Retrospective effect (start of years of assessment ending on or after 1 January 2010)

Ability to offset foreign losses

South Africa taxes worldwide income

Ability to offset foreign trading losses limited to other foreign trading profits

Not able to offset against either foreign investment income or foreign capital gains

When limitation introduced was done so on basis of insufficient information held by SARS

10 years ago, so SARS must surely have the information

The avoidance referred to then can be specifically targeted not by such a broad denial

Other