Taxation Laws Amendment Bill 2014 - Commentary
August 2014
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Individual and savings
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Employer-provided residential accommodation
► We welcome the proposed amendment
► However, there is an issue with apportionment where two or more employees jointly inhabit employer-provided accommodation (i.e. how do joint employee-tenants split the rental value?).
► This issue applies to many taxpayers and needs to be addressed.
► Division of the rent can be the default method.
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Cross-border retirement saving► Contributions made to an approved “pension fund”
and “provident fund” will be taxed in the hands of the employee and deductible by the employer
► It is unclear whether contributions to a foreign fund will receive the same treatment
► With overall retirement tax reform now in effect, the taxation of cross-border pension issues need to be reconsidered
► Given the complexity of the issues involved, it is proposed that the review take place over two years (Note: A review has been announced but no action has yet taken place.)
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Tax-free savings accounts► The legislation covers property unit trusts but not real
estate investment funds
► It should further be noted that real estate investment trusts are now the dominant form of listed property investment with property unit trusts being phased-out
► In addition, the features of the legislative structure are seemingly best designed for bank accounts and government retail savings bonds.
► If the main policy goal is to encourage low-income savings as opposed to high-income savings – ► easier to have a generic annual passive savings exemption for
all categories of savings income; and ► exemption could be phased out for wealthier individuals if
vertical equity is a consideration
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Business
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Third-party backed shares – Issue one► We welcome the proposed relief for third-party
backed shares in respect of limited share and loan pledges / guarantees
► Relief should apply to third-party backed shares issued for all permissible “qualifying purposes” – not just for the initial acquisition of equity shares in an operating company
► This broader view would be more consistent with section 8EA as a whole
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Third-party backed shares – Issue two► Many historic third-party backed arrangements are
now by section 8EA due to impermissible guarantees (having been entered into before section 8EA was enacted)
► Funders are often willing to permanently waive these
impermissible guarantees in order to eliminate the impact of ordinary revenue under section 8EA
► However, this unilateral waiver is most likely a GAAR violation even if the waiver is permanent because the waiver will be performed solely for tax reasons
► It is requested that a special legislative or interpretative exemption from GAAR be made to allow for the permanent waiver of third-party rights and obligations
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Limited interest deductions for section 47/47 reorganisation and section 24O acquisition transactions
► We welcome the proposed changes to section 23N, especially the removal of the 10 per cent floor
► However, we are concerned about riskier target company operations mainly funded by the IDC, the DBSA and the DFIs. The debt levels in these circumstances tend to be higher than the general 3:1/4:1 of EBITDA ratio and lack aggressive managerial tax motives. Solutions;► Allow for an increased level of debt if the IDC, the
DBSA and DFIs represent more than 50 per cent of the funding for the acquisition; or
► Section 23N should at least be softer in impact so that section 23N no longer eliminates the excess interest deduction but merely operates as a deferral mechanism like section 23M (as in section 23M(4)).
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Interest limitation in respect of interest paid to exempt persons (section 23M) – Issue One
SA Parent Co.
SA Subsidiary
50%
50%
Unrelated Foreign Creditors
50%
100% of specialdividend paid to
Assmang
100% 100%
Loan to SA Parent Co.
SA Parent Co.
SA Subsidiary
50%
50%
Unrelated Foreign Creditors
50%
100% of specialdividend paid to
Assmang
Loan to SA Subsidiary Co.
Guarantee on loan to SA subsidiary
The rules relating to guarantees by controlling persons are creating a variety of anomalies
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Interest limitation in respect of interest paid to exempt persons (section 23M) – Issue two► Matter not raised in Bill but the connected person threshold for triggering
section 23M is far too low
► In the initial Bill, the threshold was 70 per cent and concerns were raised in the 2013 hearings that the 70 per cent threshold was too low because the test failed to take into account the use of debt to minimise the cost of net equity in the case of Black Economic Empowerment shareholdings (i.e. typically involving 26 per cent).
► The proposed testing threshold is too low (often 20%)
► This threshold is having unintended impact on unlisted property groups and infrastructure (at least restore the initial group connection)
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REIT unbundling
► We do not support the removal of a tax-free unbundling in the case of REITs and its controlled subsidiaries
► The issue was not announced in the Budget Review and cannot be viewed as a technical correction.
► REIT unbundling has the same policy purpose as any other unbundling
► We propose that this form of unbundling should not be treated as a “qualifying (i.e. deductible) distribution” under section 25BB. Otherwise, a deduction results on the one end and potentially exempt receipts and accruals occur on the other
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Insurance – Definition of risk policies
► The definition of risk policy is too broad and outside the stated objective (i.e. the purpose of moving these policies to the company shareholder fund is because profit of risk (e.g. death and disability) policies goes to the shareholders)
► However, the definition seemingly includes all of the various forms of “smooth bonus” and other complex investment plans (the profit of these policies often go to the policyholders)
► These pure investment products were the core reason for the four fund policy system and should accordingly remain within the policyholder funds unless a decision is made to abandon the four fund system altogether.
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Business Incentives
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Further adjustments to the R&D incentive ► The amendments offered are supported (including the associated regulations)
► The main issue is the slowness and unwieldiness of the application process -
multi-department approval process (the DS&T, National Treasury and SARS)
► The DST should be given a budget to run with the programme fully
► The tax expenditure can be better controlled like an indirect grant with the DST being in full control (SARS can remain for legal issues)
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Industrial policy projects (proposed proviso to the section 12I “manufacturing asset” definition”)
Project is undertaken by tenant on land owned by landlord
Manufacturing building (section 13)
Manufacturing plant (section 12C)
Manufacturing machinery (section 12C)
Eligible for the section 12I additional allowance
Eligible for the basic allowance if the various spheres of government lease the land (and for certain government sponsored projects)
Not available for privately leased land
The plant is not eligible for additional and basic deductions
The machinery is always eligible for additional and basic deductions
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Public private partnerships – Improvements► The need for a new section in regards to leased
improvements or buildings pursuant to a lessor obligation is unclear.
► Rather than create confusion with the creation of
yet another section in this area, the current rules of section 11(g) should be adjusted to cover “obligatory” improvements involving government/PPPs
► If double dipping is a concern, the anti-double dipping rules of section 12P should be used
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Small business funding entities
Issue 1 – Use of “All” as Entry Criteria►In order to obtain this relief, the funding by the entity must be “widely accessible to all small, medium and micro-sized enterprises”
►Many funding entities would seemingly fail the incentive scheme because most grants have some form of eligibility criteria (e.g. turnover limits, size limits, sector and location restrictions)
Issue 2 – Exclusion of passive income►In addition, the relief for passive income (as well as capital gains) is noticeably absent. The rules also limit recurring fundraising so an internal need exists to grow funds via reinvestment.
►Why is this is case when this is the core of PBO relief? These funding groups do not have business activities to compete. All activities are for funding and/or training.
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Small business relief
► The stated relief is actually a tax increase for anyone using the current 10 per cent rule in a meaningful way
► The R15 000 amount is also too small for any viable small business - the direct and indirect costs of tax administration are far higher
► If a credit system is to be employed to reimburse tax administrative costs, other small business types (e.g. services) should fall within the new regime because these other small business face the same tax administrative costs
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International tax
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Transfer pricing
► The proposed correlative adjustment from “loan” treatment to “dividend” treatment is largely welcome
► However, because the adjustment takes effect from 1 January 2015, it is unclear how interim adjustments will be treated going forward that stem from the pre-1 January 2015 period
► In addition, while deemed dividend treatment is generally correct for a correlative adjustment, this result is incorrect if the under-pricing benefits a foreign subsidiary? In this case, the deemed downward transfer from a South African company to a foreign subsidiary is more akin to a tax-free contribution
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Value Added Tax
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Imported e-commerce – Issue One
► Under the e-commerce test as revised, another trigger may be delivery at an address within South Africa
► However, it is highly unlikely that any recipient of these services would receive a tax invoice delivered at an address in South Africa
► They would more likely receive these invoices via email with an email address as the address on the invoice
► Does government specifically require a physical letter or does government envision that tax invoices emailed to an email address which is accessed in South Africa also be included?
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Imported e-commerce – Issue two
►As a result of the 2013 amendments (and initial regulations), electronic services should register if either (i) the recipient is a South African resident, or (ii) where any payment for those services originate from a South African bank account.
►Under the revised test, a new trigger is added as stated above – (iii) delivery at a South African address. However, two out of the three tests must be satisfied, meaning that new parties will be required to registered but others may fall away.
►Question. If companies already registered a few months ago because of the initial e-commerce rules, must these same companies now deregister for VAT because if they no long fall under the e-commerce rules under the new “two or three” test?
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Deletion of the zero rating for agricultural products
► The wholesale deletion of the zero rating for agriculture products on the grounds of avoidance cannot be justified
► If a specific avoidance is a stated concern, a narrow anti-avoidance rule should suffice
► Farmers will also be losing the 4-monthly Category D so as to further add to their burdens
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Closing
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Legislative Process
► In 2013, several important last minute amendments were made after the hearings. Taxpayers did not have a chance to comment even though these amendments had a noticeably harsher impact on taxpayers. For example:
► The section 23M amendment was initially a higher threshold (as discussed above)
► Section 43 originally allowed for shares swaps of all companies and section 43 was mainly limited to dual-linked shares
► What happened to the widespread relief for tenant improvements on private landlord land under the proposed changes to section 12N?
► These items were also not included in the response document
► Rules of openness require that these types of changes should not occur without a fair hearing
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Thank you
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