By Ahmed Jooma (Independent Tax, Legal, and Public Policy Consultant)
On February 21, 2018, South Africa’s Finance Minister, Malusi Gigaba, presented the country’s National Budget, which will be tougher on the populace than on multinational corporations. Most of the tax changes that will affect cross-border transactions are of a technical nature. A continued focus on base erosion and profit shifting is expected to assist in arresting the deteriorating fiscal environment. This is further exacerbated by pressure to maintain a relatively low corporate tax rate in the face of tax competition.
International tax measures
In 2017, the rules relating to foreign-controlled companies were extended to foreign companies held through trusts or foundations. Rules were formulated to classify the discretionary distributions of foreign trusts and foundations as taxable income of the South African resident beneficiary. The proposals were withdrawn as a result of complexity. These rules are to be looked at again.
Next, the definition of “dividend” for the entire income tax legislation has an anomalous treatment of “dividend” in the transfer pricing provision of the same legislation. It is proposed to resolve this by treating a dividend for the transfer pricing provision as a dividend in specie unless it is a dividend for the definition of general application in the legislation.
Currently, it is unclear as to who bears the withholding obligation where interest is paid to a non-resident beneficiary of a trust after vesting. Trust income rules do not deem the beneficiary to have received interest if the beneficiary is non-resident. This is to be corrected.
Finally, the short term insurance taxation provisions apply to South African resident insurers only. Foreign reinsuers operating through branches instead of subsidiaries are prejudiced. The taxation provisions are to be extended to apply to foreign branches.
Tax base preservation measures
Aside from a focus on enforcement, specific technical measures are under review. The Government will review whether a reduction in the controlled foreign company tax exemption is warranted in the face of reducing corporate tax rates of key trading partners. The Government will soon publish a discussion document containing a review of the tax treatment of excessive debt financing.
Reducing fiscal constraint
The level of borrowing is approaching the red line 60 percent of GDP for emerging economies. Since 2008, the debt to GDP ratio increased from 26 percent to the current 53.3 percent. Fiscal consolidation, within the current constrained fiscal space, is torn between the convergence of structural impediments to the South African economy, and the inability of the Zuma era in providing leadership in structurally reforming the economy onto a sustainable growth path. Instead, the era will be remembered for its accelerated kleptocracy and corporate governance deterioration.
The deficit of over ZAR50.8bn, therefore, is budgeted to be filled by raising ZAR36bn in revenue, ZAR22.9bn of which will come from the one percent point increase in the value added tax (VAT) rate. A further ZAR6.8bn will arise from the lower than inflation increase in the lower tax brackets, and a freeze on any increase for inflation in the top four personal income tax brackets.
The key to reducing the fiscal constraint is economic growth, elimination of ‘fruitless and wasteful’ expenditure, and maximization of the leverage provided by the international exchange of information and cooperation between revenue authorities to ensure tax compliance.
The author is an independent tax, legal, and public policy consultant. He previously was head of the financial services sector at the South African Revenue Service, a Chief Director at the South African Treasury’s Tax and Financial Sector Policy Division, a senior manager at KPMG Tax Services, and Head of WTS South Africa.