Today, 23 February 2022, South African Finance Minister Enoch Godongwana delivered his inaugural Budget Speech. Due to a growth in tax-revenue, largely thanks to strong commodity prices, the Minister announced several tax relief measures to assist in the country’s economic recovery.
Decrease in tax rates
- A decrease in the corporate income tax rate (from 28% to 27%), which was announced in the 2021 Budget, will apply to companies with years of assessment ending on or after 31 March 2023.
- While personal income tax rates have been increased, the increase is below inflation and may provide limited tax relief for individuals. Rebates for natural persons have also been increased.
- There is no annual increase in the fuel levy or the Road Accident Fund levy.
Broadening the tax base whilst reducing the corporate tax rate
The measures announced in the 2021 Budget, intended to broaden the tax base, will come into effect at the same time as the corporate tax rate reduction on 31 March 2023:
- Limiting the deduction of interest to 30% of tax EBITDA – The current interest limitation rules will adjust to a fixed-ratio limitation (of 30% of tax EBITDA) applicable to a broader range of related party debt.
- Limiting the use of assessed losses – Assessed losses carried forward are limited to set off against 80% of taxable income. The effect of this is that a company will be taxed on 20% of its taxable income.
Tax incentives
- To encourage employment, the employment tax incentive will be increased by 50% from the current maximum monthly value of ZAR 1 000 to ZAR 1 500. However, in light of the abuse of employment tax incentives, legislation will be amended to provide for the imposition of understatement penalties on reimbursements that are improperly claimed.
- Expiring tax incentives that have not widened social economic benefits will not be renewed, including incentives for airport and port assets, films and the sale of low-cost residential units.
- The research and development incentive will be extended in its current form until 31 December 2023. A workshop will be held in 2022 to consider revisions to the incentive.
Tax collection
The drive to broaden the tax base through the rebuilding of SARS (which has over the past year appointed 490 new staff members) and increasing tax collection will continue. Initiatives include:
- The provisional tax system will be revised.
- High net worth individuals (HNWI) should expect to be under the spotlight, with a dedicated new unit focusing on HNWIs, and increased disclosure requirements for provisional taxpayers with assets above ZAR 50 million.
2021 tax proposals that have been deferred
Following public comment, the following tax proposals contained in the 2021 Taxation Laws Amendment Bill have been deferred for further consultation:
- An amendment to the definition of contributed tax capital, which would have severely impacted specific share buybacks and preference share redemptions.
- Amendments to the tax treatment of shares and bonds used as collateral.
Other key business tax proposals
- Collective investment scheme: The capital or revenue nature of receipts and accruals of collective investment schemes has been a contentious point for a number of years. In 2018 there was a proposal to amend section 25BA of the Income Tax Act. The proposed amendments raised serious concerns from the industry which culminated in their withdrawal. In the 2019 Budget Speech the Minister made reference to a study that was to be undertaken in the 2019 legislative cycle. Today’s announcement is probably the outcome of the study. A discussion document dealing with the tax treatment of collective investment schemes will be published.
- Taxation of lay-by arrangements: Lay-by arrangements shorter than 12 months will be brought into the debtor’s allowance provisions in the Income Tax Act.
- Recoupments triggered by the forgiveness of debt: The forgiveness of debt used to fund assets that have been scrapped or disposed at a loss will trigger a recoupment for the debtor.
- Corporate tax rollover relief: There will be more instances in which the tax cost of loans or preference shares (given as consideration for the acquisition of assets intra-group in terms of tax rollover relief) will be restored.
- Insurers: Changes to section 29A of the Income Tax Act are proposed to align with new accounting standards.
Cross-border transactions
- Various changes have been proposed to the controlled foreign company legislation.
- Treasury intends to make an adjustment to the foreign dividend definition to cater to a nuance in the collective investment scheme industry whereby a redemption may take the form of a disposal to the management company as opposed to a buyback.
Taxing the digital economy
National Treasury is adopting a wait-and-see approach to the new OECD/G20 Inclusive Framework solution to taxing the digital economy (referred to as Pillar 1 and 2).
Once these proposals are finalised, measures may be enacted into South African law, to the extent they work for the economy. National Treasury has previously expressed concern about the fact that these laws may favour developed countries and may therefore not be suitable for South Africa.
The tax treatment of mining companies
The 2022 Budget Speech includes proposed amendments to the tax treatment of mining companies, in particular:
- restrictions on the utilisation of assessed losses on the redemption of mining capital expenditure;
- interest limitation provisions and taxing of non-producing mines; and
- diesel refunds.
Click here for more detail.
Exchange control
The exchange control announcements are extremely disappointing. The Minister of Finance announced sweeping reforms to the exchange control system in 2020, whereby a new modernised system of exchange controls would be introduced. Under this new regime everything would be permitted unless expressly prohibited. There was promise of a new dawn with extremely limited rules, thereby making our country far more investor friendly.
It is now two years later. The so called ‘modernised system’ is nowhere to be seen and the announcements suggest nothing more than certain relaxations of current rules that do very little to promote foreign investment. Click here for more detail.
Individuals and employees
- A number of the proposed amendments or clarifications relate to retirement funds. On a positive note, it seems that National Treasury will not attempt to revive last year’s proposal to trigger a deemed disposal for emigrants who remain members of their South African retirement funds, but that the relevant double tax agreements will be renegotiated.
- The proposed amendments to enable pre-retirement access to retirement funds while preserving the balance until retirement (the ‘two-pot retirement system’) are also still in the pipeline and legislative amendments are due to follow after public workshops have been held.
- Medical scheme credits have not only been retained (despite earlier speculation that they may be scrapped) but have been increased in line with inflation.
- A discussion document regarding the personal income tax regime for remote working will be published in 2022.
- Section 7B will be amended to ensure that performance-based variable payments can benefit from the deferral provided for in section 7B.
- The ‘exit tax’ rules will be amended to prevent emigrants from doubling-up on the interest exemption and capital gains tax annual exclusion when they cease to be tax resident.
- The current exemption in respect of foreign retirement benefits will be reviewed.
Indirect taxes
The key tax proposals in the indirect tax space are:
- The regulations for VAT on electronic services will be updated in line with international trends.
- As a means of tax relief, there is no fuel levy increase (except a carbon fuel levy increase of 1 cent per litre). Government is also reviewing all aspects of the fuel price.
- Annual excise increases (generally 4.5% to 6.5%) are anticipated.
- The alcohol and tobacco excise duty policy framework review papers will be released shortly.
- A new ‘advance tax ruling’ system will be implemented for customs and excise.
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Read the original publication at Bowmans.