South Africa: Tax measures included in budget 2020-2021
South Africa: Tax measures included in budget 2020-2021
The national budget for 2020-2021 was presented on 26 February 2020. Other than the usual increases in “sin taxes,” no increases were proposed for 2020. Certain tax relief would be granted for individual taxpayers, and there are “far-reaching” proposals to broaden the corporate tax base.
In line with international trends, South Africa’s government plans to reduce the corporate income tax rate over the medium term. This is intended to encourage investment, reduce the appeal of base erosion and profit shifting initiatives, and bolster South Africa’s competitiveness in trade relations. Also, the measures to broaden the tax base would limit exemptions, deductions, and incentives.
The budget includes the following measures affecting corporations:
Assessed losses: A far-reaching change would restrict the offset of assessed losses carried forward. From 1 January 2021, the offset of an assessed loss brought forward would be limited to 80% of taxable income. On face value, the implication would be that taxpayers would be subject to tax on a minimum of 20% of their taxable income calculated for that year, regardless of the quantum of any assessed loss brought forward. While not clearly stated, it is assumed that the balance of any unused assessed loss would remain available to be carried forward to the next year, subject to the same restriction in that next year.
Incentives: In line with the stated aim to reduce incentives, the sunset clauses of a number of incentives, including the one relating to special economic zones (SEZs) would be reviewed or introduced. Furthermore, no new SEZs will be announced.
- The effectiveness of the venture capital company tax incentive regime would be reviewed and could possibly be discontinued.
- The provisions dealing with allowable mining capital expenditure would be reviewed to address whether contract miners and mineral rights holders both qualify for these accelerated capital expenditure deductions.
Cross-border tax: A significant change to the interest limitation provisions in respect of cross-border loans would be introduced for years of assessment commencing on or after 1 January 2021. The proposed changes are broadly set out in the discussion document, Reviewing the Tax Treatment of Excessive Debt Financing, Interest Deductions and Other Financial Payments, which was released for public comment on 26 February 2020. The proposed regime would clarify that transfer pricing rules are to apply before the interest limitation rules. It would apply to total (external and internal) interest expenditure, as well as to payments economically equivalent to interest (currently the limitation only applies to interest paid to creditors in a “controlling relationship” to the debtor). The deduction would be limited to 30% of taxable income for the year before interest, capital allowances, and imputed controlled foreign company (CFC) income (often referred to as “tax EBITDA”). Currently, interest up to approximately 43% (depending on the average repo rate) of tax EBITDA is allowed as a tax deduction, so the proposed change would represent a significant decrease in the allowable deduction. Provision would be made for a de minimis rule and for the carry forward of interest that has been disallowed for a period of five years.
South African dividends received by a CFC in relation to a South African resident individual or trust would no longer qualify for a full exemption, and would be subject to 20% dividends tax (in line with what the treatment would have been if the South African individual / trust had received the dividend directly).
For capital gains tax purposes, the participation exemption in respect of gains on the disposal of shares in foreign companies would no longer apply if the value of those shares is attributable to South African assets.
Transfer pricing rules would be amended in order to address a scenario when a transaction is between a CFC and a non-resident connected person. Currently, the transfer pricing rules do not consider the tax benefit derived by a South African resident shareholder of a CFC by virtue of a lesser imputed amount arising from such transactions.
Financial sector: Various amendments to the tax treatment of doubtful debts would be considered.
- A number of changes to the tax legislation applicable to Real Estate Investment Trusts (REITs) are to be made.
- The dividends tax anti-avoidance provisions relating to securities lending arrangements would be tightened to cover the interposition of tax-exempt parties.
Value added tax (VAT), indirect taxes
Amendments have been proposed to the rules concerning what is the basis on which intermediaries account for VAT in respect of supplies of electronic services.
Further, implications of the income tax roll-over relief in the so-called “corporate rules” in the Income Tax Act on the related relief granted by the VAT Act are to be reviewed, as unintended consequences may arise.
Plastic bag levies, the tax on motor vehicle emissions, the incandescent globe tax, and the carbon tax rate are all to be increased.
Individuals and employment tax
The budget measure include the following proposals:
- The personal income tax brackets, primary, secondary and tertiary rebates would be adjusted for inflation.
- The tax-free threshold increases to R83,100 per year, and medical tax credits would be adjusted to a limited extent.
- The annual limit in respect of contributions to tax-free savings accounts would be increased from R33,000 to R36,000 from 1 March 2020.
- An amendment to the foreign employment income tax exemption would be effective 1 March 2020. In terms of this amendment, South African tax residents who spend more than 183 days in employment outside South Africa (of which 60 days are consecutive) would be taxed on employment income earned above R1.25 million. Furthermore, effective 1 March 2021, the concept of “financial emigration” (facilitated in the past through the Reserve Bank) would be phased out.
- A “pay as your earn” (PAYE) and individual (personal) income tax administration reform is intended to be introduced. This is the expected result in an automated PAYE system that could reduce the filing burden of salaried individuals.
- Following the implementation (in 2016 and 2017) of the anti-avoidance provisions to curb the transfer of growth assets to trusts/companies owned by trusts on low interest/interest-free loans, there are proposals to provide for preference-share funding structures that are similar to the low interest/interest-free loan structures, which currently fall outside the scope of the 2016/2017 anti-avoidance provisions.
Read a February 2020 report [PDF 135 KB] prepared by the KPMG member firm in South Africa
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