The South African government has introduced unprecedented measures to assist South Africa in its fight against COVID-19; including a nationwide lockdown effective from midnight on Thursday 26th March 2020. The lockdown was partially eased from 1 May 2020, eased further from 1 June 2020 and 18 August 2020 and eased again with effect from 21 September 2020. In terms of the revised lockdown regulations most economic activity and movement of people is permitted subject to conditions. International travel is permitted from 1 October 2020. Leisure travel from high risk countries is however prohibited. On 24 June 2020, the Disaster Management Tax Relief Bill, 2020 and Disaster Management Tax Relief Administration Bill, 2020 were tabled in parliament. These bills provide for tax measures in order to assist with alleviating cash flow burdens on tax compliant small to medium sized businesses arising as a result of the COVID-19 pandemic and lockdown and to provide for matters connected therewith. Tax relief measures introduced include a delay of remittances of the “Pay As Your Earn” (PAYE), without triggering penalties or interest, a delay in the remittances of provisional payments of income tax, without triggering penalties or interest and an acceleration of certain employment tax incentives.
Provisional Tax Relief - Corporates, Trusts, Individuals
Included in the draft Disaster Management Tax Relief Administration Bill are measures to provide for the deferral of provisional tax by qualifying taxpayers and qualifying micro businesses.
Included in the Disaster Management Tax Relief Administration Bill are measures to provide for the deferral of provisional tax by qualifying taxpayers and qualifying micro businesses.
A “qualifying taxpayer” is defined in the revised Bill as:
- A company, trust, partnership or individual;
- That is a taxpayer as contemplated in the Tax Administration Act;
- That is tax compliant as contemplated in the Tax Administration Act;
- That has gross income of R100 million or less during the year of assessment ending on or after 1 April 2020 but before 1 April 2021; and
- Whose gross income for the year of assessment does not include more than 20% income derived from interest, dividends, foreign dividends, rental etc. A carve out is provided for taxpayers whose main trading activity is the letting of immovable property.
For “qualifying taxpayers” the Disaster Management Tax Relief Administration Bill provides:
- That first provisional tax payments, due between 1 April 2020 and ending on 30 September 2020 will be reduced to 15% (normally 50%) of estimated total tax liability. No penalties and or interest will be levied by the South African Revenue Service (SARS) as a result of the reduced payment.
- That second provisional tax payments, due between 1 April 2020 and 31 March 2021 will be based on 65% of estimated total tax liability i.e. taxpayers will be required to ensure that the total first and second provisional tax payments total 65% (normally 80% or 90%). No interest or penalties will be levied by SARS as a result of the reduced payment; and
- The balance (being 35% of taxable income for the year of assessment) would need to be paid in full when making the third provisional tax payment i.e. the top up payment made within 6 months after year end failing which interest will be charged.
The requirement in relation to the R100 million gross income limit will be deemed to have been met if the Commissioner for SARS is satisfied that the taxpayer’s estimate of the gross income for that year of assessment, when making a reduced payment under the Tax Relief Administration Bill, was seriously calculated with due regard to the factors having a bearing thereon and was not deliberately or negligently understated.
PAYE Relief for Employers
A “qualifying taxpayer” (as defined in the Disaster Management Tax Relief Administration Bill) that is a resident employer or representative employer that is registered for employees’ tax by 1 March 2020, may pay 65% of the total employees’ tax due (in terms of paragraph 2(1) of the Fourth Schedule of the Income Tax Act). This deferral applies to employees’ tax amounts deducted or withheld during the period commencing on 1 April 2020 and ending on 31 August 2020 i.e. there is a deferral of 35% of the PAYE liability, without SARS imposing administrative penalties and interest for the late payment thereof.
The deferred PAYE liability must be paid to SARS, in equal instalments, over the six month period beginning on 1 September 2020 (i.e. the first payment must be made by 7 October 2020; with the last payment being received by SARS by 5 March 2021).
Skills Development Levy
In terms of the Disaster Management Tax Relief Bill, all employers are exempt from liability and payment of the Skills Development Levy for the period 1 May 2020 to 31 August 2020.
The South African government had initially announced that it is exploring the temporary reduction of employer and employee contributions to the Unemployment Insurance Fund (UIF) and to the Commissioner for Compensation for Occupational Injuries and Disease Fund (COIDA contributions). No details have been released.
Extension of Time Periods
- Included in the Disaster Management Tax Relief Administration Bill are measures to provide for the extension of certain time periods set out in Tax Acts covered by the Tax Administration Act. With effect from 1 April 2020, the period of the National Lock Down (lockdown period) being the period from 26 March 2020 to 30 April 2020 will be regarded as “dies non” - that is, a day that has no legal effect and must not be taken into account when determining the number of days that are provided for in any Tax Act or in the Tax Administration Act. The extension of periods are in relation e.g. deadlines for producing relevant material in person, any field audit where the date specified in the notice falls within the lockdown period etc.
- Importantly the provisions extend the time periods set out in the dispute resolution provisions and accompanying rules and extend the period within which assessments prescribe. The provisions do not extend the time period within which taxpayers are required to produce relevant material by way of written submission.
- The Disaster Management Tax Relief Bills also includes provisions applicable to the administration of customs law. In particular, the bill includes measures to clarify that for purposes of determining what are the customs-related implications of the “lockdown” as ordered in reaction to the COVID-19 pandemic, the lockdown period 26 March 2020 to 30 April 2020 will be regarded as “dies non” i.e. a day that has no legal effect.
VAT and exchange rates and currency fluctuations
- In South Africa, a tax invoice for a supply subject to VAT (at the standard rate of VAT) must be issued in the rand. The South African Revenue Service provides approved exchange rates in Binding General Ruling 11 (BGR 11) for determining the rand equivalent of a supply when a standard-rated invoice is issued in a foreign currency.
- BGR 11 provides that a supplier may use one of the following exchange rates (published on the website of the South African Reserve Bank and other resources):
- The daily exchange rate on the date the time of supply occurs
- The daily exchange rate on the last day of the month preceding the time of supply, or
- The monthly average rate for the month preceding the month during which the time of supply occurs.
- The options listed in (2) and (3) above may not be used in “exceptional circumstances” that result in the rand value being distorted. Examples of exceptional circumstances include the collapse of a foreign currency or a fluctuation in a foreign currency of 10% or more within the month referred to in options (2) and (3). In these instances, the daily exchange rate on the date the time of supply occurs is to be used (that is, option (1) is to be used).
- SARS also issued the following guidance concerning VAT rules in response to the COVID-19 pandemic:
- In general, when the zero-rate is applied to the exportation of goods, the supplying vendor is required to obtain documentary proof to substantiate the application of the zero-rate.
- There are prescribed time periods within which the movable goods must be exported and the documentation in support of the export must be obtained.
- Non-compliance with these prescribed time periods will require the supplying vendor to account for VAT at the standard rate on the supply of the goods exported, unless beyond the control of the vendor.
- A Binding General Ruling issued on March 26, 2020 confirms that SARS considers the current COVID-19 situation to be “beyond the control of the vendor, qualifying purchaser, or the person duly authorized to represent the qualifying person” and officially extends the prescribed periods within which to export the goods by an additional three months.
- South Africa’s National Treasury on 23 April 2020 issued a statement concerning value added tax (VAT), The VAT relief includes the following:
- Fast-tracking of VAT refunds, with “smaller VAT vendors” in a net VAT refund position being allowed temporarily to file monthly VAT returns instead of bi-monthly returns.
- Case-by-case application to South African Revenue Service for a waiver of penalties by “larger businesses” (with gross income of more than R100 million) that can show they are incapable of making tax payments due to the COVID-19 disaster and by businesses with gross income of less than R100 million for an additional deferral of payments without incurring penalties—apparently this relief would also apply with regard to VAT.
Carbon tax return filing, payment deadline extended
Relief from the filing and payment requirements for the carbon tax was announced on April 21, 2020, in response to the coronavirus (COVID-19) pandemic. The carbon tax-related relief is a three-month extension of the carbon tax accounts filing and the first payment of the carbon tax. The submission of annual carbon tax accounts and payment of the carbon tax is now due by October 31, 2020 (from July 31, 2020) for the period ended December 31, 2019.
The carbon tax is administered as an environmental levy on carbon emissions, which requires that every person operating emissions-generation facilities at a combined capacity equal to or above the legislated carbon tax threshold, must register with the South African Revenue Service and obtain a consolidated license for the combination of emissions facilities that generate emissions subject to the carbon tax. The emission facilities will be licensed as a “customs and excise manufacturing warehouse”.
Additional information on the tax implications for the mining sector are available in a March 2020 report prepared by the KPMG member firm in South Africa.
“Repo rate” reduction - Tax implications
The South African Reserve Bank reduced the “repo rate” (the benchmark interest rate at which the Reserve Bank lends money to other banks) by 100 basis points (i.e., 1%) on 20 March 2020, 100 basis points effective 15 April 2020, 50 basis points on 22 May 2020 and 25 basis points on 24 July 2020 in response to the coronavirus (COVID-19) pandemic. Provisions contained in the Income Tax Act 58 of 1962 rely on or make reference to the repo rate in the determination of the taxable income of a taxpayer:
- The reduction in the repo rate could have significant implications on the calculation of the interest limitations provided for in sections 23M and 23N (sections that add back otherwise deductible interest expenditure when the amount exceeds the limitation calculated).
- Recent budget proposals indicate that tax treatment of interest deductions and other financial payments are a focus area for the South African Revenue Service (SARS). In this regard, taxpayers need to consider repo rate movements when preparing various tax calculations (including but not limited to thin capitalization or section 23M and 23N calculations).
VAT implications for landlords with rental income reductions
- An aspect that landlords may overlook is the impact of a reduction in rent on their VAT liability (for instance, a rent reduction granted in response to the economic situation flowing from the pandemic). Landlords generally would not have a problem with regard to claiming all input VAT on the expenses they incur. If the landlord is part of a group of companies and has granted interest-bearing loan funding to another group company, that landlord could be earning significant interest income. When the landlord suddenly has a reduction in its rental income, but still accrues for the interest income, it is possible that the landlord could be faced with a VAT apportionment risk.
- Taxpayers—such as commercial property landlords—that primarily generated taxable supplies are unlikely to have previously faced a need to apply VAT apportionment because the ratio of taxable supplies versus total supplies most likely exceeded 95%. When this ratio falls below 95%, these taxpayers would now be compelled to apply the standard turnover-based method of apportionment in determining the percentage of VAT which they can claim, which will result in the limitation of input VAT.
- A limitation in the claiming of input VAT on expenses incurred would mean that the landlord is likely to have a higher output VAT liability than anticipated and this could result in further cash-flow constraints for the landlord. As VAT payments are made throughout the year, the cash-flow constraints could be significant for landlords.
Additional information regarding employment-related measures, economic stimulus measures and other meausers.