The South African Revenue Service (Sars) is taking action against tax avoidance through proposed transfer pricing rules and amendments to tax legislation, besides other initiatives.
It has been proposed that a uniform set of transfer pricing rules be introduced to deal with artificial pricing or the misallocation of prices within the different components that make up a transaction, says independent commercial law firm Deneys Reitz director Andrew Wellsted. The rules will align the treatment of both onshore and offshore transactions.
He refers to Finance Minister Pravin Gordhan’s budget speech, which stated that the Income Tax Act, No 58 of 1962, would be amended to bring greater clarity to the tax treatment of perceived unacceptable schemes associated with tax treaties and foreign tax credit arrangements. Wellsted says that cross-border mismatches will be targeted in particular. “These are schemes that are designed to generate income while making inappropriate use of foreign tax credits, or are subject to a zero rate of tax by virtue of tax treaties,” he says.
Another tax loophole of focus is the use of protected cell companies to bypass the controlled foreign company regime. Wellsted explains that this is a company that operates as a multiple limited liability entity and each cell is protected against the other. Investors of the company usually have full control over the individual cell, but do not meet the controlled foreign corporation ownership requirements for the overall foreign entity.
“Sars is clearly continuing to focus on anti- avoidance and its negative impact on the fiscus,” he says.
Meanwhile, it has been reported that revenue will now be sourced from group life schemes, and deferred income, which will be considered as a taxable benefit. He explains that many companies have made use of employee life cover as a remunerative tool that provides deferred benefit packages for the employees on retirement or termination of employment, while creating immediate tax deductions for the employer. There are also problems associated with group life schemes provided by the employer, he adds.
In the Budget speech, the Gordhan stated that steps would be taken to ensure that employer deductions relating to deferred benefit packages matched employee gross income, while employee insurance packages would be fully taxed on a monthly basis as a fringe benefit. However, Wellsted believes that, in all likelihood, this will not have a great impact on the economy.
A Gauteng-based business publication reports that, in 2008/9, the bulk of the corporate tax collected by Sars, reportedly came from less than 10% of registered companies. Deneys Reitz agrees with the reported suggestion that government should develop and implement a services policy that would boost small, medium-sized and microenterprises operating in service-orientated areas. “Such a policy would boost small enterprises and increase employment opportunities, thus broadening the tax base on both fronts,” he explains.
Further, Wellsted believes that the impact of the replacement of secondary tax on companies with dividends tax will be positive from the perspective of encouraging foreign investment, as it caps the rate of tax payable by corporates at 28%. “The tax will now be levied at a rate of 10% at shareholder level. This will also bring the taxation of dividends in line with treaty laws,” he adds.
Meanwhile, it was reported that the Treasury was considering granting relief from exchange control and taxation for various headquarter companies to enhance and encourage South Africa’s role as a gateway into Africa. Deneys Reitz understands that policymakers have had discussions in this regard, but have encountered several stumbling blocks. “These include the consequential changes to the controlled foreign company regime, the danger of externalisation of local businesses and issues relating to transfer pricing. Discussions are taking place to find ways of overcoming these difficulties before this proposal can be implemented,” he concludes.