Pretoria - The contribution of corporate
income tax to total tax collections in South Africa has diminished over the
years. Corporate tax collections of R207 billion this year was slightly lower
than the estimate.
Latest statistics show that company taxes
represent just under 17 percent of the total tax contribution – down from 20
percent in the distant past.
The Davis Tax Committee has invited public
submissions as part of its review of South Africa’s tax system. One of the issues
that will be addressed is the efficiency of the current corporate income tax
structure.
The deadline for submissions was the end of
last month.
The South African Institute of Tax
Professionals (SAIT) says in its submission to the committee that South African
“has a pressing need” for tax transparent vehicles for large scale private
investments such as investments in infrastructure funds, private equity or
venture capital funds.
Erika de Villiers, head of policy at SAIT,
says there are various different regimes or vehicles that are tax-transparent,
both in South Africa and globally.
“A trust is mostly tax-transparent in that
it acts as a conduit or flow-through (tax-transparent vehicle) whereby the
profits flow through the trust and are taxed only in the hands of the
beneficiaries.”
Similar principals apply for partnerships. However,
the biggest downsides for using trusts or partnerships as investment vehicles
are complexity and risk of the investors losing their limited liability. Losing
their limited liabilities means their assets can be seized in instances where
the vehicle has debt.
“Companies are better vehicles to provide
limited liability but they are, generally, not tax transparent as they are
subject to tax in their own right,” says De Villiers.
Investment vehicles which are not tax
transparent (such as venture capital companies) introduce an additional layer
when a group of investors want to invest through an investment holding company
vehicle such as venture capital companies or private equity funds.
The holding company typically hold one or
more operating companies. They are typically sold off once profits can be
realised.
The effect is that once the holding company
sells off the underlying investments it pays capital gains tax on the profits.
Once it distributes those after tax profits to its investors they too pay tax –
a whopping 20% dividends withholding tax.
“The additional layer created by the
investment holding company makes the investment non-viable,” says Engel.
In a tax-transparent vehicle the income or
gains flow-through as if the vehicle was not there for tax purposes at least.
Ernest Mazansky, director at Werksmans Tax,
says South Africa sorely needs more modern law relating to tax transparent
vehicles - not just as investment vehicles - but generally as business
vehicles.
South Africa is seriously lagging the world
in relation to tax-transparent vehicles which also give limited liability.
Principle
vehicle
The principle vehicles housing South African
private equity funds investing in South Africa are limited liability
partnerships (called en commandite partnerships) and trust structures.
“Our en commandite partnership rules, which
are based on the common law, are cumbersome and archaic. We could seriously do
with an overhaul, which could include the introduction of the US limited
liability company or the UK limited liability partnership, both for businesses
and professionals,” says Mazansky.
Unfortunately, the drafting of the
legislation fails under the Department of Justice, and not under National Treasury.
That is not to say that the Davis Tax
Committee could not recommend treasury to request it from justice, says
Mazansky.
In its submission SAIT illustrates that an
indirect investment (through the holding company) currently attracts an
effective tax rate on the gains of 37.9 percent whereas a direct investment has an
effective tax rate on the same gain of 18 percent.
“Ideally an investor should be neutral for
tax purposes, whether they invest directly or through an invest vehicle,” he
says.
De Villiers says although companies are in
general not tax-transparent – there are exceptions such as the real estate
investment trusts (REITs). They are
listed companies, but have a specific tax
regime that make them tax-transparent.
Generally the REIT is not subject to tax and the REIT investors are not
liable to dividends tax, but the investors pay tax on the net rental income of
the REIT as if they earned it themselves (the flow-through principle).
“The price of inaction at the domestic
level is the unnecessary additional layer of tax that may prevent investment.
This deterrence is especially problematic for infrastructure investments.”
If foreign investors are involved, the
typical choice is to shift the holding vehicle offshore to Mauritius where the
additional tax layer can easily be avoided.
The net result is to reinforce the advantages of Mauritius as a regional
hub for investment as opposed to South Africa, SAIT says.
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