The proposals aim, among others to close lucrative loopholes with the avoidance of income tax and capital gains tax and to prevent the double non-taxation of South Africans working abroad.
The bill introduces tax proposals in relation to issues raised during the February Budget. It gives flesh to the bones of what was announced in the budget.
However, Patricia Williams, a partner at law firm Bowmans, says the proposals stretch beyond issues identified in the budget. Some may shock “unsuspecting taxpayers”.
She refers to the repealing of the tax exemption on foreign income enjoyed by South Africans working abroad. National Treasury said in the budget the exemption was “excessively generous” since the person might also be exempt from tax in the foreign company.
The initial proposal was that the exemption will only be allowed if the South African worker was paying tax in the foreign country.
“The actual proposal, however, repeals the exemption as a whole, in other words it includes the full foreign income into the South African income tax net, regardless of whether or not this was taxable in the foreign country.”
She says the “blow” is somewhat softened by the fact that South Africans who have paid tax will be able to get tax credits for the tax they paid in the foreign country.
However, Erika de Villiers, head of policy at the South African Institute of Tax Professionals (SAIT), said claiming the credits won't be easy.
“It gives rise to practical concerns that are already experienced by short-term assignees (who never benefited from the exemption) and will in future also be experienced by long-term assignees (who are outside of the country for more than 183 days in a year).”
She said there was often a very long delay in receiving the benefit of the foreign tax credit. In the meantime, the employee carried the cash flow burden of the double tax.
One of the reasons for the delay is the onerous requirement of proving that the foreign tax was payable to a foreign government. Such evidence is often difficult to obtain in practice as tax systems vary and some revenue services do not provide proof.
“We expect that there will be extensive further comment and consultation on this proposal, as there are concerns regarding the impact on individuals, business and the competitiveness of South Africa as a hub for investment into Africa.”
Jerry Botha, managing partner at Tax Consulting, explained where the employee falls into the 45 percent tax bracket and pays 25 percent tax in the foreign country, the South African Revenue Service (SARS) will now collect the difference of 20 percent.
“There are limited options for South Africans abroad, should this law take effect. One alternative would be to properly emigrate, in which case there is a disposal capital gains tax event (a so-called exit charge).”
Botha said SARS probably anticipates this likely move, as the 2016-17 tax return now had a specific disclosure hereon, which never previously existed.
“We have seen some expatriates indicating that with full tax on international employment income, which is what is effectively proposed, coupled with the high costs of international work, coming home may be their only alternative.”
Williams also referred to the “over-zealous” closure of the share buyback loophole. The closure had been anticipated for some time with previous measures introduced having obviously not been sufficient for SARS and Treasury.
The share buyback arrangements was in essence misused to avoid capital gains tax. The Companies Act made provision for a company to be able to buy back its own shares. Proceeds of buybacks were included in the definition of a dividend.
Treasury said in its explanatory memorandum the dividend tax regime allowed for an exemption from dividend tax when dividends are paid to certain shareholders.
In terms of the proposal, if a company with a qualifying interest (50 percent shareholding) disposes of shares, then any dividend received at any time in the preceding 18 months, must be treated as a capital gain and taxed accordingly.
Williams said the consequence was that this would now apply to all disposals and not only to share buyback transactions. “Even for normal dividends received within 18 months before a share disposal, there would be a very significant increase in tax.”
In a normal sale (no share buyback) the proceeds on the disposal would have been subject to capital gains tax at a rate of 22.4 percent. In the case of the distribution of a dividend subsequent to the share buyback there will be no tax.
Williams said 2018 tax increases include those on sugar and carbon, and VAT on petrol and diesel.