COVID 19: TAX RELIEF IN SOUTH AFRICA
On 23 March 2020, South African President Cyril Ramaphosa, announced certain measures intended to provide economic relief to businesses coming under pressure in the current trying times.
This is uncharted territory for everyone, and we applaud Government for attempting to help businesses to deal with the effects of COVID-19 and weather the economic storm.
No details have been announced yet, though, and it is therefore difficult to know exactly what the qualifying criteria are for relief, and how it will be implemented. It is anticipated that more information will become available tomorrow (25 March) and we will update this note on our website at that time.
Tax measures announced
- Tax compliant businesses with a turnover of less than ZAR 50 million
These companies will be allowed to delay 20% of their pay-as-you-earn (PAYE) liabilities over the next four months and a portion of their provisional corporate income tax payments, without penalties or interest, over the next six months.
It appears that this simply envisages delayed payment (a ‘payment holiday’). In other words, while penalties and interest will not be charged if these business pay up to 20% less of their monthly PAYE amounts due to the South African Revenue Service (SARS), these amounts will still have to be settled in due course, presumably at the end of the four-month period, or hopefully, in installments from the end of the four-month period. It is not yet clear what percentage of provisional tax payments could be retained on a similar basis.
- All businesses, irrespective of whether their turnover is more or less than ZAR 50 million
It appears that all businesses, irrespective of whether or not they are currently benefiting from the Employment Tax Incentive (ETI), could derive a tax subsidy of up to ZAR 500 per month for the next four months for those private sector employees earning below ZAR 6 500. In other words, the normal criteria in order to qualify for ETI, such as the age of the employees, whether the employer is located in a special economic zone, etc., are not applicable. Employers may thus now, for the next four months, reduce their PAYE payable by an amount of up to ZAR 500 per month for each employee earning less than ZAR 6 500 per month. This may, depending on their monthly payroll, result in a reimbursement in terms of the ETI (see below). The wording used by the President is somewhat ambiguous as it indicates that employees will benefit from the subsidy, while the ETI normally benefits (and thus incentivises) employers. Either way, the incentive should free up some cash.
Currently, ETI reimbursements may be claimed from SARS at the end of August and February of each year. SARS intends to accelerate the payment of these reimbursements from twice a year to monthly to get cash into the hands of compliant employers as soon as possible. There is, as yet, no indication as to when this is due to be implemented.
Government is exploring the temporary reduction of employer and employee contributions to the Unemployment Insurance Fund (UIF) and employer contributions to the Skills Development Fund (SDL). The maximum (combined employer and employee) UIF contribution is currently ZAR 297.44 per month, while SDL is payable at 1% of the total payroll. Should this be implemented, it should provide some (although not huge) relief, depending on how much these contributions are reduced.
- Measures focused on employees
While not directly related to tax, it is also important to consider the proposals intended to support employees of struggling businesses. For example, although we are still waiting for further details to be released:
- there are indications that UIF reserves could be accessed in order to provide support to employees of small and medium enterprises (SMEs) and other vulnerable firms;
- it is also envisaged that the Temporary Employee Relief Scheme (TERS) could be used to enable companies to pay employees and avoid retrenchment; and
- employees who become ill through workplace exposure, will be paid via the Compensation Fund
The tax relief for businesses with turnover of ZAR 50 million or more, at this stage is thus minimal, although the ETI, UIF and SDL measures could provide some relief for businesses with a large employee force.
The obligation to comply with the submission of returns (such as PAYE, VAT and provisional tax) remains and there is as yet no indication that SARS will consider providing relief. For example, the 10% late payment penalty as well as the 20% provisional tax underestimation penalty is a significant financial burden for a distressed taxpayer. Interest on the late payment of PAYE, VAT and provisional tax could also be crippling.
Taxpayers who submit provisional tax estimates must remember that they may be called upon by SARS to justify their estimates. Should SARS be dissatisfied with the estimate, SARS could increase the amount to what it considers to be reasonable. It is to be anticipated that many businesses will have to adjust their estimates downward in light of the current crisis. It will now be more important than ever to have a calculation that supports the provisional tax payments.
In light of the fears of the severe implications should businesses be unable to pay employees (and the resultant PAYE), VAT and provisional tax, relaxations in respect of penalties and interest, also for businesses with a turnover exceeding ZAR 50 million per year, would be very welcome.
While the measures designed to support employees are vital, it is also very important to do as much as possible to help businesses survive, so that they can continue employing people and generating income once we have weathered this storm.