SOUTH AFRICAN NATIONAL BUDGET SPEECH, 2020 – KEY BUSINESS TAX ISSUES
Today, 26 February 2020, Finance Minister Tito Mboweni delivered his highly anticipated Budget Speech.
The good news is that there will be no tax rate increases. Instead, South Africa will benefit from a corporate rate reduction in the near future and simplified cross-border trade.
2020 Budget outline
Reduction in the corporate income tax rate
The corporate income tax rate will be reduced in the near future to encourage investment and bring South Africa in line with countries with lower, more competitive corporate income tax rates.
Broadening the tax base
Instead of tax rate hikes, Government will seek to broaden the tax base by eliminating exemptions and deductions. This will include:
- Minimizing tax incentives – Sunset clauses will be introduced for tax incentives. Some incentives that already have sunset clauses will be repealed without renewal or could be significantly overhauled. Government will consider publishing information on companies benefiting from incentives, including the amount of the incentives.
- Limiting the deduction of interest to 30% of earnings – The detail of the limitation will only be finalised after a consultation process. The proposal will take effect for years of assessment commencing 1 January 2021.
- Limiting the use of assessed losses – As from years of assessment commencing 1 January 2021, assessed losses carried forward can only be set off against 80% of taxable income. A company will therefore be taxed on 20% of taxable income.
Significant exchange control relaxation will be phased in over 12 months (to be fully implemented by 1 March 2021), more so for individuals than for corporates. The intention appears to be to change the current system, in terms whereof no capital outflows are allowed unless expressly permitted, to a system in terms whereof cross-border transactions will be permitted unless specifically prohibited.
National Treasury continues to focus on the rules dealing with emigrants and ensuring cross-border tax loop holes are closed, especially with the impending exchange control relaxations.
- New rules are proposed that will seek to ensure that South African individuals are taxed appropriately when entering into “loop structures” (in terms of which South African assets are held via a foreign entity), which will be unrestricted under the exchange control relaxations.
- The proposals include amendments to the rules dealing with the tax treatment of foreign dividends, controlled foreign companies and the application of the participation exemption applicable to capital gains arising on the sale of shares held in foreign companies.
- Legislation is further proposed to deal with the withdrawal of retirement savings in the event of emigration and to discourage residents from shifting asset holdings on the JSE to foreign exchanges, regardless of whether the investor retains its South African tax residence.
- An encouraging change for South African residents working offshore is that the foreign earnings exemption (which was due to be capped at
ZAR 1 million from 1 March 2020) will be increased to ZAR 1,25 million from that date.
- A number of employees’ tax issues will be addressed in legislation to address anomalies, such as changes to so-called subsistence allowances as well as to the rules regarding the deduction of ‘own contributions’ to a retirement fund on retirement.
- The proposed changes to the tax exemption in respect of employer-provided bursaries is more concerning, as the intention appears to be to avoid the structuring of remuneration packages to include exempt scholarships or bursaries in such packages. It is particularly concerning that the amendments are intended to take effect on 1 March 2020.
- The anti-avoidance rules in respect of loans to trust will be amended to curb perceived abuse in respect of the funding of companies owned by trusts by way of preference shares.
SARS revenue recovery plans, include:
- A new centre focused on wealthy individuals who have complex tax arrangements.
- Review of the PAYE framework to develop a modern, automated administrative process.
- Extended SARS authority to issue estimated assessments and withhold refunds.
- Focus on non-compliance by tax exempt public benefit organisations.
VAT, customs and excise
Environmental taxes will increase, minor VAT issues will be addressed, and customs and excise taxes are subject to the anticipated annual increases. Click here for more detail.