SOUTH AFRICAN NATIONAL BUDGET SPEECH, 2021 – KEY BUSINESS TAX ISSUES
Today, 24 February 2021, Finance Minister Tito Mboweni delivered his highly-anticipated Budget Speech.
2021 Budget Outline
A decrease in tax rates
The good news is that there will be no tax rate increases. The ZAR 40 billion tax measures proposed in the October medium-term budget will not be implemented. Instead, a decrease in the corporate income tax rate is proposed - from 28% to 27% for companies with years of assessment commencing on or after 1 April 2022. This proposal, and the promise to consider further tax rate decreases to make the South African tax system attractive, is welcome.
Individuals will also be pleased that, instead of hiking personal income tax rates and/or introducing a new wealth tax, the personal income tax brackets and rebates will be increased by 5%, thus providing limited relief for individuals. It seems that the intention is for the revenue ‘cost’ hereof to be made up by an increase in ‘sin taxes’ on alcohol and tobacco.
Measures to broaden the tax base
Instead of tax rate hikes, the focus will be on broadening the corporate income tax base through proposals that were contained in last year’s budget. These proposals were initially intended to take effect for years of assessment commencing on or after 1 January 2021, but were deferred when the country was put into lockdown. They will now apply in respect of years of assessment commencing on 1 January 2022:
- Limiting the deduction of interest to 30% of earnings – The current interest limitation rules will adjust to a fixed-ratio limitation of 30% of earnings, restricted only to connected party interest.
- Limiting the use of assessed losses – Assessed losses carried forward can only be set off against 80% of taxable income. The effect of this is that a company will be taxed on 20% of its taxable income.
- Reducing the number of tax incentives – Amongst others, the venture capital company incentive will not be extended beyond 30 June 2021.
Once again, there was a commitment to focusing on the abuse of transfer pricing, tax base erosion and (with the use of technology), SARS intends to establish a dedicated unit to improve the compliance of wealthy individuals. This first group of taxpayers has been identified and will soon be receiving messages, more likely during April 2021.
Other key business tax proposals
- Corporate tax rollover relief: There are several changes proposed to the corporate tax rollover relief provisions, mostly to benefit taxpayers. Click here for more detail.
- Contributed Tax Capital: The definition of ‘contributed tax capital’ (CTC) will be amended to clarify that shareholders within the same class of shares should share equally in the allocation of CTC as a result of a distribution to curb alleged abuse by some companies that allocate CTC according to shareholder.
- Re-characterisation of interest as dividends: It is stated that sections 8F and 8FA of the Income Tax Act (which deem interest on debt with equity-like features to be dividends) do not deem the interest to be a dividend for the recipient, and this will be addressed. We find the proposal puzzling, since the legislation already appears to provide reprieve for the recipient of the interest to treat same as (typically exempt) dividends.
- Controlled Foreign Companies: There are concerns that South African taxpayers are using foreign structures to prevent tax on global sales routed through their controlled foreign companies. Typically, the diversionary rules (aimed at taxing transactions between connected party residents and their controlled foreign companies) would effectively tax these sales where the goods are sourced from a South African connected party tax resident and distributed globally through a single foreign distributor. The diversionary rules may not apply in cases where the foreign distributor purchases similar goods from unconnected persons that are based mainly in its home territory. These rules are supposedly being abused and therefore the exemptions to the diversionary rules will be tightened.
- Looping: Paragraph 64B of the Eighth Schedule exempts the sale of foreign shares in certain instances (the participation exemption). When a foreign company ceases to be a controlled foreign company, it is deemed to have disposed of all of its assets for market value and the South African resident shareholder may be taxed on the deemed sale. When the participation exemption applies, it is then not necessary to have regard to the laws that deal with the deemed disposal of the assets of a foreign company that ceases to be a controlled foreign company. To cater for the removal of the exchange control prohibition on loop structures the capital gains tax participation exemption was removed to the extent that the foreign shares sold included the ownership of South African assets. The laws that govern the tax treatment of foreign companies that cease to be controlled foreign companies where not adjusted as part of these amendments. These provisions will now be considered.
- Royalty withholding tax exemption: Laws will be introduced that will require those claiming a royalty withholding tax exemption to make a declaration to the payor of the royalty confirming their exempt status, in line with the interest withholding tax provisions, for them to continue to benefit from their exempt status.
The Minister confirmed that the South African Reserve Bank will soon publish the measures dealing with the more modern, risk-based capital management flow system announced as part of the 2020 budget, which is expected to see a relaxation of the existing exchange controls.
- Medical tax credits will be increased to provide for inflation.
- Perceived abuse will be addressed in respect of various structures, such as in respect of low-interest loans to trusts, a specific structure (the cession of a right to receive an asset) aimed to avoid donations tax, and also abuse in the context of the Employment Tax Incentive (ETI).
- Working from home has become more prevalent over the last 11 months, also for employees who did not previously enjoy this option. National Treasury intends reviewing the current travel and home office allowances to investigate their efficacy, equity in application, simplicity and also compatibility with environmental objectives. Taxpayers should not expect to see any changes soon, though, as this is a multi-year project, commencing with consultations during the 2022 tax year.
- The nature of long-service awards for fringe benefit purposes will be reviewed.
- The ceiling for Unemployment Insurance Fund (UIF) contributions will be increased from the current ceiling of ZAR 148.72 to ZAR 177.12.
- A number of positive changes are proposed in respect of the retirement fund industry. Click here for more detail.
VAT, financial sector levies, carbon tax and customs and excise
Apart from addressing certain VAT anomalies and the expected increases in excise duties, a new bill will be introduced to impose levies on the financial sector. There are also changes proposed to carbon tax. Click here for more detail.