BUDGET 2018: IMPORTANT PROPOSED CHANGES FOR BUSINESSES

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Finance Minister Malusi Gigaba delivered his Budget Speech today (21 February 2018). Members of our Tax Practice have identified the following highlights worth noting. 
Detailed commentary on various aspects of the speech have been published on our website. Click here for more.

Tax Rates

  • The VAT rate has been increased by 1% to 15%.
  • Estate Duty has been increased (up to 25% for estates with a value over ZAR 30 million).
  • Most tax rates remain unchanged: the corporate income tax rate remains at 28%, the capital gains tax inclusion rate for companies and individuals remains unchanged, the dividends tax rate remains at 20%, and the maximum marginal income tax rate for individuals remains at 45%.

Problematic Tax Changes from 2017

Two significant tax changes from 2017 that were passed without proper consultation, will be dealt with in the current legislative cycle. These are:

  • Making the “corporate rollover relief” (business restructuring) rules “subject to” the new “dividend stripping rules”, which taxpayers have argued erodes the purpose and effect of the corporate rollover relief rules; and
  • Provisions that give rise to a taxable benefit when there are changes to the terms or conditions of a debt, which taxpayers have argued unfairly taxes economic losses.

Increased Taxes/ Anti-Avoidance

  • Extending the controlled foreign company regime to companies held through foreign foundations or trusts
    Budget 2017, and the draft legislation released in July, sought to extend the controlled foreign company regime to apply to companies held through foreign foundations or trusts.  These draft changes were withdrawn owing to drafting issues. New versions of legislation will be introduced in 2018.
  • Increase in the official rate of interest
    The official rate of interest will be increased.  This will effectively increase taxes, for example in relation to fringe benefits and loans to trusts governed by section 7C of the Income Tax Act.
  • Extension of joint and several liability for VAT to members of a joint venture
    This proposal gives rise to significant concern, given that independent parties often operate joint ventures on a contractual basis.  In the circumstances, joint and several liability for any tax whatsoever, appears commercially and legally inappropriate.
  • Reviewing the tax treatment of excessive debt
    Government has been reviewing the tax treatment of excessive debt financing. Deductibility of interest payments has been highlighted as a mechanism for stripping profits from “high-tax” countries.
    It was announced that a discussion document will soon be published, inviting public discussion on this issue. The announcement notes that Government is, “striving for a balance between certainty, simplicity and adequate base protection to ensure a sustainable corporate tax base”.
    It is not clear at this stage what aspects of “excessive debt” and deductibility of interest will be dealt with in the discussion document: for example, whether the document will address relevant provisions under the Income Tax Act, or the long-awaited rules on thin capitalisation.