Download: In the public eye: information management in the public sector

Since the democratic elections in 1994 the relationship between communities and government has changed. For the past 20 years, organisations have striven to build more open and collaborative relationships with their customers, partners, suppliers, and other stakeholders.

When the recession took hold, many such initiatives took a backseat, as cost cutting became the first priority. Government departments had to focus on helping service providers survive as they tried to maintain service levels to the general public.

At the same time, the use of mobile communication technology has increased tremendously in both the public and private sectors, giving everyone greater personal choice and control.

Against this background, the need to structure and organise information to ensure services are available and relevant to the public has never been so important.

In this edition we look at the additional reporting requirements in respect of third party financial information the TAA has introduced attorneys and estate agents. The first deadline for submitting returns was 31 May 2013.

Looking at practical matters, we consider whether a bonus provision raised at yearend may be deducted for tax purposes, or whether it should be treated as a temporary difference. We also provide an overview of the new, automated tax clearance application process, which is expected to be introduced in August.

The TAA requires all tax practitioners – everyone who provides tax advice or completes returns for a fee – to register with a recognised controlling body* before 1 July 2013. We support this bid to regulate the industry and consider some of the benefits of working with a registered tax practitioner.

Finally, in our usual transfer pricing overview, we highlight how the new ITR14 provides SARS with useful information regarding companies’ transfer pricing related activities, which will allow them to select cases for audit more easily and efficiently.

Third party returns – attorneys and estate agents are you aware of your future reporting obligations?

Bonus provision – when is it tax deductible?

New tax clearance application process

New requirements for tax practitioners

The new ITR14 corporate income tax return targets transfer pricing

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Third party returns – attorneys and estate agents, are you aware of future reporting obligations?

By Bruce Russell, Tax consultant Grant Thornton Cape

The list of persons that are required to submit third party returns to SARS was published in Government Gazette No. 36346 of 5 April 2013. These third party returns must be submitted to SARS in respect of certain financial information taxpayers hold in respect of third parties.
In the past it was mainly financial institutions that bore the brunt of this administrative burden to prepare and submit third party returns in the form of IT3 certificates.

However, with the enactment of section 26 of the Tax Administration Act (TAA) and the notice published on 5 April 2013, a larger group of persons are specifically obligated to issue third party returns. They include estate agents and attorneys – as contemplated in the Estate Agency Affairs Act and Attorneys Act – who pay to, or receive money in respect of investment, interest or the rental of property, on behalf of a third party.

Another administrative duty
Not only will attorneys and estate agents be faced with extracting financial information relating to their clients, but will also have to invest time and expertise to generate IT3(b) certificates and/or files in a format required by SARS in its Business Requirements Specification: IT3 Data Submission Manual.

The following information must be provided:
Amounts received or paid for the benefit, or on behalf of a third person, in respect of investment, interest, royalty or the rental of immovable property.
Transactions recorded in an account (such as a transactional account), which is maintained for a third party.

This information must be linked – in a format required by SARS – to each client or third party. In each instance, voluminous information would need to be included, along with the financial information.

This required data includes:

• The legal name of the client
• FICA status of the client
• South African ID number, foreign passport number or registration number
• Physical and postal addresses.

This information must be submitted via the following SARS channels:

• Fewer than 20 records – via SARS e-filing or manually at a SARS branch office;
• 21 to 50 000 records – via the SARS https bulk data file platform;
• More than 50 000 records – via SARS e-filing with detailed records submitted electronically through the SARS managed data transfer platform.

It is recommended that attorneys and estate agents review the SARS Business requirement specification manual (BRS:IT3) to understand what is required of them and the scope of information SARS requires.

Third party returns deadline
Attorneys and estate agents will be required to submit third party returns according to this schedule:

• By 31 October – Information relating to the period 1 March to 31 August
• By 31 May – Information relating to the period 1 March to the end of February

The first deadline for submitting returns was 31 May 2013 for third party returns in respect of the 2013 tax year.
It is clear that a number of institutions and persons have already missed the first deadline to submit third party returns; possibly without them even having any knowledge of their obligations. Contact your Tax adviser for information and advice.

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Bonus Provision – when is it tax deductible?

By Christel du Preez, Senior Tax Manager, Grant Thornton Johannesburg

The issue whether a bonus provision raised at yearend may be deducted for tax purposes, or treated as a temporary difference and therefore added back in the calculation of taxable income, has always been a contentious one.

Position before 1 March 2013
In terms of the general deduction formula, an employer has always been entitled to deduct salaries and wages incurred in the production of income as a tax deduction.

Variable remuneration, such as commission, overtime and bonuses were deductible by employers, but only if the employer could argue that it had an unconditional legal obligation to pay the variable remuneration, regardless of it actually being paid out to the employee. Leave pay was the exception as it was limited as a deduction until such time when the leave pay was paid by the employer, thereby linking the employer’s tax deduction with the employee’s PAYE liability on the income received.

With bonus provisions there have always been some difficulty in proving that the company had an actual, unconditional liability at yearend.

In Nationale Pers BPK v KBI (1986 (3) SA 549 (A)), the taxpayer attempted to deduct a bonus provision for staff bonuses. The bonuses were only payable to employees after yearend and on condition that they were still in the employment of the company at the time of the bonus payments. The court held that the payment of the bonuses were contingent on a future event and were therefore not deductible and did not constitute expenditure actually incurred at yearend.

However, certain companies have in the past been able to argue that bonus provisions raised at yearend constituted expenses actually incurred, not subject to contingent conditions and were therefore tax deductible. This was typically the case where the bonus would have been paid out regardless of an employee resigning before the bonus payment. These companies would have claimed the bonus provisions raised at yearend as a tax deduction and would have only withheld PAYE from employees on the date the actual bonus was paid to the employee, resulting in a mismatch between the timing of the tax deduction for the employer and the taxability of the income for the employee.

Position after 1 March 2013
In order to address this mismatch between the tax deduction and withholding of PAYE on variable remuneration, section 7B was introduced into the Income Tax Act from 1 March 2013. It is applicable to amounts accrued and expenditure incurred on or after this date.

In terms of section 7B, an employer will now only be allowed a deduction for variable remuneration when it actually pays the remuneration to the employee, thereby aligning the timing of the employer’s tax deduction with PAYE withholding.

Note
Employers should take note that although a deduction may have been allowed in the past where it could have been argued that the bonus provision was an unconditional legal obligation at year end; it will no longer be allowed as a tax deduction until such time as the bonuses are actually paid out to employees.

This could have a significant impact on the companies’ calculation of taxable income, as the bonus provision will now for the first time have to be added back in the tax computation as a temporary difference , which could result in a significant higher taxable income for the year and provisional taxes which have to be paid.

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New tax clearance application process

Michelle Espag, Senior tax manager: Grant Thornton Cape

In another of its initiatives to use technology to enhance its enforcement capabilities and to ease its own administrative burden, SARS announced that it will be rolling out a new automated system to apply for tax clearance certificates from August 2013.

Gone will be the days when taxpayers could apply for multiple copies of a tax clearance certificate that were valid for one year from the date of issue. Instead, in a bid to deal with corruption involving paper-based tax clearance certificates, SARS developed an electronic mechanism to provide real-time, up-to date and continuous tax status to taxpayers and interested third parties.

Some of the new system’s features will include:
A new application will have to be submitted for each tender bid.
The application process will be electronic and SARS will no longer accept manual applications.
For each application, a unique one-time access code will be generated.
The details of the tender third party must be included in the application. The unique code will be provided to both the taxpayer and the third party. This code will give both parties access to check on the status of the tax clearance certificate.
An electronic notification will apparently be sent to the taxpayer every time the unique access pin is used.

Big brother is watching
SARS will also use this system to obtain feedback on successful tender bids. This will enable SARS to match income from successful government tender bids with income declared by the taxpayer. SARS also intimated that individuals that apply for tax clearances for the purposes of foreign investment or immigration must be prepared for tax audits.

While this new process will provide administrative relief to taxpayers, it will also require ongoing tax compliance.

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New requirements for tax practitioners

In recent years, the corporate world has shifted to embrace overall good governance practices. In line with this, tax practitioners will now be regulated in the same way as other registered professionals, such as auditors, lawyers and the medical professionals.

The Tax Administration Act (TAA) requires all tax practitioners – everyone who provides tax advice or completes returns for a fee – to register with a recognised controlling body* before 1 July 2013. This is in addition to being registered as a tax practitioner with SARS. This move, which is believed to be the first phase of the regulation, is expected to develop the tax advisory industry by building its professional image and through professional support provided by these controlling bodies. The second phase will involve the establishment of an independent regulatory board for tax practitioners.

While taxpayers should never pay more tax than is required, there will always be grey areas, especially with SARS’ changing requirements and increased capacity to identify discrepancies. A professional tax adviser can provide the taxpayer with legitimate strategies to steer clear of grey areas, pay the correct taxes and remain tax compliant.
Another key consideration is that where SARS raises additional assessments on particular aspects of a taxpayers affairs, the taxpayer may be able to have any penalties waived if it received formal advice on the said transaction from a tax practitioner that is appropriately registered and certain other criteria is met.
Investing in a long-term, transparent relationship with a qualified professional tax practitioner can clearly save taxpayers energy, time and money. The new registration requirements will provide taxpayers with further assurance that their tax position will be managed by bona fide, registered tax advisers, who operate within a legal framework that balances tax obligations with taxpayer rights.
At Grant Thornton, our experienced tax directors and senior staff leading specialist areas provide hands-on guidance to ensure your tax matters receive the degree of skill and attention to give you peace of mind. Our staff are registered with the South African Institute of Tax Practitioners and the South African Institute of Chartered Accountants.

* A number of controlling bodies were recognised automatically in terms of the Act and if your tax adviser is a registered with these bodies, no additional registration is required.

These bodies include:

• Independent Regulatory Board for Auditors – IRBA
• General Council of the Bar of South Africa, Bar Councils and Societies of Advocates referred to in Section 7 of the Admission of Advocates Act, 1964
• Law Societies established in terms of Chapter 3 of the Attorneys Act, 1979.

Alternatively, SARS also recognises professional affiliation with these controlling bodies:

• Institute of Accounting and Commerce (IAC)
• South African Institute of Chartered Secretaries and Administrators (ICSA)
• South African Institute of Chartered Accountants (SAICA)
• South African Institute of Professional Accountants (SAIPA)
• South African Institute of Tax Practitioners (SAIT)

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The new ITR14 corporate income tax return targets transfer pricing

By Tarryn Spearman, Tax consultant: Grant Thornton Johannesburg

On 4 May 2013 SARS introduced an enhanced Income Tax Return for Companies (ITR14) as part of the modernisation of Corporate Income Tax (CIT), aimed at improving efficiency and compliance. The new ITR14 provides SARS with useful information regarding companies’ transfer pricing related activities, which will allow them to select cases for audit more easily and efficiently.

Tell SARS more
If companies have an IT14 or IT14SD in the old format which was not submitted by 4 May 2013, they are now required to complete the new ITR14 for submission. However be warned that the new form requires significantly more mandatory information, especially in the area of related party transactions.

In cases where a taxpayer selects yes to these questions, the new ITR14 requires detailed information about these ‘affected transactions’:
“Did the company enter into an affected transaction as defined in s31 where the company: Received / earned foreign income?” or
“Did the company enter into an affected transaction as defined in s31 where the company: Incurred foreign expenditure?”

If a taxpayer answers yes to these questions, the ITR14 requires information about the extent of transfer pricing supporting documentation prepared by taxpayers as follows:

Taxpayers must further disclose the value of cross-border international related party and third party transactions as well as the value of domestic related party transactions. It appears that SARS is taking a transactional approach to managing all related party transactions because there are separate fields for the most common related party transactions e.g. sale of goods, interest received/receivable, royalties/license fees received/receivable, admin fees received/receivable etc.

On a practical note, a number of aspects of these transfer pricing questions are either easily misunderstood or still require clarification from SARS. These could lead to unintentional incorrect disclosures and we suggest that you contact us should these questions apply to you and you need to file your tax return in the coming weeks.

Thin capitalisation
The ITR14 now requires taxpayers to disclose various financial ratios (debt: equity; debt: EBITDA; EBITDA: interest paid) and the draft thin capitalisation practice note states that SARS will be using these ratios as risk indicators. Should these ratios exceed 3:1, companies are at risk of being considered to be too thinly capitalised. This clearly proves SARS are intensifying it focus on transfer pricing, as highlighted in the 2012 and 2013 Budget speeches.

Best practice
With the increased disclosure requirements, it is now even more important that taxpayers consider whether their related party transactions meet the required ‘arm’s length’ standard. In cases where non-arm’s length pricing is disclosed on tax returns, taxpayers are at risk that SARS will investigate further.

It is highly recommended that taxpayers who are engaging in a significant amount of related party transactions or where material values are concerned, document their intercompany pricing policies in a robust transfer pricing document which is updated regularly and is available for SARS’ scrutiny.

…and if taxpayers don’t comply?
From 1 April 2012, where an arm’s length relationship cannot be demonstrated, the transfer pricing adjusts will give rise to a deemed loan by the South African entity to the foreign related party. The South African entity will therefore be subject to tax on the interest resulting from the loan.

Ordinary penalties will apply to non-compliant taxpayers, i.e. up to 200% of unpaid tax for material non-disclosure and tax evasion. Interest is charged on any amount of underpaid tax at the prescribed rate (currently 8.5%).

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Download: Grant Thornton IFRS News: Q2 2013

Our second edition of 2013 starts with a detailed look at the IASB’s new proposals on accounting for the impairment of financial instruments before considering other items in the IASB’s ‘pipeline’.

We then go on to IFRS-related news at Grant Thornton before turning to a more general round-up of financial reporting developments relevant to IFRS preparers. We finish with the implementation dates of newer standards that are not yet mandatory and a list of IASB publications that are out for comment.

About IFRS News
IFRS News offers a summary of the more significant developments in International Financial Reporting Standards (IFRS) along with insights into topical issues and comments and views from the Grant Thornton International IFRS team.

However, the TAA does modify several administrative procedures which will bring relief, and for compliant taxpayers it “should ensure better service and a lower compliance cost”, according to SARS.

SARS: Waiving and compromising tax debts
In this edition of e-taxline, Tax Partner Dave Honeyball also looks at situations when SARS will consider waiving tax debts temporarily and in some cases, permanently.

New income tax forms for companies
It has been in the pipeline for a while but SARS has now introduced new forms for companies as part of their modernisation of corporate income tax.

The future of VAT apportionment unknown
We also remind taxpayers of the new new income tax forms that have been introduced for companies and delve deeper into the changes that can be expected when the current turnover based VAT apportionment method is re-evaluated as part of National Treasury’s list of research projects introduced earlier this year.

Transfer pricing rules for South African domestic intergroup transactions
Finally, in our regular transfer pricing feature, we focus on the influence that UK and Indian precedent may have on South Africa’s domestic transfer pricing rules on intergroup transactions.

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SARS: Waiving and compromising tax debts

By Dave Honeyball, Tax Partner, Grant Thornton Port Elizabeth

Chapter 14 of the Tax Administration Act deals with the waiving of tax debt and compromises on debt owed to SARS by taxpayers. It may come as a surprise that SARS is willing to write off or reduce debts owed to them, but in specific situations they do indeed – subject to the provisions discussed further below.

The term “compromise” is defined as an agreement;

• that is entered into between SARS and the taxpayer
• where the debtor undertakes to pay an amount which is less than the full amount of the tax debt due to SARS
• in full settlement of the debt
• SARS agrees to write off the remaining portion of the debt permanently.

The basis for the compromise is that, where a taxpayer is unable to pay the debt, SARS will secure the highest net return from the recovery of the tax debt. The request for a compromise must be initiated by the taxpayer and SARS requires detailed information in respect of the taxpayer’s financial affairs before making any decision as to whether the compromise will be accepted. When considering whether to enter into a compromise with the taxpayer, SARS will consider the history of payments by the taxpayer, past transgressions of tax law and the reasons why the taxpayer is unable to pay their debt in full.

A compromise may not be entered into where:

• The debtor was party to an agreement with SARS to compromise an amount of debt within a period of three years before the current request for compromise;
• The debtor’s tax affairs are not up to date;
• Another creditor has communicated its intention to, or has, initiated liquidation or sequestration proceedings against the debtor;
• The compromise will prejudice other creditors, or if the other creditors will be placed in a position of advantage relative to SARS;
• It may adversely affect broader tax compliance;
• The debtor is a company or trust and SARS is unable to take action against or recover the debt from the personal assets of the persons related to e entity.

These provisions are quite useful in a business rescue situation where SARS may be asked, together with other creditors, to enter into a reduction of debt in order to keep a business afloat as part of restructuring the past debt of the business.

SARS may also decide to waive an amount of tax debt temporarily if it is considered uneconomical to pursue the debt. In this situation, the debtor is not absolved from the liability but is given a reprieve from paying the debt for a specific period. SARS may decide to withdraw its decision to waive of the debt if it believes that circumstances have changed to make pursuing the debt feasible.

Hopefully taxpayers won’t find themselves in situations where they need to compromise their tax debt, but should it be necessary, they are advised to approach SARS for a compromise, with the assistance from an experienced tax consultant.

In our experience, SARS is willing to enter into compromises where the taxpayer is in financial distress and has no realistic possibility of settling its tax debt which will bring the taxpayer immediate financial relief.

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New income tax forms for companies

Barry Visser, Associate Director: Tax, Grant Thornton Johannesburg

It has been in the pipeline for a while but SARS has now introduced new forms for companies as part of their modernisation of corporate income tax.

New registration form (REG01)
Contact, address, banking and public officer details of a company may be verified and may be updated (if required) on the REG01:

• Via eFiling, by clicking on the “Maintain legal entity details” button. (SARS may request that details be verified at a branch.)
• Visiting a SARS branch

New income tax return (ITR14)
The new ITR14 will allow a company to create a customised return according to the company type specified when completing the return. Company types will be classified in line with the following company category descriptions:

Dormant company
A dormant company is classified as a company that has not actively traded for the full year of assessment (i.e. if the company partially traded during the year of assessment, the company will not be regarded as a dormant company).

Share block company
A share block company is defined in section 1 of the Share Blocks Control Act, 1980 (Act 59 of 1980).

Body corporate
A body corporate is defined in section 1 of the Sectional Titles Act, 1986 (Act 95 of 1986).

Micro business
A micro business is classified as a company with a gross income (sales / turnover plus other income) not exceeding R1 million and total assets (current and non-current) not exceeding R5 million, and that is not classified as a body corporate / share block company.

Small business
A small business is classified as a company with a gross income (sales / turnover plus other income) not exceeding R14 million and total assets (current and non-current) not exceeding R10 million, that is not classified as a body corporate / share block company or micro business. (Note: a small business is not the same as a small business corporation as defined in section 12E)

Medium- to large business
If a company is not classified as a body corporate / share block company, micro business or small business, it will be classified as a medium to large business (i.e. gross income (sales / turnover plus other income) exceeding R14 million and / or total assets exceeding R10 million).

Submission of supporting schedules 
An important change is that SARS now require certain supporting information to be submitted via eFiling at the time of submitting the ITR14

For a small businesses and medium to large businesses, it is now compulsory to submit signed off supporting annual financial statements. For all other companies, it is optional.

The following schedules (available on SARS) must also be completed and attached to the ITR14 as relevant material where applicable:

• Short term insurers: ICS01 Short term insurance schedule
• Mining companies: GEN-001 Mining schedule
• Headquarter Companies: RCH01 Schedule for Headquarter Company election
• Controlled Foreign Companies: IT10 Controlled Foreign Company CFC return
• A company that claimed an allowance for learnership agreements: (section12H) – IT180 schedule

Benefits
Some of the benefits of the new ITR14 are that mandatory fields will be indicated in red on the electronic form, so simplifying the completion of the ITR14. The ITR14 can now be saved on eFiling at any time and completed later.

New supplementary declaration form (IT14SD)
The IT14SD form also comes in a new format.

Important note
New ITR14 and IT14SD forms need to be submitted if these were not submitted before 4 May 2013. It should also be noted that if notification of selection for audit is received within the 21 working day period before 4 May 2013, a new IT14SD must be requested before making the submission.

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The future of VAT apportionment unknown

By Cliff Watson, Associate director: Tax, Grant Thornton Johannesburg

The proposed future
At the time of the 2013/2014 budget speech, National Treasury issued Annexure C – Miscellaneous tax amendments – which includes a list of research projects that Treasury proposes to undertake.

One of these projects, which we alluded to in the March edition of e-taxline, is a review of the apportionment of input tax relating to non-financial sectors. The financial sector is excluded because the VAT treatment of transactions and the input tax apportionment methods relating to this sector are extremely complex and are addressed separately from the non-financial sectors.

The proposal specifically indicated that the default apportionment method allowed by SARS is based on turnover and “appears” to be inequitable in certain circumstances. This is because there “may” not be a direct correlation between expenditure incurred and the resultant turnover generated by the vendor.

Our experience is that the standard turnover apportionment method is indeed usually inequitable and there is seldom a direct correlation between the expenses a vendor incurs and the resultant income generated. Vendors and tax practitioners are waiting expectantly for the results of this re-evaluation process.

The status quo
However, mere days after the announcement to review VAT apportionment regime, SARS issued a Binding General Ruling (BGR), which confirmed that the turnover based apportionment method is the only apportionment method vendors can use to apportion the input tax incurred in respect of goods or services acquired to make taxable and non-taxable supplies (mixed use purposes).

Thus despite SARS and Treasury agreeing that the turnover based apportionment method is inequitable, it remains the only acceptable apportionment method, without a ruling from SARS. However, SARS appears to be very hesitant to allow any other apportionment method.

The current method
In essence the formula for the turnover based method is:

The challenge
One of the biggest problems with this apportionment method is that SARS requires vendors to include as non-supplies in the formula; any other amounts which are not classified as taxable or exempt supplies and which were received or accrued during the period, irrespective of whether these amounts were received in respect of supply or not.

This is particularly problematic for dividends received. To illustrate, a holding company where income from dividends represents a significant portion of the company’s total income. While little or no expenses are directly incurred to earn the dividends, holding companies are generally actively involved in their subsidiaries’ day-to-day management and consequently charges these subsidiaries a management fee for providing the required services.

Most, if not all, expenses incurred by such a holding company relate directly to the supply of the management services. Yet, based on the turnover based apportionment method, a significant portion of VAT incurred for mixed-use purposes such as on general overheads e.g. rent, utilities and certain statutory expenses are now disallowed.

Your options
Vendors can either use the standard turnover based apportionment method but must remember to exclude the value of any capital goods or services and the value of any goods or services where input tax was specifically denied.

Where the formula yields an equitable ratio, the vendor may use such ratio for apportioning its input tax for mixed-use purposes. Where the resultant ratio is in excess of 95% the vendor may claim a full input tax deduction. This is referred to as the de minimis rule.

Where the ratio does not yield an equitable result, it is recommended that vendors approach their tax practitioners to assist in applying to SARS to use an alternative method that yields a more reasonable result.

SARS and National Treasury should involve all affected parties to participate in developing a more practical, uncomplicated standardised apportionment method and allow other standardised methods. Such a move, will not only result in a more equitable solution for vendors and general industry growth, but will also further entice foreign direct investment such as with the head quarter company incentive.

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Transfer pricing rules for South African domestic intergroup transactions

By Tarryn Spearman, Tax consultant, Grant Thornton Johannesburg

The United Kingdom introduced transfer pricing rules nearly 50 years ago and regularly updates legislation to stay abreast of global trends set by large multinational enterprises that consistently challenge tax authorities through the perceived employment of complex corporate structures and intergroup profit shifting in an effort to minimise the consolidated group tax liability.

Transfer pricing developments in the UK
South Africa, like many other countries, bases certain of their efforts to establish and implement domestic taxation rules and regulations on the experience of the UK. In the past, South Africa has mirrored the UK in developing and enacting of many income tax provisions and it will be interesting to see whether this will be the case with transfer pricing.

As an OECD member country, UK Income Tax Legislation on transfer pricing reflects and enforces the arm’s length principle. The transfer pricing legislation is based on a self-assessment system which requires all companies to self-assess whether their intergroup transactions occur at arm’s length.

Initially, transfer pricing rules were implemented in the UK only in respect of cross-border intergroup transactions. In April 2004, UK transfer pricing legislation was amended to address deficiencies in the introductory legislation which failed to counter a range of UK tax planning structures that allowed companies to shift profits domestically to benefit from assessed tax losses. Transfer pricing legislation now includes domestic transactions, providing the UK with one of the most robust and effective transfer pricing regulation systems.

South Africa’s situation
In the 2010 Budget Speech, Finance Minister Pravin Gordhan said, “Steps will be taken against several sophisticated tax avoidance arrangements and the use of transfer pricing and cross-border mismatches.” This indicated that South Africa had become very aware of the misuse of transfer pricing by companies and the ensuing loss to the fiscus.

The revision of Section 31 of the Income Tax Act 58 of 1962 to align South Africa’s legislation with the OECD Model Tax Convention was one of the major steps taken to address this issue. The revised legislation makes arm’s length transactions compulsory for all international dealings between connected persons.

The discretion and duty to adjust arm’s length prices no longer rests with the Commissioner, but instead, like the UK’s self-assessment, it is the taxpayer’s responsibility to determine arm’s length transfer prices.

Currently, section 31 doesn’t apply to domestic transfer pricing. However, with the revision of transfer pricing rules, section 80A was incorporated into the Act. This section relates to impermissible tax avoidance arrangements and its anti-avoidance rules require all transactions (including domestic transactions) to be conducted at arm’s length. Section 80A therefore indirectly makes provision for domestic mispricing.

However, in a recent Johannesburg Tax Court case (no. 12262), a taxpayer succeeded in charging a South African subsidiary company service fees which were challenged by SARS on the basis that they were excessive in the circumstances and thus, there is much doubt as to whether section 80 is an effective means of regulating domestic transfer pricing.

In his judgment, Judge Willis stated, “…taking advantage of an accumulated assessed tax loss is not an inherent wrong. On the contrary, advantages presented by losses can influence strategic decisions which can save companies and turn them around to obvious benefit of employees and the revenue services, among others.”

This illustrates that the applicability of the arm’s length principle to domestic transfer pricing is very subjective and open to interpretation by the courts.

Seeking help from India
To address the inherent transfer pricing legislation weaknesses, SARS has sought guidance from Indian Revenue Authorities who have experienced much success in the realm of international transfer pricing.

To strengthen SARS’ ability to perform efficient transfer pricing audits and draft guidance in this respect, many employees are being seconded to India. In addition to the UK influence, South Africa is therefore likely to adopt Indian transfer pricing principles which are known to be quite aggressive.

Like the UK, India has also taken steps to address domestic mispricing issues. In the 2011/2012 financial year the Indian tax revenue net was cast wider and deeper by including “Specified Domestic Transactions” in the purview of transfer pricing.

Domestic taxpayers with specified domestic transactions in excess of RS50 million in the new financial year are required to maintain extensive documentation to verify that their domestic intra-group dealings are arm’s lengths and comply with the rules relating to international transactions.

How is your business affected?
SARS has expressed that transfer pricing is a key focus area. Further, with the recent developments in respect of the taxation effects of company reorganisations, the future adoption of domestic transfer pricing provisions by SARS has been specifically referred to.

In the light of this as well as the influence of both UK principles historically and India’s guidance discussed above, it remains to be seen whether South Africa will go ahead and enact specific rules relating to domestic transfer pricing to strengthen the current transfer pricing legislation.

Taxpayers must be prudent in ensuring that all connected party transactions are justifiable in the light of emphasis placed on arm’s length.

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The Grant Thornton International transparency report 2013 describes policies and procedures in place as at 31 December 2012. The member firm information is for the year ended 30 September 2012.

This transparency report outlines the legal structure and governance of Grant Thornton International Ltd and the tools available to the individual member firms of the organisation to support them in delivering distinctive, high quality assurance services.

The report explains the global quality control procedures and the global independence practices and tools. It also highlights the attention paid to client acceptance and risk management.

• Read the Grant Thornton International Ltd transparency report 2013 online
• Download the Grant Thornton International Ltd transparency report 2013

Download the Grant Thornton International Business Report – Mergers & Acquisitions 2013 report – The rise of the cross-border transaction.

Accessing global customers, relationships and new markets may well now be the most important strategic tool for companies seeking to grow, especially as many continue to experience either limited growth domestically or are operating in a highly competitive saturated domestic market.

As dynamic businesses look to Mergers & Acquisitions (M&A) within their own borders or across the globe, Grant
Thornton’s M&A experts across the global organisation of more than 110 member firms have the experience and expertise to assist business owners and management teams in achieving their strategic goals.

The March e-taxline concentrated issues related to the 2013/2014 Budget and so this edition brings the usual news that keeps our readers abreast of tax developments and provides practical business guidance to improve their overall tax outcomes.

In this edition

Can interest really be claimed on share acquisitions? – We look at new measures SARS has introduced that allows for the deduction of interest on loans used to acquire shares, without the complex structures that have become the norm.

Taxation of government grants – We clarify some of the recent changes to the treatment of exempt grants and subsidies, as clients often seek our advice regarding the taxation of government grants.

Proposed relaxation of VAT export rules not all good news – This section highlights the potential administrative relief promised by the proposed relaxation of VAT export rules.

Tax developments in the United Kingdom – We provide an overview of tax developments in the United Kingdom as many local stakeholders are affected by these changes and they provide useful insight regarding tax policy development in the prevailing economic cycle.

In our next edition
Besides the proposed relaxation of VAT export rules discussed in this edition, SARS have issued a number of other DRAFT Interpretation Notes (IN) in recent weeks for commentary. An IN is SARS’ interpretation of prevailing tax legislation and how they intend applying the law – it is important to note that this is not the law.

The most important draft IN issued is arguably the one dealing with section 31 of the Income Tax Act insofar as is relates to Thin Capitalisation. This draft IN is intended to replace the old Practice Note 2, which deals with the determination of the portion of interest that is not tax deductible due to too much loan funding from a non-resident related party.

Of concern is the on-going absence of the proposed IN on Transfer Pricing.

Future e-taxline publications will touch on the above Interpretation Note, as well as the following:

• Taxable benefit – use of employer-provided telephone or computer equipment or employer-funded telecommunication services
• Vouchers supplied at a discount
• Deductibility of expenditure and losses arising from embezzlement or theft of money
• Tax treatment of tips for recipients, employers and patrons
• Deduction of expenditure on repairs
• Allowances for future expenditure on contracts in terms of section 24C.

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Can interest really be claimed on share acquisitions?

By Warren Martin, Director: Corporate tax consulting, Grant Thornton Pretoria

It has become well known through case law and practice that interest on loans used to acquire shares may not be deducted by the taxpayer. This is because taxpayers earn exempt dividend income and it is impossible to show that the interest deduction is directly connected with the production of taxable income. This practice has resulted in the use of complex structures that enable full or partial interest deductions becoming the norm in share acquisition transactions and which hampered many acquisition deal structures. However, tax legislation has been introduced which will simplify the tax treatment and accordingly negate the need for these complex structures in many cases.

During the 2012 fiscal year, SARS partially came to the assistance of the taxpayer – without the fanfare usually associated with major changes – through the introduction of Section 24O of the Income Tax Act. It allows the taxpayer to deduct interest on the purchase of shares, if the following requirements are satisfied:

• The target company must be an operating company i.e. the target company must be a business that provides goods or services for consideration and carries on that business on a continuous basis; or
• The target company is a controlling group company of an operating company; and
• When the transaction concludes, the purchaser must become a controlling group company with at least a 70% interest; and
• The deductions are only available in respect of wholly domestic acquisitions.

Caution
Section 23K, which requires an application to SARS for a directive that covers a specific interest deduction, has been extended with the inclusion of a further subsection. It now includes acquisition transactions conducted under section 24O. As a result, prior to the deduction of any interest balance, taxpayers have to submit an application timeously that provides:

• support for the proposed interest deduction; and
• full details of the parties involved and the proposed transaction.

Section 23K was extended to allow SARS to obtain full detail of the transaction and it is possible these directives will only be granted where there is no loss to the South African fiscus (e.g. foreign debt will not result in a taxable income within the SA tax net and it is considered prudent that these will be disallowed).

Allow time to reap the benefits
The concerned taxpayer should understand that the process to obtain a section 23K directive, although not complex, would require time for both the preparation of the application and the approval process and adequate time must therefore be allowed.

The principals contained in section 24O are a welcome relief to the corporate environment and should result in the ability to avoid complex structures being required by the taxpayer. However some structuring may still be required by moving the deduction to the entity which is deriving the taxable income, in order to optimise the deduction for the group.

The provisions of this section are only applicable from 1 January 2013 and can only apply to acquisition transactions where interest-bearing or debt arrangements are effected after this date. The deduction is also only available for as long as the requirements stipulated above are met and the conditions as stipulated in the Section 23K directive are applicable.

It is hoped that further tax proposals encouraging investment and specifically international transactions will be encouraged by SARS in the future.

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Taxation of government grants

By Anton Kriel, Principal:Tax, Grant Thornton Cape

Generally, government grants or subsidies under incentive programmes have always been exempt from income tax in the hands of the recipient. However, some subsidies or grants were indeed taxable and the tax legislation lacked overall policy direction. This often led to confusion about the nature of the receipt.

During 2012, tax legislation was amended to introduce a uniform set of rules to deal with the exemption of grants and subsidies. Tax legislation now contains a list, which will be updated annually, of all exempt grants or subsidies.

No more double-dipping
Previously, taxpayers who received tax-free grants and used these grants to pay for goods and services acquired in the course of its business, also claimed these costs as tax deductions. Consequently, they received a so-called double-dip benefit, i.e. the tax-free receipt as well as the deduction of the expenses paid with the tax-free income. The new legislation, which introduced a comprehensive set of anti-double-dipping rules, puts an end to the double-dip benefits. It applies to all grants received during tax years commencing after 31 December 2012.

Where an exempt grant is awarded to a taxpayer, the new rules will operate as follows:

• If the exempt grant is used to fund the purchase of trading stock or to reimburse expenses so incurred, the cost price of the trading stock must be reduced by the amount of the grant.
• If the grant is used to fund the acquisition or improvement of an allowance asset or to reimburse the cost previously incurred to acquire an allowance asset, the base cost of the allowance asset must be reduced by the amount of the grant. If the grant exceeds the base cost of the allowance asset, the base cost of that asset will be reduced to zero and the excess grant funding will reduce the taxpayer’s allowable deductions.
• If an exempt grant is awarded to fund the acquisition or improvement of a capital asset or to reimburse expenses so incurred, the base cost of the capital asset must be reduced by the amount of the grant.
• If an exempt grant is awarded and the grant is not used to fund the acquisition of trading stock or an asset, the taxpayer must reduce section 11 deductions otherwise deductible from its income.

The new legislation introduces a significant shift from the way tax-free grants were treated previously and taxpayers will have to take great care in the way they report the receipt of the grants in their tax returns.

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Proposed relaxation of VAT export rules not all good news

By Clifford Watson, Associate director: Tax , Grant Thornton Johannesburg

SARS recently issued draft Interpretation Note (IN) no. 30 which sets out the time and documentary proof which is acceptable when exporting movable goods on the direct basis where the VAT vendor is in complete control of the export process. It also ensures that these goods are exported from South Africa (SA).

Included in the Interpretation Notes are proposed relaxations which include:

• The general time to export the goods from SA is increased from 2 months to 90 days from the earlier of the time an invoice is issued by the vendor or the time any payment of consideration is received by the vendor.
• Specific time rules for export relating to goods supplied progressively or in stages such as construction contracts or where the goods are subject to a process of repair, improvement, erection, manufacture, assembly or alteration. There are also industry specific time of export rules proposed relating to professional hunters and suppliers of tank containers.

Extensions and exceptions
The draft Interpretation Note also makes provision for the extension of such periods in specific circumstances beyond that vendor’s control, subject to an application to the Commissioner prior to the expiry of the initial period.

Vendors are also now allowed additional time to obtain the required documentary proof to substantiate the zero rating. While legislation currently allows three months, the draft Interpretation Note proposes an increase to 90 days calculated from the date the movable goods are required to be exported from SA i.e. 90 days to export and a further 90 days to obtain documentation, which ultimately will increase the time allowed to 180 days.

Currently, vendors are allowed one year to obtain all the documents required to claim back VAT on export sales. If they are unable to do so within the one year limit, they are forced to account for VAT as if the export sale was subject to 14% VAT. The draft Interpretation Note however proposes that this period is extended to the standard five year period in which to claim VAT. This means that, where vendors manage to obtain the remaining documentation, they have five years during which they can then claim back the VAT that they previously declared on the export transactions.

The draft Interpretation Note also makes provision for vendors not to account for 14% VAT on the export transactions in certain instances where the vendor does not obtain the required proof of payment for the total consideration within the required period. Examples include situations where the vendor entered into a payment agreement with its customer and obtained the required Reserve Bank exchange control approvals or where the vendor has written off the debt.

Where the draft note does not make provisions for an organisation’s specific circumstances, it is advisable to approach SARS for a ruling prior to applying the zero rate and possibly exposing the organisation to penalties and interest.

As mentioned in the March 2013 edition of e-taxline, SARS has also proposed the draft Export Incentive Scheme to relax the indirect export rules to also include indirect exports via road and rail at the zero-rate.

Unfortunately, this is not all good news. All the relaxations in the rules come with a number of additional and demanding requirements which should be adhered to avoid penalties and sanctions. The current versions of Interpretation Note no. 30 (Issue 2) and the Export Incentive Scheme are still effective until the new versions are issued. Vendors should ensure that they still comply with the current requirements set out in these publications until they are withdrawn.

SARS Commissioner, Mr Oupa Magashula’s comment that “the economic outlook remains muted and it will have to unleash in order to come near the target,” indicates that SARS will go full out to meet its increased revenue targets. Vendors need to ensure that they are fully compliant with tax requirements, especially when it relates to exports and cross border transactions.

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Tax developments in the United Kingdom

By AJ Jansen van Nieuwenhuizen, Director and Head:Tax, Grant Thornton Johannesburg

On 20 March the British Chancellor announced the national budget for the coming year. This should be of particular interest to a number of South African (SA) companies who have a presence in the United Kingdom (UK) and to individuals that are currently based in SA, but which still have links back to the UK. Most relevant to role players in the SA tax environment, especially local policy makers, is the development of tax policy in the UK in response to the prevailing economic cycle.

The key announcements included:

• A reduction in the corporate tax rate to 20% from April 2015. From 1 April 2013 the main rate of corporation tax will fall from 24% to 23%. This rate will reduce to 21% from April 2014 and then to 20% from April 2015. The UK will then have the lowest corporate tax rate in the G20 group of nations. At 28%, SA certainly has room to consider a reduction in our corporate tax rate in order to enhance our regional positioning for foreign investment and bolstering the economy.
• A £2,000 employment allowance from April 2014 which will reduce National Insurance contributions. This is a move that will be welcomed by smaller businesses seeking to hire additional employees, although it will not provide any help to the self-employed who have no employees.
• A new capital gains tax relief on the sale of a controlling interest in a business from 2014. The Chancellor has revealed proposals for a new capital gains tax exemption to help support employee share ownership. This tax exemption, which will be available from April 2014, will apply to certain qualifying disposals of a controlling interest in a business into an employee owned structure. It is hoped that it will encourage entrepreneurship.
• Income tax and National Insurance relief on shares for employee shareholders from 1 September 2013. Plans to offer tax relief for employees receiving company shares in exchange for releasing some of their employment rights were released. In particular, the government confirmed that the first £2,000 of shares received by employee shareholders would be exempt from income tax and NIC. The element of releasing certain employment rights is of interest for SA, where it is argued that our labour laws are skewed towards the benefit of the employee. Surely a simple measure such as this could effectively deal with one of the main detractors for foreign investment into SA and for local companies expanding and investing back into their businesses?
• An increase in the new above the line research and development tax credit to 10% from 1 April 2013.
• The removal of Stamp Duty on shares traded in growth markets such as AIM and ISDX Growth Market from April 2014. The Chancellor has confirmed that the government will abolish stamp tax on shares for companies listed on growth markets including the Alternative Investment Market (AIM) and the (ICAP Securities & Derivatives Exchange) ISDX Growth Market, from April 2014. This is a significant event for the growth market that is expected to drive larger fund volumes towards AIM companies, thereby lowering the cost of their capital.

The Finance Bill 2013, published on 28 March 2013 contains (amongst other things), actual legislation to introduce:

• A general anti-abuse rule from the date of Royal Assent.
• A statutory residence test from 6 April 2013. From 6 April 2013, a new statutory test for UK residency will be introduced. The new residence test adopts a mixture of objective tests (day-counting) and more subjective rules looking at a sliding scale of how closely a taxpayer is linked to the UK. As part of these reforms, the government has also confirmed that ordinary residence will be abolished. As expected, there is anti-avoidance within the new legislation intended to prevent temporary non-residence for the purposes of avoiding tax.
• Corporation tax reliefs for the creative sector from 1 April 2013. Three new tax reliefs for the animation, high-end television and video games industries will be introduced from 1 April 2013, subject to State aid approval from the European Commission. These will provide an additional deduction at a rate of 100% of qualifying expenditure or a payable tax credit at a rate of 25% of qualifying losses surrendered.
• An annual tax on enveloped dwellings (ATED) from 1 April 2013 and capital gains tax on such dwellings from 6 April 2013. Enveloped dwellings are those that are owned by ‘non-natural’ persons (NNPs) (broadly companies, partnerships with companies amongst their partners or collective investment schemes) and which exceed a certain value. The purpose of this tax on residential properties is to address perceived tax avoidance. From 1 April 2013, residential properties owned by NNPs that are valued at over £2 million, will attract an annual charge.

The ATED will be calculated on a step basis where the property value exceeds set thresholds as follows:

Read further commentary and perspective from our colleagues at Grant Thornton UK.

South Africa’s 2013/2014 Budget focused on compliance, tax evasion and companies seeking to shift their income around the world in an effort to avoid taxes. In this edition of e-taxline, we take a closer look at two of these focus areas – compliance and the impact of foreign exchange relaxation will have on offshore investment decisions.

The Budget speech was read during a challenging time for the South African economy. While there are signs of economic recovery in other parts of the world, we are not achieving the robust growth rates the country needs, especially considering unemployment and other imbalances in South Africa.

At the same time, tax payers are becoming increasingly insistent that their tax money should be spent efficiently, with no more waste and corruption. To this end the minister introduced specific programs to address these issues and instead ensure that the hard earned taxpayer’s money is going towards the services and infrastructure spending required to grow the country.

Manage tax risk to protect profit
It would also appear that Treasury has realised that the ‘golden geese’ cannot contribute any more than they already are and is now looking to collect every penny from registered tax payers while continuing to expand revenue collections through other measures that we have seen being implemented over the past few years.

Complying with the latest record keeping requirements
While on the topic of compliance, the requirements for record keeping are specifically prescribed by the Tax Administration Act (TAA) which became effective on 1 October 2012. Together with Government Gazette No 787, the TAA also stipulates the requirements for electronic record keeping.

VAT proposals from Budget 2013
Your business and personal pocket may be affected by the VAT proposals announced during the Budget speech.

Gateway to Africa – Is this goodbye to foreign exchange restrictions?
Another announcement form the 2013 Budget was that new financing or holding companies would in future not be subject to exchange control regulations. If accepted, these proposals will take South Africa a step closer to becoming the headquarter investment destination in Africa.

Transfer pricing – Transactional method comparability concerns
Finally, in our transfer pricing feature, we look at the pros and cons of the methods available to companies in determining reliable arm’s length prices as part of their transfer pricing analysis.

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Manage tax risks to protect profit

By Willem Oberholzer, Tax partner, Grant Thornton Pretoria

The boards of directors of corporate entities in South Africa have become well aware of the increased risk exposure that they are facing in their personal capacities as custodians of their companies’ Income Tax, PAYE and VAT obligations. Increased monitoring of corporate processes by SARS with its additional assessment systems in place certainly adds further demands here, especially the effect of the new Tax Administration Act, the onerous IT14SD forms and the notable improvement in the SARS’ review and auditing processes of submitted income tax returns.

As tax payers are adjusting to recent and proposed tax changes, it seems opportune to remind ourselves of Benjamin Franklin’s famous quotation that “nothing is certain except death and taxes”.

There is very little that corporate entities or individuals can do to avoid their tax fate – not much can be done when we consider the macro-economic state of the country and the world as a whole. The focus for the 2013 tax year should really be on managing tax risks by becoming even more conscious of our personal and corporate compliance and administrative obligations.

We are emerging from a recession, with some countries still largely embroiled in it, and no real end is in sight. The reality is that growth has slowed, profits are under pressure and the resulting income collection of the state has significantly been reduced.

Simultaneously government is undoubtedly attempting to curtail the levels of State lending wherever possible. It therefore stands to reason that as much as companies would move to grow market share, the government, through SARS, will focus on collecting as much as possible from the tax payers.

In its simplest form, we are well aware that tax is levied on net income and it therefore makes sense that SARS will have indeed ensured they collect every cent from registered tax payers while continuing to expand revenue collections through other measures that we have seen being implemented over the past few years.

Some of these measures include:

• closer scrutiny of the VAT returns and reconciliations to declared income
• the review of registration details of companies for income tax and VAT
• the closer reassessment of fringe benefits afforded to employees and more specifically to directors of companies
• the review of structured finance transactions
• the enforcement of transfer pricing laws.

When taking into account that counties like the US, UK, Canada, Belgium etc. have successfully moved towards having their corporations and individuals pay closer attention to tax filing obligations, South Africa is only now beginning to come to terms with the harsh realities.

So it stands to reason that South Africa’s already strained tax payer base – the ‘golden geese’ – must make doubly sure it is giving adequate attention to the extent to which filed income tax returns are completed, while compliance risks need to be carefully mitigated and managed.

Reducing exposure to penalties and interest that could further reduce profit margins will no doubt bring some relief to our “golden geese”.

SARS’ new Tax Administration Act indicates that penalties for late submission, under declaration and incorrect filings could amount to between 5% and 200% of the already strained profit lines. So protecting that golden bottom line wherever possible would prove to be a very realistic and proactive step. SARS is casting the tax net as wide as possible, and will continue to discourage nefarious tax practices through a transparent penalty system.

After all, generating turnover in a strained economy is a lot harder to achieve than minimising costs that could have been prevented through a couple of pragmatic internal controls pertaining to tax compliance and operational risk management.

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Record keeping – are you complying with the latest requirements?

By Michelle Scholtz, Senior tax consultant, Grant Thornton Johannesburg

In the August 2012 e-taxline we discussed the general requirements and importance of record keeping for tax purposes.

However, when the Tax Administration Act (TAA) came into effect on the 1 October 2012, effective record keeping was specifically prescribed and failure to comply became a criminal offence which can result in fines or even imprisonment.

We have summarised the basics of record keeping:

General requirements of the TAA

1. Records are defined in the TAA as the records, books of account or documents that a person is required to keep or retain in terms of the TAA.
2. The record-keeping requirements apply to a person who:
   • has submitted a return
   • is required to submit a return for a tax period and has not done so
   • due to the application of a tax threshold or exemption is not required to submit a tax return but who, during the tax period, received income, had a capital gain or loss or was engaged in any other activity that has a tax effect or would be subject to tax
3. Records must be retained for a period of five years from:
   • the date of submission of a return, or
   • where no return is required, from the end of the relevant tax period.
   • However, if the records relate to an audit or investigation, or an objection or appeal lodged against an assessment, the records must be retained until the audit is concluded or the assessment or decision becomes final, even if it exceeds five years.
4. The records must be kept in:
   • their original form
   • an orderly fashion
   • a safe place;
   • or in the form, including electronic form, as may be prescribed by the Commissioner.

Electronic records
Section 30(1)(b) of the TAA and Government Gazette No 787 dated 1 October 2012 specifically prescribes the requirements of electronic record keeping.

1. Electronic records are defined in the GG as records kept or stored in electronic form on a computer or other electronic storage device which were either originally created in an electronic form, or which were converted from any non-electronic form, to an electronic form.
2. The GG stipulates inter alia, that:
   • there must be adequate storage and back up of the electronic records
   • the electronic records must be in an acceptable form that satisfies the standards contained in the Electronic Communications and Transactions Act
   • the records must be easily accessible for inspection by SARS at all reasonable times, if required
   • the records must be kept and maintained at a place physically located in South Africa, unless otherwise authorised by SARS. However, such authorisation will only be given if SARS is satisfied that the records can be accessed from South Africa and that their foreign location will not impair accessibility of the records.

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VAT Proposals from Budget 2013

By Basil Dikobe, Tax manager, Grant Thornton Johannesburg

Minister Gorhan’s 2013 Budget Speech included a number of proposals affecting VAT. Here are some of the highlights and our view on their practical implications on tax payers:

Foreign businesses supplying digital goods or services such as e-books or music in South Africa will be required to register as VAT vendors.
Regulating transactions that are mainly concluded online and obtaining information relating to such transactions will be arduous.

Foreign businesses who want to transact with South Africans will be subjected to SARS’ stringent VAT registration and compliance rules. Some of the compliance requirements will include opening a local bank account and appointing a South African resident VAT representative who will be responsible to carry out the duties as imposed by local legislation.

While this could result in a significant source of income for SARS, the South African consumer will be affected if the proposal is accepted. Foreign businesses will either choose not to transact with South Africans due to the compliance burden, or pass the additional VAT and administration costs on to the consumer.

The current VAT treatment of financial services and VAT apportionment within the financial sector will be reviewed.
A significant portion of financial institutions’ supplies are exempt from VAT. These institutions, like banks, are therefore limited to the amount of input tax that they can claim on costs incurred. This VAT leakage has the effect of increasing the vendor’s cost base.

Changes to the VAT treatment of financial institutions’ supplies will have a direct impact on the consumer. If transactions that are currently VAT exempt become taxable, the cost will likely be passed on to the consumer. However, it will also result in an increased VAT claim for the financial institution – this could soften the blow to the consumer if passed on in the same way.

The existing turnover based method of apportionment will be reviewed for non-financial sectors.
The turnover based method of apportioning input tax is the only apportionment method allowed without a specific ruling from SARS to use an alternative method of apportionment, such as the input based or time based methods.

In recent years it has become difficult, if not impossible, to obtain a VAT apportionment ruling from SARS to use an alternative apportionment method. All non-financial services sector vendors and their tax consultants are waiting expectantly on any proposed changes which will provide clarity and certainty.

Proposal to extend the current VAT exemption on the supply of services by a body corporate to home owners associations (HOA).
While the input VAT of the HOA will be limited due to non-vatable expenses being incurred, the HOA should be in a position to decrease levies / fees charged to members of the association due to the exemption of the levies/fees.

New legislative amendments to be made on export regulations to replace the current export incentive scheme.
SARS issued a draft Export Incentive Scheme for public comment late last year. The draft scheme proposed that vendors could in future also export goods indirectly via road and rail at the zero-rate, provided they comply with a number of demanding requirements. Comments were due by 31 January 2013.

If approved, it would generally be easier for vendors to charge14% VAT and leave its customer to claim from the VAT Refund Administrator or alternatively comply with the direct export requirements and supply the goods at the zero rate. As there are no requirements to be met, it may be easier to charge the 14%.

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Gateway to Africa – Is this goodbye to foreign exchange restrictions?

By Hylton Cameron, Associate director, Grant Thornton Johannesburg

Another announcement from the 2013 Budget was that certain financing or holding companies would in future not be subject to exchange control regulations. This is another positive step in the gradual process of relaxing exchange controls that we have seen over the years.

The Reserve Bank provided further details and issued Circular 7, which specifies that a JSE listed subsidiary company can now exist without exchange control restrictions.

Generally, when an investor considers investing offshore, other than the actual investment decision, the investor will also consider the:

• tax implications of holding or acquiring the investment
• the exchange control restrictions related to the investment

Due to tax and exchange control regulations, some investments are held offshore via intermediary companies. I.e. the investment flows from Company A to B to C instead of directly from Company A to C. Company B is often located in a tax friendly jurisdiction in an effort to ease the tax burden, and due to the fact that B does not have exchange control restrictions.

Easing foreign exchange restrictions
The proposed reform aims to remove exchange control hurdles and therefore possibly limit the need to involve an intermediary company. The proposals are specific and require, amongst other things, the new holding company to be registered with the Financial Surveillance Department.

Easing the tax burden
Addressing the second question posed by offshore investors, the Budget Speech also provided that these new financing or holding companies may be entitled to use their foreign currency as a starting point for tax calculations. This proposal is welcomed, because it will mean that the company should not have unrealised gains or losses on certain foreign currency assets or liabilities.

Will these proposals make South Africa more attractive to African investors?
While the proposal should make South Africa more competitive, Mauritius still provides a more attractive tax environment, whilst not having any exchange control restrictions. Investors will therefore have to decide between a lower effective tax rate in Mauritius versus the practical benefits of being established on the African mainland, close to potential markets and key infrastructure. Most important is the consideration of Controlled Foreign Company tax legislation – many companies may establish a presence in Mauritius for the wrong reasons and still have their income tax in South Africa, therefore defeating the objective and incurring unnecessary costs. Seek professional tax advice before taking this leap – it will be worth your while!

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Transactional method comparability concerns

By Tarryn Spearman, Tax consultant, Grant Thornton Johannesburg

The foundation of any transfer pricing analysis lies in the ‘arm’s length principle’. Roughly, this means that the price agreed upon by related parties of Multinational Enterprises (MNEs) is tested against the price that would be mutually agreed upon by two unrelated parties entering into a similar, comparable transaction.

In rare instances, it is possible to compare the prices charged in related and unrelated party transactions directly. More often however, the relevant comparability criteria required to deem the transactions substantially similar are not met. This is because the comparability criteria applied in such analysis (generally referred to as a comparable uncontrolled price method analysis) is largely ‘product’ or ‘service’ focused.

It is often difficult to identify identical products with which to compare the tested party product and making adjustments to eliminate any significant differences is tricky. As a result, most taxpayers rely upon the other transactional methods prescribed by the Organisation for Economic Co-operation and Development (OECD) namely the Cost Plus Method (CPM) or the Resale Price Method (RPM.)

Outcome based measurement
Referred to as outcome based, these methods compare the ultimate profits achieved by companies as result of an overall pricing policy. The CPM and RPM are usually more practical to apply and focuses more on functionality, and less stringently on product or function similarity.

By applying these methodologies, a taxpayer will effectively compare the profit margin resulting from a single transaction to the overall profit margin of a functionally similar company. There has been much debate as to the acceptability of the comparison in trying to establish an arm’s length result, as overall company margins are affected by a number of profit drivers within the business.

Mind the (data) gap
If comparable company data were reported more comprehensively in segmented balance sheets showing the results of individual business divisions, the results of the CPM and RPM would be far more comparable in that divisional data could be used as a basis for comparison. However, it is rare for companies to report their divisional financial information publically and hence taxpayers are forced to use overall margins and make adjustments as needed. This is a subjective exercise and there is little guidance regarding data adjustments that won’t affect the viability of the independent comparable transactions.

Comparing apples to oranges
Databases such as Bureau Van Dijk’s product are typically used to establish a set of comparable companies when performing transfer pricing analyses. However, these databases only include data of companies that have regulatory requirements to submit and publicise financial accounts. Therefore, the comparable data sets are grouped together by very ‘broad’ trade descriptions and the comparable transactions produced by the database may be quite different in reality. This often compels tax advisors to perform further research to determine the true comparability of transactions.

Another weakness of such an analysis is that companies and their advisors are fully aware of the prices or margins they seek to achieve in order to minimise transfer pricing adjustments. Taxpayers may then “cherry pick” by eliminating outlier companies and selecting only those that have the desired results. This defeats the purpose of transfer pricing analysis and will clearly not yield a reliable arm’s length result.

In addition, developing countries such as those in Africa, seeking to legislate and apply transfer pricing provisions, are faced with the complete lack of comparable financial information relevant to their geographic areas. Due to market differentials, country risk adjustments would likely be required to make the data from these databases relevant. In practice, adjusting the data is often complex and even impossible in some cases as both taxpayers and tax authorities lack the required skill and experience to undertake the task.

Taxpayers embarking on a transfer pricing documentation or benchmarking exercise should therefore ensure that they are involved in the process of documenting their transfer pricing policies and assist in validating the benchmarking results carried out based on their businesses criteria. This will ensure that the ‘comparable’ companies being accepted or rejected by the tax advisor in the comparability process are being treated correctly so that a valid arm’s length range is established. Nobody knows a taxpayer’s business like himself, so it makes sense that all your inputs are considered.

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Grant Thornton’s tax directory 2013 is an easy reference, pocket-sized overview of the South African tax system, incorporating announcements made in Minister Pravin Gordhan’s Budget speech on 27 February 2013.

Download: Grant Thornton tax directory 2013 (PDF)

Below are this year’s the income tax changes in a nutshell.

Tax tables
In terms of the tax tables, as usual and thankfully the Minister has increased the tax brackets to allow for inflation.

One of the possible Budget expectations was an increase of the marginal tax rate to above 40%, and this has not materialised. In stating that the rate has remained the same though, if one uses a CPI rate of 6%, even after the “inflationary” adjustment to the tax tables, unfortunately year-on-year tax payers will in fact be worse off, if you earn R120 000.00 or more per year.

Sin taxes
In terms of Sin taxes announced for 2013 – just like the sun rises in the morning – people will need to pay more for sins – the rates have gone up yet again.

Non-retirement savings
This year, the Minister announced that there is a proposal for contributions to tax preferred savings accounts with an annual contribution limit of R30 000 and lifetime limit of R500 000. Such investment payouts will be tax free but this is only from April 2015. This should provide an incentive to invest, although at the same time the interest-free exemptions will be increased from 1 March 2013 and then no further. Initially, at least this would seem beneficial but further details would be required to be ascertain any long term benefits. A simple interest deduction would probably have been easier to administer!

Retirement savings
Increased contributions to provident funds will be allowed from the current 20% (SARS practice) up to 27.5% of taxable income. However, this will be capped at R350 000 for equity reasons. If one is promoting retirement savings, it seems more appropriate for government to incentivise this with no cap but it is understandable to see where Treasury is coming from.

Employment tax incentives
To help youth enter the workforce, an incentive will be provided, but this benefit will fall away when the person reaches the personal income tax threshold level. It will be interesting to see whether this will have any benefit at all in terms of “big picture” tax income and employment in general.

Employer housing
Assistance announced by the Minister to low income earners in regard to acquiring houses from employers is welcomed.

Exempt income from off-shore
Currently employees working overseas are not taxed if they are off-shore for more than 183 days and 60 continuous days. It would seem that this will be looked at again especially if there is a South African employer involved. In view of numerous Double Tax Agreements which provide for the 183 day rule, such changes may create more complexities than achieving any real revenue for government.

Special economic zones
Similar to other foreign jurisdictions, the Minister is proposing to provide incentives for investment in certain special economic zones. In this regard the corporate tax rate will be 15%, an employment incentive for workers earning less than R60 000, plus an accelerated depreciation allowance for buildings. This is pleasing – at least in theory.

Donations
For the philanthropic tax payer, donations in excess of 10% of your taxable income to certain Public Benefit Organisations (PBO’s) will now be allowed as a deduction in a subsequent year (currently the deduction is limited to 10% of taxable income, and the excess is lost). For the few providing such donations this would only really assist if the donations are less than 10% in the following year.

Old age grants
This is currently based on a complex “means test”, but by 2016 this is proposed to be phased out, and all South Africa citizens will be eligible, although there will be other off-sets for the wealthy. This may then shift the tax complexity to the old age taxpayer which would be unfortunate wouldn’t it?

Trusts
These have been a long-time concern for SARS. Effectively discretionary trusts are being killed as they will be taxed at 40%, although they have allowed distributions as tax deductible expenses, to the extent that the trust has taxable income. The beneficiary will then receive income if there is a deduction; alternatively if there is no deduction for the trust, the amount will be received tax free.

Off-shore trusts
The Minister announced during his Budget Speech that distributions from off-shore foundations will be treated as ordinary revenue – ouch!

Share schemes
Last year we were promised reform to this complex legislation, but no changes have been made. Again changes are being promised – and we wait in hope.

Acquisition debt
Various deals over the years have caused this to be a large concern for SARS. The current rules should adequately deal with this. However the proposal is to take this one step further and only allow the deduction for up to five years. This may kill numerous acquisitions – sadly, like a shotgun, this will take out both the good and the bad.

Withholding Tax (WHT) on interest and royalties
Last year’s budget saw the announcement that this would come into effect on 1 January 2013 and then this was moved to 1 July 2013. Now, in terms of the Ministers 2013 speech the effective date has been pushed out again to 1 March 2014. In addition this will also apply to cross border service fees – strictly speaking this is probably already covered by current law, nevertheless people should be looking at the Double Taxation Agreement more closely to ensure the relevant relief.

NHI
Once again we await the funding proposal (to be released in 2013) of this leviathan.

No submission of tax returns
Currently if you earn employment taxable income of less than R120 000 you do not have to submit a tax return – this is to take a large leap forward to a taxable income of R250 000, which will be a welcome relief for many.

Review of various innovative financial instruments
This area will be researched in more detail by SARS. This is the constantly moving field of the planner versus the taxman – and the taxpayer whenever looking at such instruments should be aware that this is on SARS’ radar screen.

Leasehold improvements
Problems exist with tenants improving leasehold property. It’s proposed that the person using the asset as opposed to the person owning the asset be entitled to a tax deduction. But the main issue here is that someone should get the allowance, and if this proposal allows for this, it will be welcomed.

SARS, as an international policeman
Currently the taxpayer is entitled to a deduction when an expense has been incurred. This can create uneven tax treatment when one is dealing with foreign parties. It is proposed that the deduction will only be allowed when the expense has been paid. This type of amendment is welcomed from a tax consulting perspective as the law is simply being made more complex which means help is needed to understand difficult legislation and this inadvertent helps with advisory fees – not a great planning tool on the whole.

Treasury operations
Large groups usually have a company which act as a treasury company. It is proposed that listed companies can elect one such company to act as such and it will be treated as a non-resident company for Reserve Bank purposes. They can then use their foreign currency as a starting point for tax calculations. This is most welcomed as an incentive to keep such operations within SA. It would be preferred to see such dispensation to be allowed to all companies meeting certain requirements as opposed to only the listed entities. Unfortunately the impact of this proposal will be somewhat diluted as such treasury operations are often physically conducted from more tax-friendly jurisdictions – with which we currently cannot compete.

Controlled foreign companies
The Minister’s speech provides that certain anomalies have crept into controlled foreign company legislation over the years, and these will require clarification. Certain legislation in this regard does indeed provide what one can only assume are unintended consequences and we certainly hope that these will be rectified.

Winnings
To close, a gambling tax was proposed in 2011 and we are told this will be implemented in 2013. With any luck we can only hope this “lotto winning number” will be missed again.

• Grant Thornton Budget 2013 tax data card
• Grant Thornton Budget 2012 tax data card – Budget for growth
• Grant Thornton Budget 2011 tax data card – Tax highlights
• Grant Thornton Budget 2010 tax data card – A new beginning
• Grant Thornton Budget 2009 tax data card – Budget for all seasons
• Grant Thornton Budget 2008 tax data card – How much are you in for

The Grant Thornton Budget tax data card is a handy pocket guide that contains all the salient features of Finance Minister Pravin Gordhan’s Budget speech including:

Tax schedules

• Customs and excise
• Residence Basis of Taxation
• Provisional Tax
• Deductions
• Allowances
• Dividends tax
• In the pipeline…
• Tax Administration Act penalties
• Capital gains tax
• Companies – tax rates
• Donations tax (Rate – 20%)
• Estate duty (Rate – 20%)
• Exchange control – individuals
• Fringe benefits tax
• Individuals and trusts – tax rates
• Interest rates
• Other taxes, duties and levies
• Schedule of values for travelling allowances
• Capital allowances
• Transfer duty
• Value added tax

The below calculator is merely an indication of your tax saving as a result of the 2012 Budget. Your actual tax saving will vary based on the deductions and exemptions you may qualify for. Data for graphs illustrating how your tax rands are spent by Government is based on information from the National Treasury Budget highlights 2013.

Calculator and graphs developed by Netspace.

Download the Grant Thornton International business report: Focus on South Africa.
Quarterly research highlights political uncertainty, poor government service delivery and restrictive regulatory environment as biggest growth concerns. [read more]

Dividend withholding tax moves into the second phase
Following the Minister’s speech, dividend withholding tax (DWT) replaced the Secondary Tax on Companies (STC) regime. This new tax dispensation, effective from from 1 April 2013, has introduced a number of compliance requirements and it is expected that both SARS and taxpayers will experience teething problems as systems are implemented and developed to administer DWT. Find out what the current filing requirements are as SARS moves into the second phase of DWT implementation. [read more]

Proposals to encourage retirement savings through tax incentives
The second topic relates to the proposed changes to retirement fund contributions, which was recently the cause of confusion when certain commentators incorrectly suggested that the new legislation would be effective from 1 March 2013. The proposed changes are yet to be legislated and will only be effective from 1 March 2014, but will have a significant impact on both taxpayers and employers that will require advance planning. [read more]

Controlled foreign companies and the concept of effective management
Failing to do proper tax planning, many South African taxpayers that form companies in foreign jurisdictions to seize investment and expansion opportunities or benefit from no or low tax rates are faced with the shock of double taxation. Hawa Hoosen explains that taxpayers that own foreign companies need a clear understanding and awareness of the controlled foreign company (CFC) regime, to avoid possible double taxation. Hawa has recently joined the Grant Thornton Tax team as a consultant, based in Durban. [read more]

SARS takes further steps to strengthen their transfer pricing initiatives
Finally, in the transfer pricing feature, we look at SARS’ latest initiatives to strengthen its transfer pricing division’s capabilities through collaboration with fellow BRICS countries. [read more]

Budget 2013
Remember to bookmark www.budgetnews.co.za and follow @grantthorntonza on twitter for Grant Thornton’s downloadable 2013 tax data card, a user-friendly tax calculator, interest rate comparisons and our analysis of Minister Gordhan’s 2013 Budget Speech on 27 February 2013.

Dividend withholding tax moves into the second phase

By Bruce Russell, Tax consultant, Grant Thornton Cape Town

Due to delays encountered by various stakeholders in implementing and developing systems to administer dividend withholding tax (DWT), which was introduced on 1 April 2012, SARS is adopting a phased approach to enforce the new tax.

SARS’ phased approach
Initially, in order to facilitate the timely payment of DWT on dividends paid from 1 April 2012, a standardised return, DTR02 was made available which allowed the manual capturing of DWT due.

The second phase requires transaction data to be submitted through the submission of a Dividends Tax Transactions Information declaration, or DTR01. SARS has now informed companies that the DTR01 has to be completed in respect of all DTR02s previously submitted for dividends paid after 1 April 2012. The deadline for the submission of DTR01 forms for DWT previously declared is set for 1 March 2013.

However, from 1 January 2013, a DTR01 must be submitted to SARS for dividends paid on or after this date. Once the DTR01 is successfully filed, the DTR02 must be requested via eFiling and filed by the company or regulated intermediary paying the dividends.

DTR01 data requirements
Information regarding dividends received and dividends paid must be supplied and will allow SARS to track and match DWT data.
For dividends paid by the company the following must be provided for each beneficial shareholder to whom a dividend is paid:

• legal name
• identity number or registration number
• income tax number
• tax residency
• any criteria qualifying the beneficial owner for reduced DWT (including an exemption from DWT)

Similarly, in order for SARS to track dividends which are exempt from DWT, companies must declare all dividends received. The information required for each dividend received includes:

• The ISIN number of JSE listed shares on which the dividend is received
• The date that the dividend is declared, paid and received
• The STC credit utilised per share
• The dividend amount received per share

Supporting documentation required for preparation of DTR01
Signed declarations are required from the beneficial owner if dividends are paid to a beneficial owner who is:

• exempt from DWT (e.g. if the dividend is paid to a SA registered company)
• or is subject to DWT at a reduced rate (e.g. if the dividend is paid to a foreign shareholder who is entitled to a reduced rate of DWT in terms of a double tax agreement). If a reduced DWT rate applies, the signed declaration must state the reduced rate.

The beneficial owner is required to inform the dividend paying company when the beneficial owner’s DWT status is altered, or when it will no longer be a beneficial owner of future dividends paid.
SARS do not provide declaration forms to be completed by beneficial owners. The company paying the dividend is responsible to provide a declaration form. Contact your Grant Thornton office for assistance when preparing such a form.

Channels for filing DTR01 and DTR02 returns

• Companies paying dividends to 20 or fewer beneficial ownersmay file their DTR01 and DTR02 returns using SARS’ eFiling system or by capturing the data at a SARS branch office.
• Companies with more than 20 and fewer than 10 000 beneficial owners will need to file DTR01 and DTR02 returns via e@syFile.

Don’t delay preparing and submitting your DTR01 and DTR02 returns.
SARS have indicated that for DTR02 returns previously submitted, the accompanying DTR01 return is to be submitted by 1 March 2013. In order to allow for the timely payment of DWT payable on future dividends, DTR01 and DTR02 returns are to be submitted by the end of the month following the month during which the dividend was paid.

Administering this newly introduced tax will undoubtedly cause some teething problems and frustration. Some areas of concern include:

• The DTR01 return requires information to be included which may not have been collected from beneficial shareholders in the past. If not obtained in time, the issuing and filing of the DWT return (DTR02) for current dividends paid, may be delayed and result in late submission. Such a late submission will expose the dividend paying company to interest and penalty charges.
• The DTR01 return further requires data to completed in line with SARS’ formatting requirements and should therefore not be left to the last minute.

To avoid penalties, frustration and wasted time, start this process as soon as possible and if you have any questions, contact your Grant Thornton office for assistance.

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Proposals to encourage retirement savings through tax incentives

By Douglas Gaul, Tax manager, Grant Thornton Johannesburg

Finance Minister Pravin Gordhan revealed a proposal to change legislation governing retirement fund contributions in the 2012 Budget. Recently, this proposal was at the centre of confusion and concern amongst taxpayers, when certain commentators incorrectly suggested that the new legislation would be effective from 1 March 2013.

If legislated, the proposed changes will only become effective from 1 March 2014 and have a significant impact on employers and taxpayers alike.

The current position
There are currently three types of retirement saving vehicles available to South African taxpayers – pension, provident, and retirement annuity funds. Each of these has separate tax dispensations for the treatment of contributions to, and benefits received from the funds.

Provident funds

• Employer contributions are not considered fringe benefits and therefore not taxed in the hands of the employee.
• An employee’s contributions to a provident fund are not allowable as a deduction against taxable income. However, the contributions are carried forward and are deductible against the lumpsum received on retirement from the fund.

Pension funds

• Employer contributions are not considered fringe benefits and therefore not taxed in the hands of the employee.
• An employee can however claim a deduction for contributions to an approved pension fund, limited to a maximum of the greater of 7.5% of their retirement funding employment income*, or R 1 750.

* Retirement funding employment income is essentially an employee’s cash salary, excluding travel allowances and bonuses, as well as other non-employment income such as interest (net of the exemption), annuities, etc. Further, any portion of the employee’s salary that is not taken into account in calculating contributions made by him, or on his behalf, to a pension or provident fund is excluded.

Retirement annuities

• Contributions by an employer to a retirement annuity are currently considered fringe benefits in the hands of employees.
• An employee may claim a deduction in respect of contributions to a retirement annuity fund limited to the greater of:
  • 15% of his non-retirement funding employment income*;
  • R 3 500 less his current contributions to his pension fund; and
  • R 1 750
• Any portion of the contribution that is not deductible is carried forward and will be available for deduction against future non-retirement funding employment income and/or the lumpsum payable on retirement from the fund.

In the case of contributions to a pension fund and/or retirement annuity fund, there is opportunity to make an additional “top-up payment” to such fund before the end of February to get the maximum tax benefit, if the rules of the fund allows for this.

If this is possible, it means that, at the maximum marginal tax rate, a taxpayer will get an additional tax deduction of 40% of the top-up contributions made, which means that the fiscus is effectively financing 40% of such contributions.

Proposed changes
A recent discussion document released by Treasury indicated that the current regime governing deductions of retirement fund contributions is considered unsatisfactory for the following reasons:

• The complexities and undue administrative burden involved in tracking the deductibility of contributions;
• A perceived unfair advantage gained by high income earners arising from the absence of a monetary cap on the tax deductions available to them.

The following changes were therefore proposed to simplify and balance thetreatment of retirement fund contributions:

It appears that all contributions by employers to the three types of retirement funds will be treated as a fringe benefit, taxed in the hands of employees, subject to, inter alia, the allowances below:

• Employees will be granted a deduction of employer and employee contributions to all types of retirement funds of up to 22.5% (or 27.5% for those aged 45 and above) of the higher of employment income or taxable income, with a maximum deduction of R250 000 p.a. (R300 000 p.a. for those aged 45 and above). It appears that employment income will essentially mean “cost to company” and will include employer’s contributions to any funds on behalf of employees.
• Non-deductible contributions in excess of the above thresholds will be exempt from income tax if, on retirement, they are taken as part of a lump sum or as annuity income.
• A rollover dispensation, that is similar to the current retirement annuity fund contributions dispensation, will be adopted to cater for flexibility in contributions for those with fluctuating income.

Below is an example of the potential effects on a taxpayer.

Note:
The deduction of R 93 750 is less than the maximum deduction allowable (22.5% of R 540 000 = R 121 500). However the deduction exceeds the fringe benefit and the excess of R 3 750 will be carried forward and will be available for deduction on retirement.

This new tax regime is yet to be legislated but theproposed implementation date is 1 March 2014.

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Controlled foreign companies and the concept of effective management

By Hawa Bibi Hoosen, Tax consultant, Grant Thornton Durban

South African taxpayers commonly form companies in foreign jurisdictions to seize investment and expansion opportunities. However, often the intention of the taxpayer is also to benefit from no or low tax rates in these foreign jurisdictions. These actions have resulted in an erosion of the South African tax base and the controlled foreign companies’ regime was introduced to prevent this and discourage taxpayers from shifting their income into such jurisdictions.

Taxpayers that own foreign companies need a clear understanding and awareness of the controlled foreign company regime as the foreign company in question, although incorporated in a country outside of South Africa, may still be subject to tax in South Africa.

The place of “effective management” of a company that is not a South African resident must be determined with absolute certainty where a company is considered to be a controlled foreign company. A ‘controlled foreign company” (CFC) is:

• a company that is incorporated and considered to be effectively managed outside of South Africa and
• 50% or more of the participation rights or voting rights of that company are held directly or indirectly by South African residents.

Effective management
It follows that, the place where a company is considered to be effectively managed is where it will be resident for tax purposes. Interpretation Note 6 (IN 6) issued by SARS during 2002, outlines and provides guidance to taxpayers on SARS’ view on the meaning of effective management and conducts a “three-stage inquiry” in practically determining this.

• Where the management functions of a company are carried out at a single location, that location will be the place where the company is effectively managed.
• Where the management functions are carried out at multiple locations for instance the use of videoconferencing or email, then the place of effective management is where the regular or day-to-day business operations and activities are run and where operational and commercial decisions are implemented.
• Where management functions and operations are carried out from various locations and in this instance the place of effective management is the place with the “strongest economic nexus”. It is cautioned that IN 6 serves only as a guideline and has no legal standing.

Taxing CFCs in South Africa
CFCs are subject to section 9D of the South African Income Tax Act. The provisions of section 9D subject to specific exclusions prescribes that the net income of the CFC be included in the taxable income of the South African resident in proportion to the resident’s rights in that company. This is congruent with the basis that South African residents are taxed on their worldwide income and is aimed at taxing residents who invest their income-earning assets in foreign companies and earn passive or “diversionary” income as a result.
The net income of a CFC will be excluded from the taxable income of the South African resident in the following three instances:

• If the net income of the CFC is attributable to a “foreign business establishment”;
• Where the de minimus exemption applies; and
• Where the income of the CFC is taxed at a specific rate in a foreign jurisdiction.

It is apparent that the concept of effective management and the provisions envisaged in section 9D are riddled with complexities that taxpayers should understand and consider on a case by case basis to ensure compliance.
An IT10 return is required to be submitted to SARS for statutory disclosure purposes of the CFC and in terms of section 72A of the Income Tax Act. The annual financial statements of the CFC will be requested by SARS and must be retained for review. Taxpayers should note that with respect to the foreign business establishment exemption claimed by most taxpayers, SARS audits and reviews the exemptions claimed by most multinationals.

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SARS takes further steps to strengthen their transfer pricing initiatives

By Tarryn Spearman, Tax consultant, Grant Thornton Johannesburg

Only weeks after African Tax Administration Forum (ATAF) member countries and the OECD signed a memorandum of co-operation on transparency and exchange of information, SARS formally agreed to a further exchange of information forum with its fellow BRICS (Brazil, Russia, India and China) countries. This illustrates SARS’ proactive approach to improving the enforcement of transfer pricing regulations.

The BRICS countries have officially committed to sharing their experiences of best practice in the area of transfer pricing, capacity building and general anti-avoidance and a coordinated group has been established to discuss tax policy and administration. It is hoped that this will provide a greater scope for consensus building and exchange of ideas and experiences between developing countries on key aspects of international taxation.

To enhance the auditing ability of SARS officials working in the transfer pricing division, SARS formally indicated the intention to second a number of employees to other BRICS countries for training and will receive BRICS officials in return, so that each BRICS country is able to learn from the skills and experience of their respective fellow members.

In addition, SARS expressed particular interest in the Advanced Pricing Agreement (APA) regimes of the other BRICS countries and there is consensus to focus more effort on addressing the practices currently resulting in what is perceived to be a concerning erosion to the tax base. India has specifically committed to assisting South Africa in this regard and has pledged to share its resources and knowledge with SARS. In addition, China is also being assisted by India in their implementation of an efficient APA system.

In the past few years, India has emerged as a benchmark for many aspects of not only the BRICS nations, but many other countries’ tax systems. India’s transfer pricing legislation and court case precedent has been applied as a guideline for other countries in the process of drafting legislation in this regard. With the assistance of India, it is likely that the APA process will be introduced and developed more quickly and efficiently. This is good news for tax professionals and multinationals in South Africa and China alike.

What is interesting to note is that none of the BRICS countries are members of the OECD. Brazil, in particular, has legislated transfer pricing rules quite at odds with OECD accepted practice. This is perhaps because traditionally developed and developing countries have had different positions on issues relating to international tax policy, and it is widely recognised that the OECD guidelines are more applicable to developed nations and thus not always suitable to transactions occurring in less developed economies. Further, comparability concerns have often hindered the application of the OECD methodologies.

India, being the most notable transfer pricing influence on the BRICS countries, acknowledges the OECD principles in applying Indian fiscal law. However, during the past few years, Indian tax authorities have consistently been aggressive, often ignoring generally accepted international principles and therefore it is important that in accepting assistance from India, South Africa consider their position as an OECD observer country.

By establishing a forum to promote the sharing of resources, the BRICS countries may be able to provide working solutions for the problems being experienced by developing nations in applying the OECD methods. This will greatly assist many developing countries, including the other ATAF members, especially in the light of the ATAF exchange of information agreement committed to by SARS.

In addition to a more collective approach to transfer pricing being applied, easing the ability of developing countries to engage in more efficient trade, the commitment of the BRICS countries to work more closely will likely result in more aggressive transfer pricing regulations being introduced, meaning increased tax revenues and enhanced ability to achieve sustainable growth, much desired goals of most developing nations.

It is important, however, that the BRICS countries as well as the ATAF member countries carefully manage the balance between effective development of transfer pricing regulations and ensuring that these countries remain attractive investment locations.

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The only constant in the tax world is change – we have seen our fair share of legislative amendments in 2012 and 2013 will be no different. It is imperative to keep abreast of these tax developments in order to ensure that all aspects of taxation that impact on your business are understood and effectively dealt with.

That is where Grant Thornton’s new “Reason and Instinct” brand positioning is especially pertinent for our clients. While “Reason” defines the tax decisions we make, it is only with efficient guidance and effective advice that we can ensure our “Instinct” is on target, thus helping our clients improve their outcomes in the year ahead.

This month’s e-taxline focuses on:

• VAT: Ensuring you have the right processes in place to meet your VAT submission deadlines during the Festive period
• Tax Administration Act: Highlighting the new Tax Administration Act and new, potentially onerous penalties which we all need to be aware of
• Learnership rebates: Updated information on Section 12H and the learnership rebates which companies could look to benefit from; and
• Transfer pricing: Some significant joint partnerships in Transfer Pricing to benefit the African continent

Best festive regards
Grant Thornton Tax

Plan in advance to avoid any nasty surprises in the New Year
By Clifford Watson, Associate Tax Director, Grant Thornton Johannesburg

With the Festive Season upon us and with holidays aplenty, it’s not surprising that VAT return submission deadlines are at the bottom of our To Do lists when we plan the afternoon vacation schedules.

It is that time of the year when employees and employers alike start shifting their focus to the festive season, to the summer holidays and to spending leisure time with family and friends. Unavoidably, the focus on work and deadlines often diminishes as we get closer to the end of December.

This is where the problem arises.
For some vendors, especially the retail sector, this is the busiest time of the year, mainly due to Christmas and last minute holiday shopping. Naturally, a diminished focus in the work place is not conducive to this heightened level of economic activity. Experience has indicated that many vendors do not take the necessary precautions to mitigate the risk of both unintentional and fraudulent errors which may arise.

The biggest risk is that staff that are normally responsible for completing and submitting the vendor’s VAT returns may be on leave and the remaining staff are encumbered with this function. The general submission date for manual VAT returns is the 25th of the month, but since 25 December is Christmas Day, the VAT return and related liability payment should be submitted to SARS on or before 24 December, being the previous working day. Vendors’ VAT functions should ensure that skeleton staff are aware of this requirement.

In some instances, vendors close completely over this period with some companies e.g. construction companies, closing as early as the 7th of December. This would necessitate that VAT returns are submitted and that payments are made prior to these closing dates. As the time to complete and submit the returns are significantly reduced, staff would be under pressure to obtain all the relevant information to complete and submit the returns in time. This rush may lead to errors and resultant penalties and interest being levied.

It should be noted that where a vendor submits its VAT return and pays its VAT liability via e-filing, the vendor is entitled to submit its November VAT return and pay the attendant liability up until the last business day of December i.e. Monday 31 December 2012.

It should also be noted that, subject to certain requirements and limitations, SARS’ e-filing system has the functionality to submit returns and prepare the payment instruction in advance. The vendor should ensure that the action date is set on 31 December 2012. This function is only possible where the vendor has submitted the return and loaded the payment instruction via e-filing.

Then there is also the risk that where vendors submit VAT returns via e-filing that SARS may query the return and request the vendor to either revise the return or to submit substantiating documentary proof. Where vendors close down for any significant period over the festive season, this significantly reduces the period in which to collate and submit the information to SARS and could ultimately lead to assessments being raised by SARS.

We therefore recommend that vendors make the necessary arrangements and put processes in place to ensure that VAT returns are completed correctly, that the information submitted is complete and that all relevant transactions are included in the return. It should also ensure that the revised deadlines are complied with. In order to avoid any nasty surprises in the New Year relating to unnecessary penalties and interest being levied on late submission or payment as well as to mitigate any underpayment penalties being levied, it is advisable that this process is managed closely and that consideration be given to seeking professional support where necessary.

Vendors should also remember that deadlines for returns and payments for other taxes such as provisional tax and PAYE are also affected by the festive season break.

Tax administration Act – mistakes to cost taxpayers dearly
By Anton Kriel – Tax Director, Grant Thornton Cape Town

With the introduction of the Tax Administration Act (TAA) in October 2012, the SARS now have a completely new penalty regime to apply when they issue revised additional assessments. However, the legislation regarding the new provisions seems to be very onerous. Whilst one can understand the need for stricter enforcement and more consistent treatment by the SARS of taxpayers that break the rules, it appears that not only does the current application of the rules by SARS set out to only punish tax offenders, but it also punishes the entire taxpaying community, including those that make honest mistakes.

Let us first consider how the new provisions came into being.
Prior to the TAA, additional taxes of up to 200% could be imposed on taxpayers where the SARS issued additional income tax, VAT or Employees’ tax assessments. The SARS however had discretion to reduce or waive the additional tax if it was satisfied that the mistake or under-payment of taxes that gave rise to the additional assessment was not due to fraud, tax evasion or any intentional under-payment of taxes. The reality was that the SARS rarely imposed the additional tax and taxpayers generally only had to deal with late payment penalties (percentage penalties).

The TAA introduced the concept of under-statement penalties (USP). The legislation states that the SARS can impose the USP if an “understatement” occurs. An understatement is any prejudice to the SARS that results if there is a shortfall between the taxes owing based on the return submitted by the taxpayer and a subsequent additional assessment raised by the SARS as a result of an omission from the return or an incorrect disclosure by the taxpayer.

The USP regime set out to establish, firstly, the taxpayer’s behaviour and secondly the taxpayer’s conduct. Based on the SARS a set penalty is imposed. The below table sets out the penalty matrix.

The SARS will firstly consider the taxpayer’s behaviour. Once a behaviour has been identified, the SARS will consider the taxpayer’s conduct. If the taxpayer has not made a voluntary disclosure at any time and was not guilty of obstructive behaviour and the ‘offence’ is not a repeat case the penalty defaults to a standard case.

For example, if a taxpayer omitted to declare an amount of income in his return and the SARS has to subsequently issue an additional assessment the SARS will consider the person’s behaviour. If it is found that the taxpayer did not have reasonable grounds for having omitted the income from his return and it is the taxpayer’s first ‘offence’, a penalty equal to 75% of the additional tax payable as a result of the additional assessment will be imposed. If the taxpayer is found to have infringed any of the listed behaviours during the past five years, the penalty will be 100% of the additional tax payable.

The behaviour which is termed ‘substantial understatement’ will only apply if it is found that the taxpayer was not guilty of any of the behaviours (ii) to (v), and the amount of the additional tax resulting from the revised assessment is the greater of either 5% of the additional tax or of R1 million.

If the SARS decides to impose an understatement penalty they must provide full reasons and grounds for their decision.

Except for a USP imposed under behaviour (i), i.e. substantial understatement, the legislation does not allow the SARS to remit any USP that is imposed. Once the SARS have made the decision to impose a penalty, a taxpayer’s only recourse is to lodge an objection to the imposition of the penalty. Any objection lodged to a SARS assessment or decision should be lodged in accordance with the rules prescribed under the TAA otherwise taxpayers would do well to consider the objection rejected.

Whilst it is still early days, it appears that the SARS have taken a default position that every additional assessment they issue must be punished with a penalty and they automatically impose a penalty under behaviour (ii), i.e. ‘reasonable care not taken in completing the return’, in respect of all additional assessments they issue. It appears as if it is their view that all additional assessments that they issue must carry an under-statement penalty. To complicate matters further taxpayers are not always provided with reasons for the SARS decision to impose the understatement penalty.

It is questionable whether it was the intention of the legislature to punish taxpayers for all mistakes they make. One can only hope that the SARS will take a more lenient approach in applying the understatement penalty provisions than what appears to be the case currently.

Are you benefiting from the Section 12H learnership allowances that are available to you?
By Michelle Scholtz, Senior tax consultant, Grant Thornton Johannesburg

Training of staff not only creates a greater skilled workforce within your organisation, there are also allowances which can be claimed by employers for this training, bringing additional financial benefits to company learnership programmes.

In order to further encourage organisations to promote training and education within the workplace, the government has provided incentives in Section 12H of the Tax Legislation, bringing practical returns to education investments.

What is section 12H?
Section 12H provides for additional allowances to be claimed by employers for certain training contracts entered into with employees. The purpose of Section 12H is to allow additional allowances as an incentive to employers to train employees in a regulated environment which will result in job creation and the improvement of skills development. Training programmes which qualify for the benefit are learnership agreements which have been registered with the Sector Education & Training Authority (SETA) and apprenticeship initiatives which are registered with the Department of Labour.

Development of Section 12H
In its original form , Section 12H proved to be complex and this acted as a deterrent for employers in making use of the additional allowances available to them. In 2009 Section 12H was amended in order to simplify the section and hence make it more accessible to employers.
Section 12H states that an additional deduction is available for an employer during any year of assessment that a learner is party to a registered learnership agreement with the employer. However the Section also states a condition that requires the agreement to be entered into pursuant to a trade carried on by that employer.

Proposed changes to Section 12H – registered learnerships
As the legislation currently stands, only once the contract is signed by the employer and employee, and is formally registered with SETA, will it constitute a registered learnership.

However, administrative difficulties have arisen as a result of the delay between when the learnership is entered into, and when it is actually registered by SETA. This has caused unnecessary setbacks in the timing in terms of the claiming of this allowance.

It has therefore been proposed that the learnership wlll be deemed to be entered into once the contract is signed, provided it is registered with SETA within 12 months after the year of assessment in which it is officially entered into.
It is also worth noting that Section 12H grants both an annual allowance and a completion allowance, which are further explained below.

Annual allowance
An employer will qualify for the annual allowance if:

• the learner is party to a registered learnership agreement with the employer during any year of assessment;
• the agreement has been entered into pursuant to a trade carried on by that employer; and
• the employer has derived “income” from that trade.

The allowance granted is R30 000 (or R 50 000 for a disabled learner) in the company’s financial year that the learnership is entered into, but this grant must be apportioned for each period of less than 12 full months. In terms of defining the disabled learner grants, SARS has set out the criteria for what it considers to be disabled, which is available on the SARS website.

Common pitfalls regarding the annual allowance:

• It is important to note that a learner who has not yet commenced employment with the employer cannot have entered into an agreement with the employer as there is no employment relationship between them yet.
• The employer must derive some income from the trade carried on by him in order to qualify for the allowance.
• If a learner previously failed any learnership that contains the same educational and training components with any other employer, such learnership will not qualify for the annual allowance. However, it is proposed that from 1 January 2013, a learnership will only be disqualified if the same type of learnership was previously not successfully completed under the auspices of the same employer or an associated institution.
• a month means a calendar month. For example if a registered learnership is entered into on 15 February for eight months, and the employer’s year end is September, seven full months would be claimed in that year of assessment (from 15 February to 14 September).

The completion allowance
When claiming the allowance upon completion of the learnership the following criteria will determine how the allowance is calculated:

• Was the learnership entered into for a period less than 24 months?
• Was the learnership entered into for a period equal to or exceeding 24 months?

If the learnership was entered into for a period of less than 24 months, a R30 000 (R50 000 for a disabled learner) completion allowance can be claimed in the year of assessment that the learner successfully completes the learnership, and no apportionment is necessary.

If the learnersip was entered into for a period equal to, or more than 24 months, the R30 000 completion allowance (R50 000 in the case of a disabled learner) multiplied by the number of consecutive 12 month periods within the duration of the agreement can be claimed in the year that the learner successfully completes the learnership.

Common pitfalls regarding the completion allowance:

• The allowance can only be claimed once the learnership is successfully completed i.e. on the date that the employer receives written confirmation from the SETA that it has been successfully completed (not the date that the employer informs SETA of the learnership completed).
• Prior to the 2009 amendments, the termination of a learnership resulted in a recoupment of the learnership allowance unless the termination was caused by death or ill health. The 2009 amendments now allow the employer to still claim a pro-rata portion of the annual allowance in the year that the learnership is terminated. No completion allowance can be claimed.

Example:
Employer A , which has a 30 September year end, enters into a 24 month learnership agreement with learner X on the 15 April 2010. The learnership has been registered with SETA.

The learnership is completed on 14 April 2012. Employer A receives a letter dated 5 October 2012 from SETA to confirm that the learnership was successfully completed.

The allowances that can be claimed in each year as follows:
Year end September 2010 – annual allowance of R30 000 x 5/12 = R12 500
Year end September 2011 – annual allowance R30 000
Year end September 2012 –annual allowance of R 30 000 x 7/12 =R 17 500
Year end September 2013 – completion allowance of R30 000 x 2 =R 60 000
Note: confirmation from SETA was only received on 5 October 2012 which means it was only successfully completed in 2013 tax year.

 

Reporting requirements
Employers are reminded that there are certain reporting requirements attached to the claiming of learnership allowances. Information must be supplied to SETA for each learnership registered with them in the form, manner and at the place and time, indicated by the SETA. SARS requires an IT180 form (available from the SARS website) to be filled in for each learnership for which an allowance is claimed.

The OECD and African Tax Administrators sign memo on Transfer Pricing
By Tarryn Spearman, Tax consultant, Grant Thornton Johannesburg

Regulatory processes are demanding improved transfer pricing practices across the African Continent. For any business transacting with connected parties throughout Africa, it is astounding how quickly transfer pricing is being introduced across Africa and it is therefore in all companies’ best interests to ensure that its transfer pricing practices are defendable. In addition companies need to ensure that they are adhering to local country compliance requirements.

It is encouraging to note that the African Tax Administration Forum (ATAF) and the Organisation for Economic Co-Operation and Development (OECD) have been working together to find mutually beneficial processes and appropriate transfer pricing applications that will work to improve methodologies to the benefit of all parties.

Since the early 1970’s, the Organisation for Economic Co-Operation and Development (‘OECD’) has been accepted as the undisputed authority for defining global transfer pricing standards. The OECD consists of 34 primarily industrialised member countries as well as a number of ‘observing’ countries. The OECD Transfer Pricing Guidelines were first published in 1995 but have since been revised and recently, in 2012, a new ‘modern’ version of the Guidelines was released. The 2010 Transfer Pricing Guidelines deals principally with the concept of ‘Arm’s Length’ and replaces the hierarchy of methods with the application of the ‘most acceptable method’ and an extensive comparability analysis.

The OECD is not the only body regulating transfer pricing standards. In the last few years, many new organizations have been established to represent countries which have a different nature to those that form part of the OECD (i.e. Developing countries as opposed to the developed OECD member countries.)

It is important to note that Multinational Enterprises (‘MNEs’) with entities in developing countries operate in an entirely different economic climate and they face many complex challenges in respect of transfer pricing not considered by the OECD Guidelines.

An example of such a body, relevant to developing African countries, is the African Tax Administration Forum (‘ATAF’) which was formally established in 2009. The focus of ATAF is to improve and enhance tax administration and enforcement throughout Africa and assist African countries in establishing practical transfer pricing rules and regulations. ATAF has a working group dedicated specifically to transfer pricing and educating African countries about the relevance of transfer pricing and the need to legislate regulations in this respect.

ATAF has helped Tax authorities throughout Africa to realise that, now more than ever, they need to put an end to multinational businesses extracting excessive profits from their countries and to date, 33 countries in Africa have introduced some form of regulation that allows them to adjust the pricing of related-party transactions.

ATAFs transfer pricing working group have done much work on reviewing the OECD Guidelines and determining their applicability to developing African countries.

In the last week of October 2012, ATAF and the OECD signed a memorandum of co-operation on transparency and exchange of information at a meeting of the Global Forum in Cape Town.

The memo was signed only days after a Transfer Pricing Summit was held in Johannesburg where a number of tax practitioners, concerned businessmen from various African countries as well as representatives from the OECD and the South African Revenue Services (‘SARS’) and a number of other African tax Authorities met to discuss the Transfer Pricing challenges faced by Africa and the current Transfer Pricing developments taking place internationally. The signing of the memo demonstrates the efforts of these regulating bodies to align their goals with respect to transfer pricing development and education in Africa.

Since characteristically there is no comparable company information available in the public domain in the majority of African countries, a process of review is currently being undertaken to determine how the OECD methods and documentation requirements can be applied in the African context and establish rules for the necessary use and adjustment of non domestic comparables.

In addition, at present, there is no harmonisation in Africa as to what is to be included in a Transfer Pricing Policy Document and when Transfer Pricing documentation has to be prepared for tax purposes. Some Tax Authorities expect companies to update their documentation after concluding a transaction or when an MNE is filing its annual return. Others impose no legal obligations to have a Transfer Pricing Policy Document but demand this information should an audit be undertaken. This uncertainty poses a difficult challenge for MNE companies operating in Africa trying to be compliant with regards to their inter-group transactions.

With OECD and ATAF intensifying their efforts to align, it is hoped that further Transfer Pricing guidance, relevant to the market characteristics of the developing African economy, is published in the near future.
Grant Thornton would be pleased to advise and assist you in this regard.

The IASB has published ‘Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27′ (the Amendments). The Amendments introduce an exception for investment entities to the well-established principle that a parent entity must consolidate all its subsidiaries.

This special edition of IFRS News explains the key features of the Amendments and provides practical insights into their application and impact.

Download: IFRSNews Special Edition – December 2012 (pdf)

Download the full Grant Thornton IBR 2012 – Emerging markets opportunity index report.

Returning to the present, this edition of e-taxline explores the potential tax benefits of transferring ownership of a residential property, held by a company or trust to a related individual. This opportunity will end on 31 December and it is advisable to start investigating the potential benefits before the yearend rush.

The second topic highlights yet another new set of tax rules for debtors, relating to debt cancellations and reductions. And in the last article, we review the decision in Canada’s first transfer pricing case, Queen v GlaxoSmithKline Inc. Read the latest edition of our global Transfer Pricing News. This issue contains transfer pricing updates from a number of countries across the globe including updates from Belgium, China, Germany, India, Japan, the Netherlands and the United Kingdom.

• Company or trust owned residential property – a window closing on 31 December 2012 but is there a net tax benefit?
• Income Tax: debt cancellations and reductions – yet another new set of tax rules for debtors
• Canadian transfer pricing ruling: Queen v GlaxoSmithKline Inc.

Company or trust owned residential property – a window closing on 31 December 2012 but is there a net tax benefit?
By Anton Kriel, Tax director, Grant Thornton Cape

Given that the impending cut-off date for this tax dispensation is officially New Years eve, which practically means mid-December before conveyancers close up shop for their summer holidays, there is very little time remaining for those people who want to make use of the residential property relief.

Background
Many individuals have historically held residential properties in separate legal entities such as companies and trusts for reasons such as protection from creditor claims, historic fringe benefit tax planning structures, to circumvent the Group Areas Act, transfer duty saving and estate planning structures. As tax loopholes have been closed and other restrictions have become redundant over the years, only two likely reasons remain for individuals using trusts or companies to hold residential property – protection from creditors and estate planning. From SARS’ perspective this tax dispensation was announced with the objective to reduce the number of registered taxpayers on their books, as most of these entities do not hold any other assets and receive no income, rendering them dormant for tax purposes, yet they remain part of the taxpayer base that SARS has to administer. The dispensation is not limited to primary residences, but includes all residential properties that are used mainly for domestic purposes by any person that is considered a connected person in relation to the company or trust that holds the property.

What is the tax benefit?
The dispensation provides for the transfer of residential property from a company (including a close corporation) or trust to an individual shareholder or beneficiary without incurring capital gains tax (CGT) or dividend tax which would otherwise be payable if the property is sold by the company or trust to a third party purchaser. In order to facilitate this dispensation, an exemption from transfer duty is also allowed. In order to quantify the net cash tax benefit of this dispensation, taxpayers should assess what tax in the future they are likely to save upon the sale of their property. For example:

• Transfer duty is payable by the purchaser, so this part of the dispensation is not considered a cash tax saving
• In the case of a company, Capital Gains Tax (CGT) of 18.67% is payable by the company on any gain arising from the sale of the property, plus 15% of any remaining distributable income which is returned to the shareholder by way of a dividend, i.e. approx 30.87% tax on any gain. This compares with a CGT rate of 13.3% and no dividend tax if the property was sold by an individual, i.e. a net tax benefit of 17.57% of any gain in favour of taking the dispensation. If the property is considered to be the individual’s primary residence, the first R2 million of profit on the sale of the property will be exempt from CGT, which is not applicable if the property is sold by a legal entity. This benefit translates to an additional potential cash tax benefit of R2 million x 13.3% = R266,000. Individuals also receive an annual CGT exclusion of R30 000, which equates to a further minor cash benefit.
• In the case of a trust, a capital gain is subject to an effective CGT rate of 26,67%, unless the gain is distributed to a beneficiary and so qualifies for the lower CGT rate of 13.3%. If the property is considered a primary residence, the individual will also benefit from the R2m primary residence exclusion.

Other non-tax benefits for shareholders or trust beneficiaries to consider include administrative cost savings such as audit or review fees, trustee remuneration and tax compliance costs.

Qualifying criteria?
The property must have been used mainly for domestic purposes between 11 February 2009 and the date of disposal (on or before 31.12.12) by a natural person who is connected to the company or trust at the time of the disposal of the property. ‘Mainly’ means more than 50% and is calculated with reference to usage based on either time or floor area. Read more, e-taxline July 2012

Are there any tax downsides to consider?
In order for a company to qualify for the tax dispensation, the property must be transferred to either a shareholder or a connected natural person in relation to the company and steps to dissolve the company must be taken within six months from the disposal date (refer below for more regarding the disposal date). In the case of a trust holding residential property, the property must be transferred to a natural person connected to the trust and steps must be taken to wind up the trust within six months of the property disposal date. The consequences of the shareholder or beneficiary owning the residential property include:

• the property will be included in the individual’s estate, possibly attracting 20% estate duty on the shareholder’s or beneficiary’s death
• the property will be vulnerable to creditor claims related to personal sureties provided to creditors.

Cessation date of dispensation?
This dispensation is available for all qualifying property disposals made on or before 31 December 2012. The disposal date will generally be the date of an unconditional agreement to dispose of the property, but may vary depending on the legal nature of the disposal, e.g. sale, distribution or dividend in specie.

The disposal date should be distinguished from the date of registration of transfer of the property with the deeds office. The latter may therefore take place on or after 1 January 2013, provided the date of disposal prior to this date can be demonstrated.

Residential property owning companies held by trusts
Another popular historic tax structure was for the residential property to be held by a company, which was in turn owned by a discretionary trust. SARS originally indicated that in order to secure the full tax dispensation, both the company as well as the trust need to be dissolved on a ‘bottom up’ basis. I.e., the company declares a dividend in specie to the trust and the trust in turn disposes of the property to the individual. This unfortunately incurs double property transfer costs (excluding transfer duty).

An additional consequence is that if the trust owns other assets, the assets would also have to be disposed of, which would result in taxes being payable, to facilitate the dissolution of the trust. Also, these assets would then fall into the estate of the individual upon dissolution of the trust, thereby undoing any estate planning benefits achieved to date. These assets would also be exposed to possible creditor claims in the individual’s hands.

SARS have since conceded to an exception in this regard and under certain circumstances it may be possible to transfer a property from a company directly to an individual beneficiary of the trust, without having to terminate the trust. Care should however be taken to ensure that the correct sequence of transactions is entered, so as not to expose the parties to other unintended tax consequences, e.g. donations tax and dividend tax.

In summary
This tax dispensation is likely to result in cash tax benefits in respect of residential property owning trusts and companies and should also save on trust or company administration costs.
The possible tax downside of taking advantage of this dispensation (potential reversal of estate planning benefits and CGT on any other assets held in trust) should however not be ignored and should be carefully weighed up against anticipated tax benefits before proceeding.

Now is a good time to start investigating the potential benefits of embarking on this process in order to avoid the likely rush in early December!

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Income Tax: debt cancellations and reductions – yet another new set of tax rules for debtors
By Steve Curr, Tax director, Grant Thornton Cape

The 2012 draft Taxation Laws Amendment Bill includes proposed changes (effective 1 January 2013) to the income tax rules for debtors who are party to debt cancellations /waivers /reductions (“reductions”). A reduction of debt by a creditor must be distinguished from a disposal by a creditor of a claim against a debtor to a third party for a consideration less than the face value of the claim. In the latter case, the amount owing by the debtor remains unaltered. A debt reduction should also be distinguished from a contractual agreement between two contracting parties to alter the initially agreed purchase price.

This article deals only with reduction of debt by the creditor, and considers only the tax implications thereof for the debtor.

Current state
A debtor currently is required to consider the income tax treatment of debt reduced by reference to three separate pieces of income tax legislation, in the following order:

1. A reduction in the balance of any assessed tax loss
2. A recoupment of expenditure or capital allowances previously deducted
3. A capital gain arising in respect of the amount by which the debt is reduced.

The application of these rules is complicated and often results in cash tax liabilities arising in the hands of the debtor, thereby limiting the benefit of the debt relief granted by the creditor.

Proposal
In terms of the new proposed rules, the ‘ordering’ of the allocation of the debt reduction delays the incidence of a cash tax liability arising in the debtor’s hands. It further ensures that any remaining or unallocated debt reduction will not give rise to an immediate capital gain, which is possible under the current set of tax rules.

The draft legislation requires an ‘ordering’ of the allocation of debt reduction as follows:

1. Debt reductions that stem from donations, claim waivers by deceased estates or an employment relationship.
   These debt reductions, which arise mainly in the context of individuals, are excluded from the income tax and capital gains tax implications set out below, but are subject to donations tax, estate duty or employees’ tax (PAYE).
2. Debt reductions in respect of debts that funded tax deductible expenses or the acquisition of assets that qualified for capital allowances previously deducted for income tax purposes.
   Firstly, there is a reduction of the base cost of the assets, or the cost of trading stock which is still on hand. If there is not sufficient cost against which to off-set the amount of the reduction, the assessed loss must be reduced. If there is no assessed loss, or the amount of the reduction is more than the balance of assessed loss, the remainder of the debt reduction will constitute a recoupment of previous deductions or allowances claimed. This allocation thereby defers the immediate cash tax cost to the debtor.
3. Debt reductions in respect of debt that funded ‘non deductible’ transactions or costs (i.e. loans not used to incur deductible expenditure or to purchase assets that qualified for capital allowances).
   Firstly the base cost of the underlying assets acquired must be reduced and if the reduction exceeds the base cost, or if there is no base cost against which to off-set the debt reduction, the balance of the reduction must then be set-off against the balance of assessed loss. If the reduction cannot be allocated to any of the above, any remaining balance is ignored for tax purposes (i.e. it will not give rise to a capital gain in the debtor’s hands).

Other tax aspects
Other tax aspects regarding debt reductions which merit consideration by the debtor and creditor before implementation:

• VAT
• Dividend tax
• Donation tax if the reduction constitutes a gratuitous disposition
• Where the debtor and creditor are related, for example, waivers between group companies
• Cross border waivers or reduction which require consideration of the tax implications in the non SA jurisdiction as well

Our advice
Taxpayers considering entering into debt reductions as either debtor or creditor, should carefully consider all tax implications before implementation.

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Canadian transfer pricing ruling: Queen v GlaxoSmithKline Inc.
By Tarryn Spearman, Tax consultant, Grant Thornton Johannesburg

On 18 October 2012, after a lengthy battle, the decision in Canada’s first transfer pricing case, Queen v GlaxoSmithKline Inc., was released. The Supreme Court of Canada (SCC) handed a defeat to the Canada Revenue Agency (CRA) ruling that it was appropriate for the Canadian subsidiary of GlaxoSmithKline to pay more for the pharmaceutical ingredient than a generic drug maker would pay due to the terms in its license agreement with GlaxoSmithKline.

The transfer pricing case involved the determination of the price paid by a Canadian subsidiary of GlaxoSmithKline, Glaxo Canada, to a related non-resident company for an active pharmaceutical ingredient, Randitine. This is a key ingredient used in the manufacture of a brand-name prescription drug, Zantac, which Glaxo Canada manufacturers and sells as their primary business. In terms of a license agreement requiring Glaxo Canada to purchase the ingredient from a specific related party, Glaxo Canada was paying a price five times in excess of the price generally charged by generic manufacturers.

Reasonable or not?
Due to the fact that the price paid by Glaxo Canada to the related subsidiary was significantly higher than the amount charged in the Canadian generic market, the CRA reassessed Glaxo Canada by increasing its taxable income on the basis that the amount it had paid for the purchase of Randitine was “not reasonable in the circumstances” and did not reflect an arm’s length consideration for transfer pricing purposes.

Glaxo Canada’s position was that the price paid was reasonable in the circumstances if viewed in conjunction with the license agreement and its primary business to sell Zantac. In order to market and sell Zantac, Glaxo Canada was, in terms of the license agreement with their UK parent company, required to purchase Randitine from its related party company. Purchasing the Randitine drug from a generic manufacturer, at the lower price, would have resulted in Glaxo Canada losing their right to sell Zantac and a host of other patented and trademarked products belonging to the Glaxo Group.

The case was first heard in the Tax Court of Canada (TCC), where the position of the CRA was affirmed and it was decided that in establishing the “reasonableness” of the amount paid, the license agreement was irrelevant as “one must look merely at the transaction in issue and not the surrounding circumstances, other transactions or other realities”.

On appeal to the Federal Court of Appeal (FCA), the basis of the reassessments by the CRA was rejected. Further, the FCA concluded that in determining the arm’s length transfer price, it was necessary to interpret the words “reasonable in the circumstances” in accordance with the reasonable business person test. The relevant circumstances in the GlaxoSmithKline case, according to the FCA, included in the business reality that in order to continue their business of selling the Zantac drug, Glaxo Canada was bound, in terms of a license agreement to purchase Randitine from the related party supplier at the stipulated price.

The decision of the TCC was not overturned by the FCA, but instead, the matter was then returned to the TCC for redetermination, in the light of the FCA’s interpretation of the “reasonableness” of the circumstances.

Due to the CRA having appealed this ruling, the case was referred to the Canada Supreme Court of Appeal where it was heard in January 2012.

The final decision?
The decision in the case was finally released on 18 October 2012. In a unanimous decision, the Supreme Court held that factors such as license agreements should be considered when determining an arm’s length price. The court considered the price paid on the basis that Glaxo Canada was buying Randitine for the purposes of selling Zantac. SCC Justice Marshall Rothstein wrote on behalf of the bench, “Considering the license and supply agreements together offers a realistic picture of the profits of Glaxo Canada… It cannot be irrelevant that Glaxo Canada’s function was primarily as a secondary manufacturer and marketer. It did not originate new products and the intellectual property rights associated with them. Nor did it undertake the investment and risk involved with originating new products. Nor did it have the other risks and investment costs which Glaxo Group undertook under the license agreement. The prices paid by Glaxo Canada to their related party constituted a payment for a bundle of at least some rights and benefits under the license agreement and product under the supply agreement.”

In terms ofthis decision, it appears that in establishing an arm’s length price, one must interpret the words “reasonableness of the circumstances” widely and establish a price reflecting the overall business reality of the transaction.

It must however be noted that despite the SCC supporting the position of the GlaxoSmithKline in relation to the interpretation of the “reasonableness” of the circumstances, the SCC declined GlaxoSmithKline’s request to determine whether the actual price paid to the related party manufacturer for Randitine was fair. This issue has been referred back to the TCC for consideration.

The eagerly anticipated revised Broad-Based Black Economic Empowerment (B-BBEE) codes of good practice were issued by Minister Rob Davies on 27 September 2012 for public comment, and circulated via the government gazette on 5 October.

Some radical proposals have been made which will have a significant impact on the B-BEE compliance levels. In this edition of BEE in the know, we look at the key amendments and their impact on business and we provide a concise overview of the specific proposed changes. Download the proposed new scorecard.

If adopted, these revised codes will have a significant impact on business in South Africa. Grant Thornton will be hosting workshops countrywide to discuss and unpack the proposals, and to invite commentary for our submission to the dti. Please join us to learn more about how these proposals will affect your business and bottom line.

Contact us to find out more about our workshops.

What do you think of the revised Broad-Based Black Economic Empowerment (B-BBEE) codes of good practice and how will it affect your business? Post your comments and questions at the bottom of the page.

Revised Broad-Based Black Economic Empowerment Codes of Good Practice – key amendments and their impact on business

The proposed revisions of the codes of good practice will have a significant impact on any company seeking recognition for contributions to Broad Based Black Economic Empowerment (B-BBEE). The key amendments published by the dti in a preparatory statement in August include:

• the number of elements will be reduced from seven to five
• enterprises with annual turnover below R10m will be exempt, and those with turnover between R10m and R50m will be considered Qualifying Small Enterprises (QSE’s)
• all five elements will become compulsory for all companies
• companies that do not achieve a prescribed sub-minimum in ownership, skills development and supplier development will be penalised through a discounting of BEE levels
• black owned exempt micro enterprises (EME’s) can now be Level 1 or 2 contributors
• the skills development strategy has been revised.

The revisions as published however contain far more onerous provisions. If the amendments are successfully implemented, the negative impact on companies will include the following:

• All companies will immediately drop a level as a result of an adjustment to the qualifying points applicable to each level. Currently a minimum of 65 points are required to achieve level four. Under the revision, 80 points will be required.
• Companies failing to achieve at least 40% of the score for either ownership, skills development or enterprise and supplier development will see a further two levels drop in their BEE level.
• When calculating preferential procurement scores, only spend with suppliers who are value added suppliers will contribute to the score, and companies may no longer exclude imports from their procurement spend. The resulting impact will significantly reduce procurement scores and place the company at risk of not achieving the 40% sub-minimum above, risking a drop of two levels.
• Employment equity scores will be restated to apply separate targets for each racial group. I.e. companies whose workforces are not racially represented between Africans, Coloureds and Indians will suffer further dilution.
• The target for skills development spend has doubled from 3% to 6% of the leviable amount, and spend must be apportioned between the racially represented groups above.

We’ll be unpacking some of these issues in separate future articles, and inviting commentary and suggestions for incorporation into our submission to the dti. It is however evident that the proposal as it presently stands negatively affects many businesses and will move the goal post for B-BBEE compliance.

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Overview – what’s in the new Codes of Good Practice?

The revised Broad-Based Black Economic Empowerment codes of good practice (the codes) contain some significant amendments that have far reaching implications for any company seeking to measure its contributions to Broad Based Black Economic Empowerment. How does it affect your company, and should you continue to pursue certification of your B-BBEE status?

Unlike five years ago when the broad-based scorecard was promulgated, today all companies are affected by the measurement of their contribution to B-BBEE. Through the Preferential Procurement Policy Framework Act (PPPFA) and the B-BBEE Act the Minister of Trade and Industry and his agents have power to withhold or grant almost any economic benefit based on the consideration of an entity’s B-BBEE status.  

So to those companies who have made strides in advancing their B-BBEE status to access these economic benefits the proposed amendments to the codes of good practice, which outline new targets and indicators for measurement of B-BBEE is a concern. We have summarised some key amendments which may be enacted following the 60 day period for public commentary. None of the amendments have actually been implemented, but we will describe them below as if they had. Download the proposed new scorecard.

General
Scorecard thresholds
The codes contain structured scorecards for large companies (annual turnover greater than R35m – Generic) and small companies (annual turnover between R5m and R35m – QSE). Companies with annual turnover below R5m and start-up companies are exempt from compliance and receive exemption certificates (EME’s).

The thresholds for these categories have been amended as follows:

More companies are therefore exempt from compliance, and the burden of compliance is shifted towards larger companies. No amended scorecard has been published for QSE’s yet, although the amendments infer that they have already been agreed.

Elements
There were previously seven elements against which targets where measured:

• ownership
• management control
• employment equity
• skills development
• preferential procurement
• enterprise development
• socio-economic development.

These seven elements have been consolidated into five elements by combining management control and employment equity and combining enterprise development and preferential procurement now labelled enterprise and supplier development.

The targets and weightings in these elements change as follows:

Penalties for not meeting priority elements
Three of the five elements have been designated priority elements, and failure to achieve a sub-minimum of 40% of the targets for any of these priority elements will result in a penalty being applied to the scorecard. The priority elements are ownership, skills development and enterprise and supplier development.

The penalty is a drop of two levels, therefore an entity that achieved a level four before the penalty, will drop to a level six if the penalty is applied.

Adjusted BEE levels
BEE levels are measured by points on the scorecard out of 100, and bands of points are allocated into contribution levels, each with a commensurate procurement recognition level. The number of points at which a company becomes a level four has increased from 65 to 80 points in a taxation derived ‘bracket creep’ adjustment. The other levels are affected as follows:

The resulting changes will result in instant reduction of B-BBEE levels upon introduction.

Benefit to black owned companies
EME’s and start-ups that are 50% black owned previously automatically qualified for a level three status. They now qualify for a level two status, and if 100% black owned they qualify for a level one.

Duration of codes
The previous 10 year term of application of the codes has been removed, with no new limitation imposed.

Ownership
The overall weighting has increased from 20 to 25 points, increasing the relative importance of ownership on the scorecard.

The weight attributed to voting rights and economic interest has been equalised. Calculations previously allocated towards bonus points, now form part of the requirements. I.e. failure to achieve them will now impact on the overall status.

The point attributed for ownership fulfilment once a share is free of all third party rights has been removed, and added to the overall net value requirement measuring the repayment period of debt on black shares. The sub-minimum penalty requirement is applicable to achieving 40% of the net value targets.

The modified flow-through principle may now not be used in conjunction with exclusion. I.e. a company that is excluding mandated investments from its scorecard may not apply the modified flow through principle elsewhere.

Management control and employment equity
The use of Adjusted Recognition for Gender calculations has been replaced with separate targets for males and females. The commensurate penalty on middle managers resulting from the gender adjustment has been removed, while the board of directors and senior management retain the need to have male and female balance. Targets for junior management have been eliminated.

Although not expressly listed in the target, there is a requirement that each target be broken down into sub-targets determined by the ‘overall demographic representation of black people’. More specifically, “for scoring purposes, the targets should be further broken down into specific criteria according to the different race sub groups within the definition of black in accordance with the employment equity act requirements on equitable representation and weighted accordingly.”

There are now separate employment targets for Africans, Coloureds, and Indians – all determined a by a moving employment equity act. If the historical application of employment equity targets in bonus points is anything to go by, then this requirement poses a serious measurement challenge, to say nothing of the implied requirement to restructure entire company workforces on the basis of racial representation.

Previously, a company was required to prove that it had submitted its employment equity returns in compliance with the employment equity act, as a pre-requisite for receiving any employment equity recognition. This requirement is now extended by requiring the data submitted in the return to be used in the calculation at the time of measurement.

This creates a timing variance in which a company that has improved its demographic representation will only obtain recognition in the following period, after it has submitted its employment equity return.

Skills development

• The target for skills development expenditure is derived from the salaries and wages paid (Leviable amount), and historically equates approximately to 3% the for the period . The target has increased to 6% of the leviable amount.
• The training programs for which skills development expenditure may be counted have reduced to exclude category F and G. This excludes all training that is not formal and occupationally directed. Only institutionally based (theoretical or practical), registered workplace learning, and formally assessed occupationally directed learning qualify for recognition.
• Training spend must also be apportioned between the overall demographic representation of black people, as per employment equity.
• In addition, “a measured entity must achieve a minimum of 40% of the target set out in the skills development scorecard in order to avoid discounting of its overall scorecard.”
• Adjusted recognition for gender adjustments has been removed.
• Overall weighting has increased from 15 to 20 points.
• Five bonus points have been added for achieving a labour absorption target. So employees trained on learnerships should progress toward formal employment.

Enterprise and supplier development
This element combines preferential procurement and enterprise development in a single element with the combined weighting increasing from 35 to 40 points. The focus of these elements has shifted from random development of black owned enterprises and purchasing from other B-BBEE contributors to deliberate meaningful development of suppliers that have a high labour component.

Value adding suppliers
Previously, to qualify for procurement recognition a company had to purchase from a suppliers that had a B-BBEE certificate. There is now a requirement that only suppliers designated as value adding suppliers may be counted.

To be recognised as a value adding supplier, a company’s salaries and wages account plus net profit should exceed 25% of turnover. I.e. the company adds a high degree of value to a raw material, or has a significant labour content to its overall output. Value adding status is shown on the face of a B-BBEE certificate. in terms of the proposed changes, only companies that have this designation may contribute towards the procurement targets of their customers.

Target
The target has increased from 70% to 80%, while the eligible suppliers were reduced to include only value adding suppliers. The overall weight attributed to procurement was 20, and is now 25. The number of points attributed to QSE’s and black owned companies has increased from eight to 17.

Sub-minimum
“An entity must achieve a minimum of 40% of [each of] the targets” set out for procurement in order to avoid overall discounting of its scorecard.

Enterprise development (ED) target
The ED targets have been separated into 2 calculations. Ten points will be allocated to suppliers for achieving a contribution of 2% of net profit after tax (NPAT) for enterprise development contributions. I.e. there are now targeted beneficiaries within the supply chain, and no longer recognition for random contributions to qualifying black-owned companies. Five points are allocated for achieving a contribution of 1% of NPAT for general ED contributions and sector specific programs.

There is also a requirement to develop an enterprise and supplier development plan for qualifying beneficiaries which includes clear objectives, priority interventions, key performance indicators and a concise implementation plan with clearly articulated milestones.

Failure to implement this plan will disqualify all points on the enterprise and supplier development scorecard. Additionally, contributions that do not reach the final beneficiary within the measurement period, are excluded.

A multiplier of recognition is provided for companies that grant three year contracts to suppliers. There is clearly an intention to stimulate enterprises by providing opportunities to sell, and assistance through supplier development. Further multipliers are granted for start-up enterprises.

Imports
The provision to exclude imported procurement from the total measured procurement spend, has been removed.

Shorter payment periods
A limitation has been applied to contributions made in the form of shorter payment periods to suppliers. The invoice value is multiplied by 15% (an approximation of the cost of capital) and then multiplied by the applicable benefit percentage based on the number of days between issuing an invoice and receiving payment.

Cumulative enterprise development
Enterprise development is now measured annually and may no longer be measured cumulatively.

Socio-economic development (SED)
Targets, qualifying beneficiaries and weighting points remain unchanged, except that 100% of the value of benefit must reach black beneficiaries (previously 75%). SED will now measured annually and may no longer be measured cumulatively.

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The calculation method of deemed profit margin in instances where the company has made a loss, has been removed and not replaced for ED and SED, leaving a void of instruction where companies have made losses.

What do you think of the revised Broad-Based Black Economic Empowerment (B-BBEE) codes of good practice and how will it affect your business? Post your comments and questions below.