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%).

Download the Grant Thornton Property tax guide 2013

Puzzled by property tax? Our experts can assist.

Our broad experience has given us a deep understanding of the complexities facing the property and construction industries across the industrial, commercial, leisure and retail sectors.

Our clients include large listed property and construction companies, property developers, the public sector and its various agencies, entrepreneurs, investors and also businesses that occupy property.

We offer a full suite of audit, tax and advisory services to the property and construction industry to assist you to professionally manage your project, business or even programme from conception to completion.

The Grant Thornton International Business Report (IBR) quarterly research data for the first quarter of 2013 confirms current global economic reports and analyst concerns that a continued international slowdown, coupled with additional issues locally constraining business growth, are all having a major impact on South African businesses.

The Grant Thornton data also revealed that 57% of business executives are being negatively impacted by poor government service delivery with 41% stating the issue as utilities (water and electricity supply), 23% billing issues and 21% of businesses citing roads (potholes, traffic lights).

An additional 14% of respondents stated being impacted by a combination of labour strikes, poor payment from government and tender fraud, quoted as core issues in the “other” category.

Grant Thornton’s quarterly International Business Report (IBR) research data for the first quarter of 2013 provides tracker insights into the views and expectations of over 12 000 privately held businesses surveyed in total per year across 44 economies. The Q1 data for IBR to March 2013 also highlights regional and national perceptions of privately held businesses regarding crime, service delivery and political climate for South African business owners.

“Our latest research is in line with many media reports currently being published in the press,” says Deepak Nagar, national chairman of Grant Thornton South Africa. “The weight of the global economic downturn is becoming unbearable and additional local pressures are not helping at all.”

Just two weeks ago, the Global Entrepreneurship Monitor revealed that onerous labour laws, crime and continued corruption were directly hindering the entrepreneurial spirit in South Africa.

“If South Africa wants to promote entrepreneurship and successfully meet the National Development Plan’s objectives for job creation, bringing additional regulations and restrictions to small and medium businesses is certainly not going to help matters,” continues Nagar. “Furthermore, failing to properly address issues of corruption and crime is a critical concern for our country, particularly in the lead up to the national elections in 2014.”

Political uncertainty continues to impact business decisions
When business executives were asked whether uncertainty about the future political direction of South Africa is impacting current business decisions, 36% said yes. Of the executives who concurred that political uncertainty is a concern, 32% stated that present conditions were causing them to put off important investment decisions, with 19% placing investments offshore rather than within South Africa and 7% of these executives are seriously considering emigration or selling their businesses.

“On a positive note, political uncertainty has spurred business executives in South Africa to review their B-BBEE status, with our Q1 research revealing that 29% are currently working hard to improve their B-BBEE status,” adds Nagar. “Ensuring that companies are doing more than just ticking the boxes for B-BBEE compliance is promising – it means that the legislation is beginning to have a direct and measurable impact on a company’s bottom line.”

Crime & security
Sadly, the impact of crime on SA businesses seems to be gaining momentum again, with 57% of business executives, their staff or family of staff directly affected through a contact crime incident in the past 12 months. Contact crime is defined in the research as housebreaking, violent crime, road rage or hijacking.

This figure has increased 11 basis points since 2011(46%) KwaZulu-Natal and Eastern Cape regions recorded the highest impact, both at 60%.

“While the figure of 57% has dramatically declined since our initial data which was recorded in 2007 (84%), it is devastatingly concerning to see this statistic climbing again,” says Nagar.

In terms of the financial burden that crime has on SA businesses, the IBR data for Q1 2013 highlighted that a startling 66% of business leaders who stated crime as a real concern in the past year reported that they had experienced increased costs for security systems in their organisations.

When asked if any executives had given serious consideration to emigrating, only 16% stated that they were considering it (2009: 30%).

Glimmer of hope on the horizon
Business owners in South Africa continue to be positive about the next 12 months with 48% of executives surveyed stating that they are optimistic about business prospects for 2013. This figure is also marginally higher than the executives in the BRIC region and twice as optimistic as the global statistic (SA – 48%; BRIC – 47%; Global 20%). However, SA business confidence is significantly down from 2010 (60%).

For the BRIC region, the results reveal that China is the country which is pulling the economic region’s optimism down, with Chinese business executives recording 21% optimism figure overall.

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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Grant Thornton and PKF in Johannesburg have announced today that they will merge the two significant mid-tier assurance and business advisory offices to create a formidable professional services firm in the city of gold.

The merger, which was formally signed this morning at Grant Thornton’s offices in Sandton, is effective 1 July 2013, when PKF Johannesburg will officially become part of Grant Thornton Johannesburg and Grant Thornton South Africa .

This is hot on the heels of another recent two-way merger when TIS/Fintis and Rebahale, two black-owned professional services firms, merged with Grant Thornton South Africa in March 2013 to enhance its position in the public sector, underlining the firm’s commitment to continuing transformation.

Both Grant Thornton and PKF have their roots in South Africa with over 169 years of combined experience providing assurance, tax and advisory services to dynamic organisations, namely listed companies, privately held businesses and private equity backed organisations. They also have a thriving presence in the public sector throughout South Africa.

The new CEO of Grant Thornton Johannesburg will be Andrew Hannington, who is currently a board member of PKF International and chairman of PKF in South Africa. Jeanette Hern who plays a significant leadership role in Grant Thornton – as well as being the driving force behind the firm’s gender equality initiatives – will assume the role of deputy CEO in Johannesburg. Current CEO of Grant Thornton Johannesburg, David Campbell, recently tendered his resignation to return home to his family in the UK and to explore new business opportunities.

“This is an incredibly exciting opportunity to work with a firm with similar goals and truly well aligned cultures, coupled with a global force to be reckoned with,” says Andrew Hannington, CEO elect of Grant Thornton Johannesburg. “This is a merger of equals – combining PKF Johannesburg’s strong market position with Grant Thornton’s established brand and intellectual property. It unifies the strengths and specialised expertise of each entity resulting in a formidable firm which will be unparalleled in the mid-tier market.”

Grant Thornton South Africa (formerly Kessel Feinstein) was established in 1920 and PKF Johannesburg was founded in 1943 as Fisher Hoffman. Together they provide high quality assurance services to over 11% (45) entities listed on the Johannesburg Stock Exchange, helping them unlock their potential for growth.

The merger will entrench Grant Thornton’s position as 5th in South Africa (ranked by fee income) according to the November 2012 International Accounting Bulletin (IAB) South Africa survey. Grant Thornton is the fastest growing global network and was recognised as the 2013 ‘Network of the year’* by the IAB. This achievement is one of the most significant accolades within the accounting profession.

Jeanette Hern, deputy CEO elect, says, “For our businesses, today’s merger of equals forms the next step in our national strategic growth plans. The new combined Johannesburg staff complement of over 500 enhances our capacity and will be beneficial to our clients. The merger is not expected to have any impact on staff numbers and will bolster the South African firm with a national staff complement of over 900.”
Andrew Hannington continues, “Our new Johannesburg office will create a more richly resourced firm, a superior client offering and will significantly strengthen our position relative to the big four, especially in terms of audit choice – a heated topic currently being debated between the auditing profession, global regulators, and the boards of listed companies. Clients are the clear winners here. We are now in an unparalleled position to service dynamic businesses, particularly as companies emerge from the global economic downturn.”

Both firms have ‘growth’ as a key strategy and the merger will see the Grant Thornton tagline – An instinct for growth – continue to inform the way in which we deliver our client service – a commitment to which we passionately adhere.

The merged offices will operate as Grant Thornton Johannesburg within the national network. Other PKF offices in South Africa will continue to trade under the PKF name and will not be part of the merger at this stage.

“Mergers are a vital step in achieving our strategic ambitions and Grant Thornton is committed to fast and strategic growth with like-minded organisations and individuals. This merger is a truly significant step for Grant Thornton in South Africa and I am pleased to welcome the new partners and staff to our global organisation. I look forward to applying the enhanced capacity and expertise that will come about as a result of this exciting merger, to our clients in South Africa and around the world,” concludes Ed Nusbaum, global CEO of Grant Thornton.

Ends

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• Grant Thornton and PKF in Johannesburg merger infographic
• CV – Andrew Hannington
• CV – Jeanette Hern

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Merger of equals as Grant Thornton & PKF in Johannesburg join forces to create a formidable client service offering gt.co.za

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Grant Thornton JHB & PKF JHB merge – Andrew Hannington new CEO & Jeanette Hern deputy CEO gt.co.za bit.ly/10dHsZP

— Grant Thornton (@GrantThorntonZA) May 6, 2013

Grant Thornton JHB and PKF JHB merger – key national facts. gt.co.za/files/Grant_Th…

— Grant Thornton (@GrantThorntonZA) May 6, 2013

Proud to sign agreement for merger of equals deal Grant Thornton and PKF Jhb offices merge to form formidable Jhb office @grantthorntonza

— David Campbell (@campbers1) May 6, 2013

@grantthorntonza so thrilled to be part of Grant Thornton!

— Andrew Hannington (@HanningtonGT) May 6, 2013

Notes to editors
*About the International Accounting Bulletin 2013 Network of the Year Award
The International Accounting Bulletin Awards are designed to celebrate accounting achievements over the past year by emphasising the individuals and businesses that have moved the industry forward. To win the ‘Network of the Year’ award, firms had to demonstrate strength across a number of key areas which included evidence of top-level network-wide audit quality, a strengthened position in strategically important markets and a strong industry leadership.

Fast facts
Johannesburg fast facts

*Source: International Accounting Bulletin – November 2012

South Africa fast facts

*Source: International Accounting Bulletin – November 2012

About the merged Johannesburg offices
PKF Johannesburg has 24 partners and directors with a staff complement of 260 and total revenues of R130m.

Grant Thornton Johannesburg has 36* partners, principals and directors with a staff complement of 261 and revenues of R210m. *Includes newly appointed partners and principals – 5 partners & 4 principals.

The firms are well aligned strategically and the merger in Johannesburg makes good cultural and business sense. The merged offices are now in an unparalleled position to offer an enhanced and competitive service to the mid-tier, dynamic businesses market. PKF Johannesburg’s merger with Grant Thornton substantially strengthens Grant Thornton’s ranking as the fifth largest International Network firm in South Africa according to the November 2012 International Accounting Bulletin survey.

About PKF Johannesburg
Situated in the hub of Sandton’s business district, PKF Johannesburg established in 1943 as Fisher Hoffman, has a longstanding history of excellence and growth. We provide expertise in multi-disciplinary auditing, accounting and business advisory services.

Our client base includes over 30 entities listed on the Johannesburg Stock Exchange, as well as mid-market and growing businesses, privately owned companies, medical aid schemes, government agencies and not-for-profit organisations.

While we pride ourselves on our ability to take on large, complex, transactions, we stay accessible, keep things simple and never stray from our commitment to straightforward advice. It means delivering solutions in a personalised, pragmatic and cost-effective manner.

For many years PKF has trained and graduated the fifth highest number of chartered accountants in South Africa and the training programmes will be continued with new vigour.

Grant Thornton’s 2013 International Business Report (IBR) on mergers and acquisitions, released this morning indicates that South African organisations, just like their global counterparts, are currently sitting on large cash piles.

“South African businesses are waiting to see when the economy will turn, when the Eurozone crisis will be abated and – on a local level – companies are also waiting for stability once the 2014 South African national elections are complete,” says Steven Kilfoil, corporate finance director at Grant Thornton Johannesburg.

This sentiment was reinforced during Finance Minister Pravin Gordhan’s 2013 National Budget Speech in which he stated that “in recent times, the world has become a more uncertain place for businesses, causing some to build cash reserves rather than invest in new or expanding operations.”

Minister Gordhan also urged businesses to keep investing in the SA economy, in order to “seize the opportunities around us”.

Kilfoil adds that plans to finance growth through public listings or even via private equity (PE) transactions are becoming less lucrative options. Only 4% of SA businesses would consider financing growth in the next three years through a public listing, with just 22% stating they would consider a private equity route.

The lack lustre interest in public listings seems to be a global phenomenon, with just 7% of global businesses considering this option, although 15% of businesses in the BRIC economies might consider a public listing in order to finance growth.

“In tough times, capital markets are naturally depressed and companies in general are just not cash generative enough to appeal to PE investors,” states Kilfoil.

The results from the 2013 report also show that, of the 32% South African companies seeking to expand through acquisition in the next three years, 42% expect to do so through a cross-border transaction, a marginal decline from 46% in 2012, but a notable increase from 31% in 2011.

In terms of key drivers behind company plans to expand through acquisition, 75% of respondents said that accessing new geographic markets was priority, with 52% stating a wish to build scale.

“As a firm, we expect cross border activity to continue to rise worldwide in the years ahead,” says Kilfoil. “This, combined with SA company findings in this year’s M&A survey highlighting a need to access new geographic markets and to build scale, speaks very well to our cross border expectations for the years ahead.

“I wouldn’t be surprised to see South African businesses expanding more actively into African markets in the future,” he continues.

In contrast, just 65% of global businesses want to access new geographic markets and, in the BRIC economies, this figure was even lower, at 58%.

Other key drivers stated by SA business owners behind plans to grow through acquisition were access to lower cost operations (47%) and the acquiring of new technology or established brands (49%).

“Wanting to acquire new technology either via acquisition or by internal development further reinforces how companies are investing primarily in their own businesses, in order to strengthen current operations and improve efficiencies,” says Kilfoil. “When the global economy eventually starts to improve, businesses will certainly benefit from strong, cash-flush balance sheets which will ultimately maximise their value on exit in the future.”

Download a copy of Grant Thornton’s International Business Report 2013 – Mergers & Acquisitions: The rise of the cross-border transaction.

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

Results of the TBCSA FNB Tourism Business Index (TBI) for the first quarter of 2013 are the surest indicator yet that the tourism industry is back on track and playing its part in South Africa’s economic landscape.

The index compiled by Grant Thornton shows that during Q1 of this year, the industry performed at 110,8 against a norm of 100, ahead of the expected 102,5 and only just behind the performance level of 111,1 achieved during the 2010 World Cup. This marks three consecutive quarters of performance topping normal, with this latest quarter being the most positive.

An expectation of 103,8 for the second quarter indicates a continued positive outlook and shows the extent to which the industry is recovering from the recessionary impacts and excess of supply it suffered post-2010.

Gillian Saunders, Head: Advisory Services at Grant Thornton said that generally the industry felt conditions were better. “In some segments the weak rand is helping, but there is still concern about overseas market strength given the ongoing recessionary conditions, particularly in Europe. We see a dichotomy where 30% of our respondents cite demand as being strong, whilst exactly the same number see it as weak. Playing in different geographic markets may impact this; for instance in 2012, Asian markets saw a huge growth in tourist arrivals and businesses targeting those markets have no doubt benefited.”

These numbers are another indication of the shifting global economic landscape in favour of developing markets. However the job remains to maintain South Africa’s destination marketing initiatives in both the traditional and emerging markets.

On balance for the next 12 months the outlook is positive (+13%) for the accommodation sector and very positive (+30%) for the rest of the tourism industry, and both have said that they will be increasing capacity and employment during 2013. Almost one in five Other Businesses are expecting to up employment and/or add capacity.

Wiza Nyondo, FNB Head of Tourism, pointed out the positive impact of investment. “Tsogo Sun’s R220 million investment in the Elangeni Maharani mega hotel complex on Durban’s Golden Mile is a case in point. The Protea and City Lodge groups have also announced plans for new projects. These show major confidence in the industry.”

The tourism industry is particularly affected by negative factors which also impact the rest of South Africa. Mmatšatši Ramawela, CEO of Tourism Business Council of South Africa explained: “The industry is concerned about input costs: the petrol price, high electricity costs and high municipal tariffs, all of which negatively impact on business performance. Petrol price hikes result in diminished domestic demand too. Fewer people go away over long weekends when the petrol price goes up,” she said.

Inevitably labour is an issue, with ongoing higher-than-inflation wage settlements affecting employment. The cost of labour is a negative factor for 40% of accommodation businesses and 29% of other businesses in the tourism industry.

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.

That’s according to Grant Thornton’s 2013 International Business Report (IBR), which surveyed 3450 businesses across 44 economies regarding the proposed new lease accounting standard set to come into effect in 2014.

“Amendments to this leasing standard will have far reaching consequences for a large proportion of SA businesses particularly companies in the airlines, manufacturing, mining or retail sectors – industries where many equipment and property leases are held,” said David Reuben, partner and head of Assurance at Grant Thornton Johannesburg.

The new Lease Accounting Standard, which is currently in its draft format, is expected to require that companies reporting under International Financial Reporting Standards (IFRS) will now need to record billions of rand of new assets and liabilities.

“This new standard from the International Accounting Standards Board (IASB) and the Financial Accounting Services Board (FASB) will require that all leases other than short-term leases will have to be reported on the balance sheet,” said Reuben. “It has the effect of broadening the definition and perceptions of what an asset and liability is.”

Towards the end of 2012 the US Securities and Exchange Commission estimated the “undiscounted value of future lease payments among US-listed companies alone were more than $1.35 trillion (R11.3 trillion)”. At this stage, Reuben said it would be difficult to estimate a similar value for SA companies and the impact on their balance sheets would still need to be calculated.

According to the IBR report, the average business globally holds 20 leases. The average was highest in Sweden (68 leases per business), followed by Japan (49 leases per business), Finland (39 leases per business) and Australia (25 leases per business).

In South Africa, Grant Thornton’s research indicated that nearly 85% of SA businesses surveyed currently hold leases, with 51% holding less than five leases, while 15% reported holding more than 10 leases in their businesses.

Reuben expressed concern about the lack of awareness amongst SA businessmen surveyed (52% are unaware of the upcoming changes), regarding these amendments.

“It is encouraging to note though that SA executives seem to be marginally more aware of the pending lease accounting amendments than their global and BRIC counterparts,” said Reuben.

The IBR survey revealed that 47% of SA executives were aware of the upcoming changes, compared to 42% globally, and just 21% in the BRIC region.

Awareness of the change was greatest in the US (75%), India (70%), Chile (60%) and the UK (56%), and it was lowest in Lithuania (8%), France (13%), Brazil (13%) and mainland China (13%).

In terms of what impact these changes would have on businesses, 34% of SA executives believe that the amendments would increase transparency for investors, while 28% are expecting the new standard to increase the cost and complexity of reporting.

Ed Nusbaum, Grant Thornton International CEO says that the current lack of transparency around operating leases certainly needs to be addressed, and in light of this he welcomed the pending lease accounting amendments.

“The information in the financial statements currently does not provide complete, readily understandable information about the obligations associated with operating leases,” said Mr Nusbaum. “But change for the sake of change is not the goal. A new standard that is not based on clear, consistent principles could actually make things worse. A major change to lease accounting is a once in a generation event and the Boards need to be patient to get things right.”

The leasing project began with an exposure draft published in 2010 and a great deal of discussion has followed it. When the draft finally is issued as expected by May / June 2013, it will be put out for public comment for a period of 120 days which would presumably end in September, according to a FASB spokesperson. If this timeline is followed, the revised standard would be issued in 2014.

That’s according to Grant Thornton’s International Business Report (IBR), a survey of more than 3,400 businesses regarding corporation tax issues, across 44 economies.

“Headline rates are not the only deciding factor for relocation of global headquarters,” said AJ Jansen van Nieuwenhuizen, Director and head of tax at Grant Thornton Johannesburg. “Of priority to most companies that operate internationally is how they can effectively manage their tax rates worldwide – a single improvement in one area isn’t always enough of a draw card. However, a combination of factors does result in change, such as reduced corporation tax rates and other tax break incentives.”

While the survey found that globally, a sizeable two thirds (67%) of business owners would not relocate to another country for a reduced corporate tax rate, executives in the BRIC economies collectively seemed the most favourable towards relocation for a lower corporate tax rate. Over 40% of businesses in the BRIC region were in favour of moving to another country for improved corporate taxes (59% of BRIC businesses opposed relocation).

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Looking at the BRIC countries individually, however, there is a discrepancy in views: in Brazil, 93% of business owners surveyed would not relocate, compared to Russia and India with only 23% and 29% respectively responding that they wouldn’t consider relocation for a lower corporate tax rate. In China, 67% of businesses would not relocate.

It is also interesting to note that business executives in Botswana were among the top five countries in the world that would consider relocating their headquarters to another country if a lower corporate tax rate was on offer, with 62% of executives stating they would relocate, and a surprising 20% saying they would do so for just a 1% reduction in the current tax rate.

“South Africa would not be considered, though, as a relocation destination for Botswana executives because Botswana’s current corporate tax rate is 25% compared to our 28% current corporate tax rate,” adds Jansen van Nieuwenhuizen.

The survey revealed that while 80% of South African businessmen would not relocate to another country for any level of reduction in the corporate tax rate, these same executives did express a wish for South Africa’s corporate tax rates to be lowered. In South Africa, 73% of business owners surveyed would favour lowering the country’s corporate tax rate, even if it meant eliminating other tax deductions currently in place.

“Obviously businesses always like more income,” said Jansen van Nieuwenhuizen. “Nobody wants to pay taxes – it’s a grudge payment in its simplest form. Any reductions would always, naturally be welcomed.”

The survey showed a similar trend with corporations worldwide wanting reductions in corporate tax rates. In the BRIC economies, an average of 77% were in favour of lowering corporate taxes, and globally, 68% of business leaders were also in favour of lower corporate tax rates at the price of sacrificing tax deductions.

“A trade-off between tax breaks and headline rates of tax, leading to an uncomplicated low tax rate with only a few deductions, has the advantage of simplicity. Tax breaks, however, are hard to remove once in place, especially in economies that are struggling to find growth and that use tax breaks to stimulate certain sectors or industries,” said Jansen van Nieuwenhuizen.

Jansen van Nieuwenhuizen added that business likes certainty so any change needs a long lead time and clear communication.

Most of the South African business owners surveyed (76%) did not feel government was doing enough with tax measures to help ease economic pressures. This differed markedly from the views of business leaders in the BRIC economies with less than half – just 37% – stating they were dissatisfied with government’s attention to easing pressures through tax breaks.

Globally, two in five business leaders surveyed (61%) did not think their governments were doing enough. The countries with the highest dissatisfaction were Argentina (92%), Japan (86%), and Poland and Spain (both 82%).

“Given the current environment where tax is headline news, it would be ideal if governments co-operated more on tax issues and providing clarity on a global basis,” concluded Jansen van Nieuwenhuizen.

Grant Thornton’s overall national pass rate in the ITC was 80%, compared to the overall pass rate of 73%. Our Cape Town office scored 100%.

The Initial Test of Competence (ITC) – Part I of the Qualifying Examination
This is the standard setting exam which is written after the completion of the CTA and is an assessment of core competence. To be eligible to write this exam a candidate must hold a CTA that has been accredited by SAICA.

Tweets:

Congratulations to Shaun Croock, @grantthorntonza candidate and @ujaccountancy student who topped the national #ITC @saica_ca_saresults

— Grant Thornton (@GrantThorntonZA) March 27, 2013

Congratulations to the Grant Thornton South Africa candidates who passed their #ITC board 1 exams. #notjust #instinctforgrowth

— Grant Thornton (@GrantThorntonZA) March 27, 2013

Judged by an independent panel of accounting experts, the accolade was presented at the IAB’s gala dinner on 14 March 2013 held in London. The IAB is a leading global accounting industry organisation which regularly analyses performance and best practices in assurance and accounting services.

“I am proud of this award, but all credit goes to over 35,000 Grant Thornton people in more than 120 countries for their commitment and hard work in providing high quality services to our clients and in helping to unlock their potential for growth,” said Ed Nusbaum, Grant Thornton International global CEO. “Having achieved a double-digit growth rate, led the six largest accounting organisations in annual growth and embarked on a new global advertising campaign – our ambitions are clear and the results speak for themselves.”

2012 saw Grant Thornton grow faster (10.4%) than the other largest global accounting networks as the firm provided leading counsel on critical global accounting issues such as lease accounting, revenue recognition, EU auditor reform, corporate governance and improving the auditor’s report.

“Grant Thornton has a strong reputation in South Africa for helping dynamic businesses and this award demonstrates our consistent and high level of expertise across key areas such as evidence of client satisfaction and strategic positioning,” says Deepak Nagar, national chairman at Grant Thornton South Africa. “The South African firm is committed to fast and strategic growth with like-minded organisations and individuals and we look forward to continued success aligned to meet our ambitious targets by 2015.”

The International Accounting Bulletin Awards are designed to celebrate accounting achievements over the past year by emphasising the individuals and businesses that have moved the industry forward. To win the ‘Network of the Year’ award, firms had to demonstrate strength across a number of key areas which included evidence of top-level network-wide audit quality, a strengthened position in strategically important markets and a strong industry leadership.

Deepak Nagar added that the award would serve to increase awareness among larger corporations that superior audit quality is available from a wider range of professional services firms.

“Now that we’ve achieved this ‘Network of the Year’ accolade, I would hope our assurance skills, broad reach, experience and reputation will see companies considering our firm when next appointing or rotating from their current audit firms,” Nagar adds.

The independent judging panel for 2013 included Sir David Tweedie, Sue Almond of ACCA, Jane Howard of Wragge & Co, as well as the editorial team of the International Accounting Bulletin.

IAB group editor for asset finance and accounting, Fred Crawley said “This year’s awards attracted more than 100 nominations from all parts of the world and we are delighted at the strength of applicants and the support these industry awards have received globally.”

Read more about the International Accounting Bulletin’s 2013 awards

Three proud partners

The three companies all have an exceptional track record and established client bases.

• FINTIS: a subsidiary of TIS Holdings Pty (Ltd) – a 100% black owned investment company founded by Terry Ramabulane in 1993 brings on board a wide range of financial and related services
• Rebahale: a 100% black owned professional services firm of chartered accountants and business advisory professionals headed by Seth Radebe
• Grant Thornton: a national firm that provides a comprehensive range of professional services, including assurance, tax and specialist business advice with a local track record dating back to 1920.

One strong future

Together, we have the capability, capacity and BEE credentials to provide a wide range of services to the public sector and enhance our private sector capacity. Some new services that the merger brings to our portfolio include public sector assurance, clean audit consulting, expanded IT advisory, human capital consulting and a training academy with a range of accredited and non-accredited training programmes.

This is according to Grant Thornton’s International Business Report survey, which assesses business owner perceptions in terms of a variety of factors that affect organisational growth and expansion.

The survey revealed that a surprising 68% of South African businesses will increase salaries in line with inflation, while more than a quarter (26%) will increase salaries by more than that over the next year. It is important to remember, though, that SA’s inflation is higher than in other countries and one must take this into account when assessing real increases.

Less than 5% of South African businesses will not increase pay.

A core theme in Finance Minister Pravin Gordhan’s recent Budget Speech was that of government’s intense focus for the year ahead on issues of poverty, unemployment and inequality.

“We applaud government for raising this concern so vocally in the Budget Speech 2013,” says Ian Scott, managing partner at Grant Thornton Cape. “However, while pay rises are certainly a necessity to help eradicate poverty concerns, unrealistic wage hikes will only bring added pressure to an ailing economy.”

By stark contrast to SA’s high wage increase expectations, a total of 18% of BRIC businesses and 21% of global businesses do not plan to offer any pay rises in the next 12 months. Only 15% of BRIC and 14% of global businesses will offer increases higher than inflation in the year ahead, while approximately half the businesses in each of these geographical areas will offer increases in line with inflation.

“SA’s labour unions and collective bargaining councils ensure that employees get salary increases every year, which sets the tone for the private sector,” says Ian Scott, managing partner for Grant Thornton Cape. “But, continuing to increase salaries every year in a struggling economy, however, places SA firmly in the danger zone for rising inflation over the next 12 months – and this could have a negative impact on this county’s growth expectations for the year ahead.”

Skills shortage epidemic threatens business growth prospects
Businesses around the world are reporting a skills shortage epidemic that is weighing on growth prospects.

In South Africa this issue is equally challenging, with a lack of qualifications and work experience exacerbating this concern even further.

A staggering 83% of local businesses reported a lack of technical skills when it came to recruitment. Only 61% of BRIC economies and 64% of global businesses reported this challenge.

“When the data is split according to sector, we note that SA’s mining industry is finding the shortage of technical skills the most challenging,” Scott continues.

The survey revealed that 58% of SA businesses report difficulties in recruiting skilled workers.

“SA urgently needs to address the enormous dichotomy between the skills shortage and unemployment,” says Scott. “There is much talk in both the private sector and government about initiatives that could improve this situation, but the time for talking is over.”

President Jacob Zuma confirmed during his State of the Nation address in February that the youth wage subsidy would be signed and that this would be just one of several interventions to alleviate youth unemployment. This was further clarified and confirmed in the Budget Speech, when Finance Minister indicated that a revised youth employment incentive will be tabled in the House.

“Hopefully these will go some way towards helping to solve the crisis,” says Scott. “However, government also needs to address a variety of other issues. These include apprenticeship schemes for skills development, which practically disappeared when our technikons and teachers’ colleges were disbanded, as well as SA’s complex labour laws which act as a deterrent to employment, especially for smaller businesses.”

Scott says it’s imperative for business and government to work more closely to find solutions to SA’s employment crisis.

“We need to find innovative solutions, for example, initiatives that allow a percentage of the total workforce to be treated more flexibly,” he suggests.

“SA also needs to urgently increase productivity, which is far behind many other countries globally, if we are to see business growth and economic success.”

It’s not all bad news, though.
According to Grant Thornton’s report, 43% of SA businesses increased the number of employees which were hired over the past year, compared to 15% of South African businesses that reported decreasing their staff complement during 2012. This is in line with BRIC countries for which the percentages were 45% and 14% respectively. Of these, the Gauteng region saw the highest employment increases (48%), followed by Durban and Pietermaritzburg (47%) and Cape Town and surrounds (41%). The Eastern Cape experienced the least employment increases (39%).

When questioned about staff retention, more than a third of SA businesses (37%) experienced no staff retention problems, while only 7% of BRIC businesses claimed the same. Of those 37% of SA companies, 46% reported ‘increased operating costs’ as one of the main problems that staff retention issues caused to their business. This was followed by ‘increased workload for the remaining staff’ (45%) and ‘fall in customer service standards’ (30%).

“A business is nothing without its people just as a strategy is nothing without the people to drive it forward. The best people boost productivity save a business time and money and ultimately grow the organisation,” Scott concludes.

In addition, only 15% of junior miners throughout South Africa believe that the Mining Charter has been successful in transforming the industry, with specific reference to BEE participation elements in the Charter. Just 41% of respondents believe the Charter has been successful “to some extent”.

This is according to Grant Thornton International Mining Report 2013 , entitled ‘Turning high risk into high potential’ which surveyed junior miners in four countries where mining is a priority – namely South Africa, Australia, Canada and the UK (specifically for its large amount of mining companies listed on AIM) .

The report highlights the difficulties facing mining companies today and illustrates how various issues will impact mining operations in the coming year. More importantly, the report underscores that there are opportunities for mining executives to leverage creative solutions to these challenges.

The nationalisation concerns which were raised in the research were with specific reference to challenges which junior mining organisations are facing in terms of accessibility to finance.

Half (49%) of the respondents in the report indicated they would need finance for their businesses within the next two years, 26% of which need funds within the next six months.

“It is vital that companies are in a position to raise finance, and this is becoming increasingly difficult,” says Steven Kilfoil, mining advisory and corporate finance director at Grant Thornton Johannesburg.

“Uncertainty arising from the nationalisation debate harmed the industry’s ability to raise finance and any instability going forward will have the same negative impact.

“Thankfully the nationalisation issue has now been settled and this stability will assist miners to access funding. Investors need predictability for resource exploration and development projects.

The lesson for government is that there must be certainty on all the issues over which it has control, including land claims.”

In terms of transformation of the local mining sector and BEE participation, Kilfoil says that the Mining Charter’s biggest problem is that specific measurable targets have now been set,  to the detriment of the essence of the Mining Charter.

“The Mining Charter was set to engender a spirit of transformation and inclusion; one that will give local communities access to SA’s underground wealth.  With the introduction of targets which need to be met by mining companies, however, the emphasis has shifted from the real spirit of the Charter to one of simply meeting the targets and checking the boxes,” he says.

“Miners may now be more focused on achieving 26% ownership participation by historically disadvantaged South Africans by the end of April 2014 than on real transformation.

Once they have ticked the compliance box, they may become complacent.”   Another negative highlighted by the survey is the issue of bribery and corruption with 40% of SA miners stating that bribery and corruption is a significant concern, nearly double the global figure which was 23%.

SA junior miners are bullish about future growth prospects
The findings were not all doom and gloom. After two tough years for mining in South Africa, junior miners are optimistic about the next 12 months.

SA mining executives are in fact more positive than their counterparts in Canada, Australia and the UK, despite expectations of significant cost increases this year, and their responses suggest the sector can look forward to positive growth.

“Being positive about the future is good news for our economy,” says Steven Kilfoil.

“The report shows that mining executives are beginning to see light at the end of the tunnel following a period of mine violence, strikes, uncertainty surrounding the mineral regulatory regime and ambiguity around government’s plans on nationalisation.”

The mining report revealed that SA junior miners will spend more on capital equipment and, despite knowing that labour and energy costs will increase significantly, they also expect to be profitable, with half (49%) of the respondents in SA also anticipating increased revenues this year.  This is significantly higher than in Australia (36%), Canada (31%) or the UK (21%).

In terms of future investments, nearly half (49%) of SA’s junior miners expect to increase their investment in plant and machinery over the next 12 months, compared to a global average of 42%, while two thirds of respondents (62%) are looking forward to higher commodity prices (compared to 54% globally).

The survey also highlighted that 44% of SA junior miners will employ more people with a positive outlook also expected for the year ahead in terms of salary increases across the junior mining sector.

A total of 44% of local respondents in South Africa have responded saying they would increase salaries by more than inflation, while 46% will offer pay rises in line with inflation.

Kilfoil believes this optimism across South Africa is probably warranted, although he highlights the fact that miners in general tend to be hopeful.   “Perhaps part of the reason is the innate optimism of those who choose mining for a career, scouring the earth for chances at outsized returns on investment despite long odds,” he says.   SA was not hit as badly by the economic recession as many other mining countries.

Kilfoil recently attended the Prospectors and Developers Association of Canada (PDAC) annual conference in Toronto, where he says the mood on the floor was generally pessimistic.

“Canada has approximately 1200 listed junior miners of which only about 800 are expected to survive the next 12 months,” he says.  “A third of them will disappear or be absorbed by major players.

The country therefore has a number of economically unviable listed resource companies that were able to raise initial funding and start drilling.

Now, however, they cannot access any further funds.” One way to raise finance is to go to market, and thankfully the SA market is more robust.

Johannesburg Stock Exchange requirements are far stricter than those of other major mining countries.

“While this has to some extent stifled exploration, it has also been very positive as investors are better protected and our exchange ensures that assets that come to market are good assets,” says Kilfoil.

“I have always been a huge proponent of exploration.  It’s vital – but it needs to be done carefully.  We don’t want to end up with a situation similar to that of Canada where there is a proliferation of smaller companies that have raised money for exploration but are now cash-strapped.”

Issues of over-regulation were also raised in the survey, by SA junior miners. “Too much red tape causes needless project delays, discourages investment in the sector and dampens enthusiasm for exploration,” says Kilfoil.  “In South Africa, it takes on average nine months to process an exploration license application while in Australia project approval times have increased from months to years.”

Access to a skilled workforce was not much of a concern to the SA junior miners, however, and was in line with the rest of the world.

This is in contrast to the findings of the recent Grant Thornton International Business Report which showed that 58% of SA businesses had difficulties in recruiting skilled workers.

“This talks to the fact that our mining industry is mature and strong, with a significant group of people that really knows the business – and understand how to mine,” concludes Kilfoil.

Notes to editors:
* Junior Miner – definition according to Grant Thornton’s International Mining Report 2013   Miners grouped by the primary stage of flagship asset of “greenfield exploration,” “brownfield exploration,” or “pre-feasibility.”     However, in terms of South Africa’s sample of companies surveyed, the above “junior miner” definition also included some companies which are involved in low-level production.

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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