22 May 2012 | Category: Establishing a presence in South Africa, Publications
Basis of taxation
- South African residents are taxed on their worldwide income.
- Non-South African residents are taxed on their South African sourced income.
- A company will be a South African resident if it is incorporated in South Africa or if it has its place of effective management in South Africa.
- An individual will be a South African resident if he or she is ordinarily resident here or is physically present here for a specified number of days over a five year period.
- Any person who is deemed to be a resident of another state through the application of a double tax agreement will not be treated as a South African resident.
Agreements to avoid double tax
- South Africa has entered into double tax agreements with most of its trading partners.
- In terms of these arrangements a foreign resident will be taxable in South Africa only if it conducts business through a permanent establishment in South Africa (note there are a few exceptions such as withholding taxes).
- South African companies are currently taxed at a rate of 28%.
- Secondary Tax on Companies (STC) is levied on companies (not the shareholders) at a rate of 10% on the excess of dividends declared over local dividends received. STC will be replaced by a dividend tax with effect from 1 April 2012. The formal legal liability for dividend tax will be moved from the company paying the dividend to the shareholder receiving it. The tax cost therefore shifts off the company’s income statement and becomes a cost to the shareholder.
- The dividend tax of 15% will generally be withheld by the company paying the dividend or a paying intermediary, and the net dividend will be paid to the shareholder.
- South African branches of foreign companies are taxed at a rate of 33% for years of assessment ending after 31 March 2008. No STC is imposed on the remittance of branch profits. From 1 March 2012 it has been proposed that the tax rate for branches decrease to 28%.
- Capital gains earned by companies are effectively taxed at half the applicable rate i.e. 14% for South African companies and 16.5% for branches of foreign companies.
- Individuals are taxed on a sliding scale with the highest marginal rate being 40%.
- Capital gains earned by individuals are taxed at 25% of the marginal rate, i.e. an effective rate of 10%. There are certain exemptions.
- During the National Budget speech delivered in February 2012 it has been proposed that the maximum effective rate for individuals from 1 March 2012 will increase to 13.3%. While for companies and trusts it will increase to 18.6%, for years of assessment commencing on or after 1 March 2012.
Key income tax issues
- Interest paid to foreign lenders is not taxable unless they have a permanent establishment in South Africa. From 1 January 2013 interest may be taxable in South Africa.
- Dividends paid to foreign shareholders are not taxable. As stated above from 1 April 2012 a dividend withholding tax will be introduced.
- There is a withholding tax on royalties paid offshore of 12% (may be reduced through the applicable double tax agreement).
- Transfer pricing rules apply and are enforced.
- Thin-capitalisation rules apply to thinly capitalised companies and the ratio of debt to equity should not exceed 3:1.
- Three provisional tax payments are made each year.
- The Commissioner for the South African Revenue Service may adjust the consideration in respect of any international transaction between connected parties to reflect on arm’s length price.
- This is to ensure that there is a fair return on the activities conducted, the products contributed and the risks assumed in South Africa.
- If prices between connected parties from different jurisdictions do not reflect an arm’s length price, the South African taxpayer’s taxable income could be increased.
- Transfer pricing adjustments will result in additional tax, interest and penalties.
- Furthermore, any transfer pricing adjustment may result in such adjustment being deemed to be a dividend, which would be subject to STC at 10%.
- Although a Transfer Pricing Policy document is not required by law, it is advisable to prepare and maintain such policy documents to defend prices if they are ever challenged.
- Businesses must register as an employer with the South African Revenue Service (SARS) and Pay As You Earn (PAYE) must be withheld on a monthly basis from remuneration paid to employees. Social security taxes are also collected through the PAYE system.
- Value-Added Tax (VAT) is levied at a rate of 14% on taxable supplies made by vendors.
- An importer/exporter has to register with SARS to obtain a customs code number. Customs duties are payable on various goods imported into South Africa. Importers need to ensure that they are using the correct tariff classification of the imported goods and applied for import permits where required on certain goods.
- Securities Transfer Tax of 0.25% is levied on the transfer of shares but is not levied on the new issue of shares.
Investment protection agreements
South Africa has entered into agreements with various countries. Visit the Department of Trade and Industry’s website for a full list.
Tax and cash grant incentives
Various tax and cash grants are available in South Africa. There are various manufacturing incentives available, they are, amongst others:
- Enterprise Investment Programme (EIP) - Under the EIP the Manufacturing Investment Programme (MIP) provides for a cash grant for local and foreign- owned manufacturers who wish to establish a new production facility, expand an existing production facility or upgrade an existing facility.
- Foreign Investment Grant (FIG) – The FIG compensates qualifying foreign investors for costs incurred in moving qualifying new machinery and equipment from abroad to South Africa.
- Tourism Support Programme (TSP) – The TSP is a reimbursable cash grant that aims to support the development of tourism entities that will create jobs and increase the geographic spread of the tourism industry.
- Production Incentive (PI) – Under the PI applicants can use the full benefit as either an upgrade grant facility or an interest subsidy facility, or a combination of both.
- Support Programme for Industrial Innovation (SPII) – SPII is designed to promote technology development in industry in South Africa through the provision of financial assistance for the development of innovative products and/or processes.
- Critical Infrastructure Programme (CIP) – CIP is a cost sharing cash grant for projects designed to improve critical infrastructure in South Africa.
- Export Marketing and Investment Assistance (EMIA) – The Department of Trade and Industry (DTI) assist SA exporters by organising National Pavilions to showcase local products at international trade shows.
- Automotive Investment Scheme (AIS) – AIS has been designed to grow and develop the automotive sector through investment in new and/or replacement models and components.
- Section 12i Tax Allowance Incentive (TAI) – TAI has been designed to support Greenfield and Brownfield investments, therefore focusing on investment in manufacturing assets and training of personnel.
- Manufacturing Competitiveness Enhancement Programme (MCEP) – A new incentive to be launched by the DTI. The MCEP will focus on firms upgrading their production facilities, processes, products and people in the short term and to strengthen the existing IDC distressed funding facility by expanding SMEs.
Various export incentives are available from different government or “semi-government” organisations.
- There is no exchange control over non-residents.
- South African subsidiaries or branches of foreign companies are, however, treated as resident and thus subject to the controls.
- Investment may be in the form of share capital only or share and loan capital.
- Where a portion of the investment is in loan capital, exchange control approval is required, but this is usually a formality.
- These can be restricted – the maximum is determined in terms of a formula and is linked to the amount of owners’ funds (share capital, loans and accumulated profits). The restriction commences with a foreign holding of 75% or more. The borrowing restrictions have been removed for most companies but are applicable with regard to transactions involving immovable property and certain ‘financial’ transactions, including the purchase of shares.
- The limits may be temporarily increased in certain circumstances.
Dividends or branch profits
- Freely remittable provided the remittances will not cause the subsidiary or branch to become over borrowed locally.
- Interest on a loan from the holding company is remittable provided that the rate of interest is reasonable in relation to the currency of the loan and the loan was previously authorised. The rate will be reduced where the foreign shareholder lends the funds.
- South African sourced interest is generally exempt from tax when received by non-residents. A withholding tax on interest payments is to be introduced in 2013.
- License agreements must be approved by the Department of Trade and Industry.
- Acceptable rates vary from 2% to 4% for manufacture of consumer goods and up to 6% for capital goods. Minimum and/or upfront payments (even if recoupable) are not allowed, unless there is immediate benefit, for example, training.
- The payment is subject to a withholding tax of 12% (unless the rate is reduced or eliminated in terms of a double tax agreement).
Management and technical fees
- These may be paid to the holding company/head office if reasonable.
- Usually no withholding tax is deductible in respect of management fees.
- Exchange control approval is not required, provided the fee is supported by a proper invoice. A fee that is calculated as a percentage of turnover will not be allowed.
- Foreign currency is made freely available for import of goods. There is a limited array of goods for which an import permit is required, but the vast majority of products may be imported without a permit. Payment is usually only permitted against proof of import, i.e. by presenting Customs-stamped documentation (though it is possible to pay in advance of shipments).
- Foreign currency is also made freely available to pay for foreign services (other than as stated above).
Forward foreign exchange cover
- Obtainable for foreign liabilities and assets.
Immigrants and expatriates
- Concessions are made to new immigrants and expatriates.
- Expatriates may freely remit their savings abroad, after paying tax on their earnings.
Notes to editors
You may quote freely from this publication, provided you acknowledge the source. This publication is an outline for information purposes and should not be relied upon for detailed planning. Readers are advised to consult professional advisors for guidance relating to new or existing legislation which might affect their business and personal decisions.
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