Country: South Africa

National Treasury may have thrown a lifeline to companies in business rescue in the 2024 Budget when it announced plans to review the circumstances under which SARS may decide to temporarily write off a tax debt under section 195 of the Tax Administration Act 28 of 2011 (TAA). 

The proposed amendment comes at a critical point where financially distressed businesses are grappling with tight financial conditions, sluggish economic growth, and mounting tax obligations amid efforts to navigate the complexities of business rescue proceedings. 

Challenges with tax compliance in business rescue: section 256 

Where taxpayers find themselves in financial distress, often leading to business rescue interventions, tax compliance becomes increasingly challenging. The significance of this becomes apparent when considering the statistics of business rescue in South Africa. According to the Companies and Intellectual Property Commission’s (CIPC) 2022/2023 Annual Report, of the 4 599 companies that commenced business rescue proceedings between 1 May 2011 and the end of the 2022/2023 reporting period, only about 20% reached substantial implementation (with 13% ending up in liquidation, 23% terminated, and 37% still active). 

Section 256 of the TAA exacerbates this situation by requiring SARS to revoke a taxpayer’s compliance status if it has outstanding tax debts. Reinstating this compliance status requires addressing outstanding issues, including the settlement of outstanding tax liabilities or, where this is not possible, devising compromise or instalment payment arrangements with SARS. 

The intricate nature of business rescue proceedings means rectifying historical non-compliance can often take time and effort, frequently involving extensive reconstruction of financial records due to mismanagement, fraud, or theft. SARS is also understandably dealing with a backlog of compromise and deferral requests, given the significant number of financially distressed businesses being forced to seek relief from SARS for pre-commencement tax debts. 

Stable cash flows are imperative to the success of business rescue proceedings, and significant delays in the reinstatement of a taxpayer’s compliance status, therefore, often leads to disastrous results for distressed taxpayers, who typically cannot tender for any new contracts, or enforce payment for work already done (particularly taxpayers that supply services to government entities). 

For example, the case of Red Ant Security Relocation and Eviction Services (Pty) Ltd v CSARS 80 SATC 431 involved a taxpayer which derived 96% of its revenue from government contracts, which it could not execute without a tax clearance certificate. The taxpayer could not receive payment for its services nor tender to provide new services, creating severe financial constraints that left its business on the brink of closure. The livelihoods of some 11 000 employees were at risk, and nine municipalities would potentially have been left without essential services if the taxpayer’s business shut its doors. 

The liquidation of businesses that could otherwise have traded back into solvency inevitably results in job losses, but SARS also loses out on the ongoing tax revenue these businesses could have generated. As a concurrent creditor, SARS also typically only recovers a very small percentage of the outstanding tax debt of the business in liquidation, compared to what could have been recovered over time, through a compromise and deferral arrangement, particularly if the taxpayer is given the opportunity to trade itself out of business rescue and back into a solvent financial position. 

Navigating the challenges of section 195: seeking relief for distressed taxpayers 

Section 195, as it is currently worded, confers powers on SARS to temporarily write off an amount of tax debt where a tax debt becomes irrecoverable or uneconomical to pursue, and where a debtor is subject to business rescue proceedings under the Companies Act. 

Section 195 could, therefore, facilitate a temporary write-off of a taxpayer’s outstanding tax debt, allowing the taxpayer’s compliance status to be reinstated immediately. This could afford distressed taxpayers a chance to trade out of financial distress without the burden of a ‘non-compliant’ status, without compromising SARS’ mandate to collect revenue, as the tax debt owed to SARS is not permanently waived or compromised (save to the extent this is separately agreed between SARS and the taxpayer), and can be reinstated at an appropriate time. 

However, the correct interpretation and application of section 195 is uncertain, and taxpayers have been unable to rely on this provision to secure temporary write-offs thus far, being forced instead to approach the courts for relief, as was the case in Red Ants and various other matters. 

Treasury’s commitment in the Budget Speech to reviewing the discretion afforded to SARS by section 195 of the TAA accordingly represents a crucial step towards aligning tax administration practices with the objectives of the business rescue provisions in the Companies Act. 

Such an amendment will hopefully prevent scenarios where SARS is compelled (by legislation or policy) to force viable businesses into insolvency due to their inability to secure a tax clearance certificate within a reasonable timeframe. Not only will this safeguard the interests of distressed taxpayers and promote economic resilience and sustainability, but it will also benefit SARS and the fiscus by prioritising extended repayment of tax debts over non-recovery (when distressed taxpayers are liquidated). 

Treasury’s commitment in the 2024 Budget to reconsider the ability of SARS to temporarily write off the tax debts of distressed taxpayers in order to reinstate their tax compliance status is a welcome development. If companies in business rescue are able to trade back to health without the noose of tax debts around their necks, this can only contribute towards a conducive environment for business recovery and economic growth in South Africa. 

On 21 February 2024, South African Finance Minister Enoch Godongwana delivered his Budget Speech.

The Minister remains committed to the goal of raising an additional ZAR 15 billion in taxes that he announced in the medium-term budget policy statement.

The country’s increasing budget deficit has made this goal even more pressing amid the continued lower revenue performance and higher than projected debt-service costs.

The Budget aims to alleviate immediate economic pressure and promote quicker debt stabilisation.

Click here for our Budget Brief outlining the tax highlights of the Budget. Click here for a visual providing highlights of the proposed tax changes.

The Financial Sector Conduct Authority (FSCA) published the requirements for rule amendments to be submitted by retirement funds to give effect to the two-component retirement system (or more colloquially known as the ‘two-pot system’) in its FSCA Communication 3 of 2023 (RF) (Communication) earlier today (16 February 2024).  The Communication also outlines the approach the FSCA will be taking when considering applications submitted by retirement funds.

The FSCA advised that all retirement funds, save for a few exceptions as set out in the Communication, are expected to communicate the proposed two-pot legislative changes to members in a manner that is ‘simple, clear and comprehensive’ and that these communications must be made timeously and regularly. The FSCA also advised that it may request a copy of the communication issued by retirement funds or administrators.

In the interest of considering applications for the approval of rule amendments expeditiously, the FSCA requested that the rule amendments be limited to those referred to in the Communication.

In respect of transitional arrangements, the FSCA advised that where applicable, retirement funds may apply for extension of time in terms of section 279 of the Financial Sector Regulation Act, 2017.

A copy of the Communication can be accessed here.

Some exciting news:  The template rule amendments necessary to implement the two-pot system, in line with the Communication, as well as other key information to assist with ensuring that retirement funds will be ready to implement the two-pot system, will be made available shortly as part of Bowmans’ Two-Pot Readiness Pack. Look out for further communications in this regard.

On 6 February 2024, the Competition Commission of South Africa (Commission) published Draft Terms of Reference (ToR) for a new market inquiry, into the South African poultry value chain (available here).

The ToR for this Poultry Market Inquiry (PMI) outlines features of the poultry value chain (in the production of both commercial meat and eggs) that may impede, restrict or distort competition, as well as the Commission’s main objectives in this market inquiry.

Market features

The ToR indicates that the Commission believes there are several features which may be adversely affecting competition in the poultry industry:

• Structure: The South African poultry industry value chain is concentrated at all levels and features a few large, vertically integrated companies. Despite government interventions and active trade policies, there has been little change in the industry’s structure over many years. This heightens the risk of anti-competitive practices and may hamper participation in by new entrants.
• Outcomes: High concentration levels and vertical integration in poultry production may have significantly restricted opportunities for new entrants to enter and compete with established producers. Consequently, transformation within the poultry industry has progressed slowly. Although contract growers have been able to enter to some extent, they continue to rely heavily on the integrated producers for essential inputs. In the broiler industry ‘there are ongoing demands for bailouts through ever-increasing tariffs and the imposition of anti-dumping duties’. The Commission notes that whilst acceding to these demands may protect the domestic industry, it may create negative consequences for consumers generally, and especially for low-income consumers, who are dependent on chicken for protein.
• Conduct: There has been increased scrutiny of contract growers’ production terms and conditions by regulators and policymakers in various jurisdictions. Power imbalances may arise as a result of information asymmetry, and the use of tournament systems. The existing market structure poses challenges for emerging producers, which are exacerbated by imports (and potentially dumping).

Main objectives

The ToR indicates that the main objectives of the PMI, are to:

• evaluate whether there are market features in the poultry value chain which distort competition (including pricing and access);
• evaluate the impact of large integrated producers as gatekeepers of key inputs, on production by SMEs and HDPs;
• evaluate the commercial relationship between contract growers and integrated producers and whether these relationships are characterised by imbalances in bargaining power and information asymmetry;
• evaluate the role of retailers, quick-service restaurants, and processed food companies in facilitating entry and access to markets by independent producers, including SMEs and HDPs, along with availability and pricing of cold chain storage and logistics; and
• determine appropriate remedies where adverse effects on competition or the purposes of the Act are found.

Interested parties are invited to submit comments on the ToR by 8 March 2024. Written submissions can be sent to [email protected]. All submissions will be reviewed, and a final ToR published by the Commission. The PMI will commence 20 business days after the publication of the final ToR and the final report will be completed within 18 months, as per the statutory requirements of the Competition Act.

In the third article in our employee mobility series, we highlighted the opportunity for South Africa to become a jurisdiction of choice for employees wishing to work in the country for their foreign employer and outlined what could be done to make it a more attractive destination for remote workers. One of the obstacles was the delay in the implementation of what is commonly known as the ‘digital nomad visa’.

After the initial announcement by President Ramaphosa almost two years ago that South Africa would be introducing a digital nomad visa, the draft amendments to the Immigration Regulations that are needed to implement these changes to our immigration laws have finally been published for public comment.

The Draft Second Amendment of the Immigration Regulations, 2014 was published in the Government Gazette on 8 February 2024 (Draft Regulations). The public has until 29 March 2024 to submit written submissions on the draft regulations.

In terms of the Draft Regulations, a ‘remote working visa’ is introduced as a species of visitor’s visa that may be issued in terms of section 11(1)(b) of the Immigration Act, 2002. This is proposed by way of extending the list of prescribed activities, in respect of which a foreigner must be engaged in South Africa to qualify for such visa, to include “work conducted…for a foreign employer on a remote basis”.

In order to be considered for this visa, an applicant must earn no less than the equivalent of R1 million per annum. The visa can be issued for up to three years, subject to the following:

• If the visa is issued for a period not exceeding 6 months within a 12-month period, the foreigner will not be required to register with the South African Revenue Service (SARS); and
• If the visa is issued for a period longer than 6 months within a 12-month period, the foreigner must register with SARS.

The Draft Regulations also propose further changes to our immigration laws, including the introduction of a points system for adjudicating work visa applications.

If the Draft Regulations are promulgated, this will be a positive step for foreign employees seeking to make South Africa their remote working destination of choice. Interestingly, the Draft Regulations introduce an income tax exemption for foreign employees working in South Africa for less than 6 months in a 12-month period, which exemption is not currently provided for in the Income Tax Act, 1962 (ITA). The ITA would have to be amended to duly provide for the exemption.

For foreign employers, it may unlock an opportunity to send their foreign employees to explore the South African market with a view to potential expansion and investment, or just give them the means to approve an employee’s request for a working stint across the waters.

While the digital nomad visa is a step in the right direction in the implementation of an effective remote working scheme in South Africa, there are still potential obstacles and employers should remain mindful of the potential tax, corporate and employment law consequences. For example, the risk that a remote working arrangement could create a permanent establishment (PE) for a foreign employer, is a substantial concern for most foreign employers. Unless this risk is addressed, it is unlikely that the digital nomad visa would attract remote workers who work in South Africa for longer than 6 months at a time.

Clarification should also be provided regarding the payment of Skills Development Levies and Unemployment Insurance Fund contributions in respect of digital nomads. For a recap on some of the tax issues that should be front of mind, see our third article in the series.

Another question is whether an external company registration obligation will be triggered for the foreign employer in terms of the Companies Act, 2008, where foreign employees work in South Africa on digital nomad visas. Consideration should be given to whether the foreign employer may be considered to be ‘conducting business’ in South Africa in such circumstances, for purposes of section 23 of the Act.

From an employment law perspective, a careful analysis should be undertaken of the circumstances surrounding the remote working arrangement to determine whether our South African employment laws will apply to remote workers while they are working in the country. This is particularly important as all foreign employees, including those who do not have valid working visas, are afforded legal protection under the Labour Relations Act, 1995, as amended.

The South African Minister of Employment and Labour has published draft regulations on proposed sectoral numerical targets for public comment.

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