Tuesday, February 19, 2008

I think one can safely say that taxpayers should not expect major tax changes in this year’s Budget.  
In the last few years, the tax landscape in South Africa has been changed remarkably. We have seen major changes to tax principles, such as the introduction of the “residence” basis of taxation and the introduction of capital gains tax.  These changes have significantly aligned the South African tax system with that of its main trading partners and the leading world economies. The only remaining difference from a tax perspective is “secondary tax on companies” (“STC”) which is imposed on the declaration of dividends and is payable by companies in respect of dividends declared.  STC is complex and not well understood by many foreign investors and the announcement that STC will be replaced by a withholding tax on dividends, is to be welcomed. 
Hopefully the Minister of Finance will give further details in his Budget speech as to how the new tax will work. As the first step in moving towards the abolition of STC, it was announced during 2007 that the rate of STC will be reduced from 12.5% to a rate of 10%. It is likely that South Africa will collect less withholding tax on dividends paid to foreign shareholders than the STC which would have been collected.  This is because many of the Double Tax Treaties concluded between South Africa and its trading partners reduce the amount of withholding tax that South Africa is entitled to collect to a rate of less than 10%.
During 2007, the Government, rather optimistically, I believe, stated that these treaties would be renegotiated during 2008. However, the negotiating, amending and the bringing into law of Double Tax Agreements is a notoriously lengthy process. It appears quite likely that the introduction of the new tax will be delayed beyond this year. However, in the upcoming Budget, I expect to see further details as to how the new tax will operate, how it will deal with issues such as STC credits and whether there will be a relief mechanism for dividends declared within a group of companies.
The electricity crisis is a major problem for South Africa. It is possible that the Government may grant some form of specific tax relief for businesses and perhaps even individuals who introduce electricity saving measures such as their own generators or solar power. Whether this will be done and the form that such relief will take can only be guessed at this stage.
It is likely that the tax brackets will be shifted upwards, in order to give some relief for inflation. However, it is probable that taxpayers will be expected to carry at least a portion of the burden of funding South Africa’s infrastructure requirements. Accordingly, I do not believe that the maximum rate of tax payable by individuals will be decreased. However, there may be scope for a reduction in the corporate rate of tax in view of the fact that this rate, together with STC, is still slightly higher than the corporate tax rates charged by South Africa’s competitors.
I do not expect that group taxation will be introduced in the Budget. Group taxation is a principle in terms of which companies forming part of a clearly defined “group” are taxed as a single taxable entity with any transactions between the group companies being ignored for tax purposes. It is probable that a system of group taxation will be introduced into South Africa at some stage in the future, but I do not believe that this would be likely in the next few years.
Hopefully the tax consequences of being given an interest free loan will be clarified in the Budget.  In a recent decision in the Supreme Court of Appeal, the Court held that where a taxpayer is given an interest free loan, the value of the right to use the loan could have adverse income tax consequences for the borrower.  The implications of this judgment perhaps go beyond the actual facts of the case, and the South African Revenue Services has undertaken to be circumspect in the manner in which it implements the principles enunciated by the Court. Nevertheless an unwanted area of uncertainty has crept into the South African tax law and it is possible that the legislature may seek to codify this aspect of the law in order to provide clarity for taxpayers.
Budget Day will indeed be an interesting day for taxpayers in view of the uncertainty of what the day will hold. However, it is unlikely to be a day on which taxpayers receive any surprises.
Barry Garven is a director at Bowman Gilfillan