NO SURPRISES IN THE 2008 BUDGET SPEECH – BARRY GARVEN
The income tax rates for South African corporates will be reduced from 29% to 28%. This was one of the key announcements made by Trevor Manual, the Minister of Finance, in his 2008 budget speech.
According to the Minister, the reduction of the corporate rate is intended to facilitate an increase in private sector investment and to stimulate the supply side of the economy. However, before one celebrates this change, it needs to be considered in the light of the forthcoming changes to the regime which deals with the taxation of dividends.
Unfortunately, little was said, either in the budget or in subsequent press release, as to how the new withholding tax on dividends, which will replace the STC system, will be implemented. We have however been told that the new system will only be coming into effect in 2009.
When STC, at 10%, is combined with the current corporate rate of tax of 29%, the effective tax rate on corporate profits declared to shareholders, as a dividend, is approximately 35,45%. However, when a dividend withholding tax is introduced and the lower rate of corporate tax is implemented, the effective corporate tax rate will be 35,2%. This is not very much less than the current effective rate. Accordingly, while companies should be pleased that the effective tax rate is not actually increasing, any celebration of the reduction should, perhaps, be seen in the overall context. The reduced rate is unlikely to enhance South African’s ability to attract foreign investors.
Perhaps one of the few tax surprises announced by the Minister is that the system of STC credits will be totally abolished by 2009. This is an important aspect for corporate taxpayers who should utilise existing STC credits by declaring dividends where this is possible. Depending on the circumstances of corporate taxpayers, it may even be worth their while declaring dividends and leaving the payment of the dividend outstanding on loan account if the company does not have sufficient funds to make a cash payment of the dividend.
As most tax commentators have expected, the new dividend withholding tax will only be payable when a dividend is received by individuals, non-resident companies or “closely held passive” companies and, accordingly, there should be no cascading effect as dividends are declared from subsidiaries to holding companies within a group of companies.
Corporate taxpayers will be pleased with the ongoing relaxations of exchange controls. The Minister announced that the exchange controls on institutional investors will be phased out and replaced by a new system of prudential regulation. Corporates will welcome the announcement that applications for exchange control approval for foreign investments will only be required where there is a potential investment of more than R50 million.
The 2008 budget did not bring about any major change to tax principles. However, some of the tax changes were the following:
· The Minister announced that a discussion paper will be made available to the public to comment on private equity transactions. The Minister stated that although private equity deals contribute to economic growth, the structure of some of these transactions undermines the tax system. Issues such as the deductibility of interest payments on leveraged deals and the tax treatment of management’s carried interest portion will be investigated.
· The compulsory registration for VAT in respect of VAT vendors was set, some time ago, at a turnover level of R300 000 or more per annum. The Minister has announced that this threshold will be increased to R1 million per annum in order to ease the compliance burden on small businesses.
· Currently, dividends received from foreign shares listed on the Johannesburg Stock Exchange are tax exempt if South African residents hold more than 10% of the foreign company’s shares. This 10% threshold unfairly discriminates against smaller listed companies and will be removed.
· The exemption in respect of foreign dividends repatriated back to South Africa from 20% held foreign companies will be expanded to include dividends declared from co-operatives.
· In terms of some of the group relief provisions, companies are required to be liquidated, wound up or deregistered within a period of 6 months. This requirement is controversial and difficult to comply with in practice. Consequently this time period will be extended to 18 months.
· Tax relief is in the pipeline for capital distributions made by one company to a fellow group company. This relief will only be available if it amounts to a deferral of tax and not a permanent exemption from tax.
· Currently, there is no formal procedure for the tax free roll-over election to be made in respect of the group relief provisions of the Income Tax Act. It has been proposed that an automatic election provision will be implemented into the Act. Taxpayers will be able to elect out of the roll-over provisions.
· In order to assist in strengthening the skills base of the economy, learnership allowances will be extended to take into account longer term apprenticeships such as those of a technical nature including electricians, welders, plumbers and the like.
· Measures will be introduced in order to relax the provisions regarding “broad-based” share incentive schemes so that they will be easier to implement. However, at the same time, there seems to be a perception of tax avoidance in respect of employee share incentive schemes. Further steps will now be introduced to tighten these provisions.
· Further amendments will be made to the changes made to the Income Tax Act in 2007. These include the provisions relating to capital distributions and those relating to the licensing of intellectual property. Additionally, the provisions relating to group relief and degrouping charges will also be subject to further amendment in the forthcoming legislation.
There may not have been any major tax surprises in the budget speech, but, as with all budget speeches, often the legislation which follows shortly thereafter needs to be carefully scrutinised as this is where the surprises for the unwary may lie.
Barry Garven is a director at Bowman Gilfillan.