The 2011 budget – the latest annual statement by the South African minister of finance about the nation’s finances – contained some interesting proposals relating to the taxation of cross-border transactions.
Co-head of tax department
Edward Nathan Sonnenbergs
It stated that a new dividends tax would replace the secondary tax on companies (STC) from 1 April 2012. Any dividend paid by South African-resident companies and any dividend paid by non-resident companies in respect of listed shares on or after 1 April 2012 will be subject to the dividends tax.
A foreign dividend paid in respect of unlisted shares will thus not be subject to the dividends tax. Such foreign dividends will therefore be subject to normal tax.
In this regard, the minister of finance pointed out in his budget speech that the issue of how inbound foreign dividends should be taxed remains unresolved. Some foreign dividends are currently exempt from taxation and others are taxable at the top marginal rates. The minister indicated that the exemptions and rates of taxation of foreign dividends will be adjusted to bring them into line with the taxation of domestic dividends.
The minister also pointed out that foreign-owned South African branches are currently subject to tax at a 33% rate. South African companies are subject to a 28% rate of tax, however this is increased by the STC. Once the STC is replaced by the dividends tax, South African companies will only be subject to tax at the 28% rate. The issue then arises whether the 33% tax rate imposed on branches of foreign companies is discriminatory. The branch tax rate may therefore be reduced.
In the budget, the minister also stated that:
“Tax treaties apply to income tax and similar taxes. The scope of the term ‘similar taxes’ is an issue, especially when the different treaties have differing lists of similar taxes. It is proposed that the income tax be amended to list all similar taxes (including the impending dividends tax and interest withholding tax) as explicitly eligible for tax treaty relief.”
This statement means that an attempt will be made to ensure that, among other things, the dividends tax and the proposed interest withholding tax qualify as creditable taxes for non-residents which are subject to such taxes.
Taxes on capital inflows?
Despite the significant strengthening of the South African rand against all major currencies last year, there is no indication of a tax on capital inflows into South Africa. This topic has been debated by the national treasury and it seems that, at present, there is no desire to impose any such tax.
However, the national treasury did announce last year that an interest withholding tax will be imposed from 2013 on loans or other debt instruments issued by South African residents to non-residents. This withholding tax will be subject to relief provided by double tax agreements (DTAs) and the tax is unlikely to be introduced until all DTAs allow South Africa, as the source state, the right to impose such withholding tax at a rate of at least 5%.
This interest withholding tax will not apply to headquarter companies, i.e. companies which qualify for the favourable tax treatment afforded to corporate entities which are used as a gateway for investments into other countries in Africa.
The interest withholding tax will also not be imposed on, among other things, government debt, listed debt instruments and bank deposits.
South Africa currently has a 12% withholding tax on royalties. It is also anticipated that the long awaited dividends withholding tax will be introduced in 2011 at the rate of 10% with certain DTAs reducing this rate to 5%.
Changes to transfer pricing rules
South Africa’s transfer pricing rules have been significantly amended. The revised rules will apply with effect from years of assessment
commencing on or after 1 October this year.
South Africa’s current transfer pricing rules apply to supplies of goods or services (including intellectual property) between connected persons at a price that is not an arm’s length price. They apply where one party is a resident of South Africa or a permanent establishment in South Africa, and the other party is either a non-resident or a foreign permanent establishment.
The South African Revenue Service is empowered to adjust the consideration paid for a transaction to reflect an arm’s length price for such goods or services.
The new transfer pricing rules will apply where any transaction, agreement or understanding has been entered into between connected persons where one person is a resident of South Africa or a South African permanent establishment and the other party is a non-resident or a foreign permanent establishment. The major difference from the existing law is that the amended rules will apply where any term or condition of a transaction, agreement or understanding differs from any term or condition that would have existed had those parties been independent persons dealing at arm’s length, and where this results in a tax benefit being derived.
If these rules apply, the taxable income of the person deriving the tax benefit will be calculated as if that transaction or agreement had been entered into on arm’s length terms and conditions.
Therefore, while the current transfer pricing rules examine the pricing of the supply of goods or services, the new rules will test the terms and conditions of all relevant transactions or agreements. This introduces a far wider ambit to the transfer pricing rules.
However, in order for the new rules to apply, there must also be a “tax benefit” derived by a party. In this regard the concept of “tax benefit” requires the avoidance, postponement or reduction of any liability for tax.
Peter Dachs is co-head of the tax department at Edward Nathan Sonnenbergs
Johannesburg
150 West Street
Sandton
Johannesburg
South Africa
2196
Tel: +27 11 269 7600
Fax: +27 11 269 7899
E-mail: info@ens.co.za
