Balancing today's demands with tomorrow's opportunities - Budget 2020/21 Tax & Legal - Deloitte
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Balancing today’s demands with tomorrow’s opportunities Budget 2020/21 Pre-Budget Commentary South Africa Tax & Legal
Contents The 2020/21 National Budget: A call to action. Hard work ahead............................................................. 1 Personal taxes - The fragile state of South Africa’s golden goose ............................................................ 3 Changing the trajectory of South Africa’s economic environment ........................................................... 5 Is a reduction in the corporate income tax rate on the cards? ................................................................. 6 The impact on the fiscus of the country’s sluggish economic growth ..................................................... 8 The implications of the recently published NHI Bill and what it means for the country........................ 9 Is another VAT increase looming?................................................................................................................. 10 Will the personal tax rate be increased?...................................................................................................... 10 A new tax is born............................................................................................................................................. 11 Transfer pricing - Important considerations for minority shareholders................................................ 12 Broadening the tax base by limiting tax deductions for interest charges.............................................. 13 State of carbon tax.......................................................................................................................................... 15 Illicit trade flows: The broader impact on supply chains........................................................................... 17 Good faith does not exempt taxpayers from paying understatement penalties to SARS................... 18 Oil and gas industry developments in South Africa .................................................................................. 19 Can government further promote share ownership through employee share plans?........................ 20
Making an impact that matters | Budget 2020/21 The 2020/21 National Budget: A call to action. Hard work ahead… By Delia Ndlovu, Managing Director: Deloitte Africa Tax & Legal Finance Minister Tito Mboweni has a We hope that the 2020/21 Budget will mammoth task ahead of him as he seeks to present the 2020/21 Budget Speech later include commentary relating to the below questions. The MTBPS this month, against South Africa’s weak fiscal position and the scrutiny of ratings What austerity measures is Treasury indicated that the agencies. taking to keep expenditure under control? gross debt-to- South Africa’s economic outlook has Government has indicated various cost GDP ratio outlook deteriorated considerably, negatively saving measures. We expect mention of impacting on revenue collections. SOEs and financial discipline, measures also paints a The South African economic growth to manage the public sector wage bill and details on the proposed funding bleak picture, forecast remains low compared to other Sub-Saharan African countries. According mechanisms for the National Health Insurance Bill and free university being projected to the International Monetary Fund, GDP growth in Sub-Saharan Africa is forecast to education. to increase to be 3.5% in 2020/21. However, South Africa What alternative mechanisms is 75.8% of GDP will only reach a sluggish 1% growth by government considering to increase 2021. In the Medium-Term Budget Policy tax revenue? in 2027/2028. Statement (MTBPS), the minister said that South Africa’s economy is expected to We are aware that to increase revenue collections, SARS has already embarked on We expect the grow to 1.7% by 2022. increasing their capacity by both hiring the people as well as embracing digitisation. minister to outline Tax revenue projections were revised down over the medium-term, reflecting The R1 billion allocated to SARS, in the MTBPS over the next few years, will assist plans to stabilise weak in-year collections, and the lower tax the revenue authority in implementing this debt-to-GDP base outlook. In the MTBPS, the minister these plans. acknowledged that SARS expects to collect ratio, and confirm R1.37 trillion this year. This is R53 billion, or 4%, less than expected. Furthermore, In the MTBPS the minister indicated that there will be further cooperation between whether the plans and according to Tax Statistics 2019, the total corporate income tax contribution as SARS and the Financial Intelligence Centre at the South African Reserve Bank to assist he previously a percentage of total tax revenue has been declining steadily over the past decade, in fighting illegitimate cross-border flows and tax evasion. It will be interesting to see indicated in last from 26.7% in 2008/09 to 16.6% in 2018/19. what tax reforms the minister implements year’s National considering to achieve this objective. The MTBPS indicated that the gross debt- Budget speech to-GDP ratio outlook also paints a bleak picture, being projected to increase to The conundrum facing the minister though is whether or not to increase taxes. South have made an 75.8% of GDP in 2027/2028. We expect the minister to outline plans to stabilise this Africa’s corporate income tax rate is high compared to many other developed impact. debt-to-GDP ratio, and confirm whether countries, e.g. the United States (at 21%) the plans he previously indicated in last and the United Kingdom (at 19%). Further, year’s National Budget speech have made increasing personal income tax will put an impact. a strain on consumers that are already 1
Making an impact that matters | Budget 2020/21 feeling the pressure of a depressed economy. Support for small businesses – an important Increasing VAT could have some political backlash. engine for economic growth and job creation – will Therefore, we believe that the minister’s options to also be sought after. The cost of tax compliance increase tax are limited. remains a significant challenge for small businesses. Addressing this issue, in conjunction There have been recent discussions globally with other measures such as tax incentives or tax around the taxation of the digital economy. Some breaks for small and medium-sized enterprises, countries are implementing a specific tax for would reduce the cost of doing business and taxing the digital economy in order to increase aid this important segment of the economy. For tax revenue (e.g. France implementing a 3% digital example, South Africa could lower the cost of doing services tax [DST]). The budget may provide some business by automating registration and filing clarity as to South Africa’s position on potentially processes. introducing this type of tax. Consideration should be given to reducing the cost What plans does government have to of travel to South Africa in order to support the revitalise economic growth? tourism industry. The possibility of more load-shedding continues to pose a serious threat to SA’s economic Businesses and investors will be hoping for performance, competitiveness and business evidence of a move towards greater policy confidence. This issue needs to be tackled in coherence and consistency, along with better the budget speech, including updates on the regulatory certainty. Wider reforms to improve diversification of SA’s power generation. the ease of doing business in SA for all corporates would also be a welcome development. The emerging digital economy, meanwhile, should also be top of mind as the world moves towards 5G connectivity. To reduce the cost to communicate and boost SA’s competitiveness, businesses will be looking for interventions to accelerate the licensing of high-demand spectrum. 2
Making an impact that matters | Budget 2020/21 Personal taxes - The fragile state of South Africa’s golden goose By Anthea Scholtz, Partner, and Claudia Gravenorst, Senior Manager, Deloitte Africa Tax & Legal The 2020/21 National Budget will continue the total tax revenue. Other taxes (e.g. to have an underlying dual challenge, transfer duty, capital gains tax) account for namely that we not only need to grow our the balance of the revenue collected in the Our country is economy, but very importantly, we also 2018/19 fiscal year. need to grow our economy inclusively – so heavily reliant on that more South Africans can participate in it and can benefit from it. The South African taxpayer – the fragility of the golden goose a relatively small This year the minister will again need The SARS report shows that the country’s total tax collections for the 2018/19 fiscal base of taxpayers to walk a tight rope when delivering the National Budget Speech as he seeks to year of R1 287.7 billion, was footed by a very small portion of the population. The to generate the navigate the fiscal, tax and economic landscape in order to bring about the tax collections was also R14.5 billion behind the revenue collection target of R1 302.2 majority of the necessary structural economic changes, while at the same time ensuring that South billion (though there was a 5.9% increase over the prior fiscal year). country’s revenue African citizens are not unduly burdened collections. with further tax hikes. The report indicates that of the 3.2 million companies which were registered To address South Africa’s many challenges, for corporate income tax at 31 March we of course need a buoyant revenue base 2018, just over 814 000 companies were Whilst these statistics should be viewed and as always, “tax” is one of our main assessed for tax in the 2018/2019 fiscal within the context of South Africa’s sources of revenue for the government. year, and only 24.3% of these latter progressive income tax system (where the companies had positive taxable income (i.e. wealthy contributes a greater proportion Whilst South African taxpayers continue to paid tax). towards supporting the state than the poor feel the “tax” pinch on their disposable and hence the more you earn, the higher incomes, the South African Revenue More concerningly, of this 24.3%, only tax you should pay), these taxpayers seem Service (SARS) 2019 Tax Statistics report 380 companies had taxable income in to be bearing a disproportionate share of (which was published during December excess of R200 million and collectively, the country’s tax burden. 2019) highlights the fragility of the South these 380 companies contributed 57.2% African revenue collection ecosystem – our of the corporate income tax collected in It is thus unlikely, given the current country is heavily reliant on a relatively 2018/2019. economic environment, that the maximum small base of taxpayers to generate the marginal tax rate would be further majority of the country’s revenue Similarly, of the 4.9 million individuals increased (it was increased from 41% to collections. assessed for tax, 1.5 million individuals 45% for the 2018 tax year). That said, it is earned taxable income in excess of anticipated that the tax brackets at the In South Africa, personal income taxes, R350 000 and these individuals contributed higher marginal tax rates will have low or value-added tax (VAT) and corporate 83% of the total personal income tax no inflationary adjustments and hence income taxes collectively account for collected. limited tax relief, whilst continued tax relief approximately 80% of the total tax will still be granted for low income earners. revenues of the country. Of the It is clear from these statistics, that a very R1 287.7 billion revenue collected during small percentage of the South African The question is thus: What alternative the 2018/19 fiscal year, personal income population is financing the tax bill and that measures could be considered to generate taxes continue to be the main contributor further, the “man-on-the-street” is paying a additional revenue for the fiscal coffers, to our country’s tax coffers, contributing a significant amount of tax (both direct taxes other than increasing personal tax rates? total of 38.3% of the total tax revenues. VAT such as personal income tax as well as We explore some of these below. contributed 25.2% and corporate income indirect taxes, such as VAT). tax contributed approximately 16.6% to 3
Making an impact that matters | Budget 2020/21 Indirect taxes developments are also starting to take Conclusion As is the case every year, the “sin taxes” place at SARS, most notably it has re- A revenue budget that supports South (i.e. tax on alcohol and tobacco) is established its Large Business Centre Africa’s future, should go further than expected to increase as well as possible (LBC) unit. just tax increases and alternative increases to “environmental taxes” (e.g. avenues should be considered to plastic bag levy, electricity levy). Increasing capacity and skills in certain generate additional revenues. Whilst the specialist tax areas, making it easier for main component of our revenue base Due to the increase in the use of electronic taxpayers to liaise with SARS, targeting will as always be tax revenues, tax is cigarettes and tobacco heating products, specific industries and sectors, as well as certainly not the only solution to raise there could potentially be a tax levied on increasing the digital capabilities of SARS, additional revenues. Key parts of the these items as well. will go a long way in assisting SARS to solution must also include expenditure generate additional revenue and meet its cuts, curbing the size of the civil service, We also anticipate an increase in the fuel revenue collection targets. reducing policy uncertainty, restoring levy, a consumption tax that is “hidden” in investor confidence, creating jobs and the price of petrol. Per the SARS 2019 Tax focusing on state-owned entities. Statistics report, this levy has had a 55% Cross-border flows and tax evasion increase from the 2014/2015 fiscal year South Africa continues to look at ways to No doubt there are tough times ahead (generating R75.3 million in 2018/2019) effectively combat the significant financial and South Africans will have to continue and we anticipate that this may increase leakages in the South African economy to tighten their fiscal belts, come 1 March further in the next fiscal year. through the erosion of the tax base, profit- 2020. shifting and illicit money outflows. The A gambling tax may also be on the cards use of tax havens by taxpayers whereby as National Treasury’s 2019 Budget review profits are shifted to no-tax or low tax document alluded to fact that government jurisdictions where the taxpayer has no intends issuing draft legislation for or very little economic presence, remains comment on this matter. a significant concern to the fiscus. It is however also a significant potential pool of Whilst we do not anticipate an increase in revenue, if South Africa manages to get its the “wealth taxes” such as estate duty and fair share of these taxes. donations tax, executive remuneration may come under the spotlight. The re-building of the transfer pricing unit at SARS will ensure that targeted Reforming SARS to its former glory audits are conducted and that shifting SARS was once the crown jewel of revenue profits through transfer pricing schemes is authorities on the continent. However, due clamped down. to the tax administration and governance issues at SARS in recent years, revenue It appears that steps are underway at collections were below targets and SARS to focus on this matter and attempts inefficiencies crept in. SARS is now slowly to stop this leakage will add significantly to emerging from this dark cloud … the revenue collection efforts. The recommendations from the findings of the Nugent Commission of Inquiry into Tax Administration and Governance are being implemented. Many positive 4
Making an impact that matters | Budget 2020/21 Changing the trajectory of South Africa’s economic environment By Hannah Marais, Associate Director: Africa Insights, Deloitte Africa With hard work lying ahead, the upcoming Budget Speech will need to signal the right messages to the market - that government will stabilise the economy and make some hard fiscal and structural choices. South Africa has been stuck in a low Particularly worrisome was the projected The MTBPS then added that some of growth rut for the last decade. The ongoing growth in nominal debt cost, these reforms can be implemented country’s growth has lagged behind many which is growing at a substantially higher using minimal state resources and emerging markets and most of its African rate than GDP and faster than any other with immediate effect. For example, peers (some countries, such as Ethiopia, spending category over the three-year government can reduce the cost of Ghana and Rwanda, have doubled their forecast period. With R11.50 of every R100 travelling to South Africa through an open- economies in size, growing 7% or more on currently spent by government on debt skies agreement, and cutting the red tape average this past decade). service costs and R34 of every R100 on for small businesses in the tourism sector. public sector compensation, this further South Africa’s deteriorating economic limits key areas that spending should be It can facilitate the diversification of power environment, compounded by political focused on, including education, health generation by granting licences to the instability and policy uncertainty, drought and infrastructure. roughly 30 small-scale energy projects. and unstable electricity supply, as well Telecommunications services can be as a weak external environment, has Acknowledging that the growth and expanded by fairly allocating spectrum, had a drag on business and consumer revenue outlook has deteriorated, thus enabling the rapid expansion of confidence, alongside income and government has taken first steps towards the country’s fibre infrastructure and spending. The inability to address stabilising the debt-to-GDP ratio, by a reduction in costs. The cost of doing much-needed structural reforms has reducing planning baselines, including business can be lowered by automating also worsened South Africa’s relative goods and services and transfers, by registration and tax filing processes. international rankings on competitiveness about R80bn over the next three years. Such interventions could create fertile and doing business. But as reported by National Treasury, ground for longer-term reforms. these measures are not sufficient. In fact Furthermore, medium-term reforms Low growth, more debt a total of R150bn in savings over the next should begin immediately within the Hinged on even lower 2019 GDP growth five years are required to stabilise South transport, water, telecommunications, and expectations than initially assumed in the Africa’s debt-to-GDP outlook – something industrial and trade policy. 2019 Budget, the Medium-Term Budget that ratings agencies will be monitoring Policy Statement (MTBPS) presented closely. With hard work lying ahead, the upcoming a widening fiscal deficit and quicker 2020 Budget Speech will need to signal rising debt-to-GDP ratio outlook. This is Changing the trajectory the right messages to the market, i.e. that based on lower tax revenue projections From the perspective of the National government will stabilise the economy (reflecting weak in-year collections and Treasury, it is clear that economic reforms and make some hard fiscal and structural a lower tax base outlook) and spending are urgently required. Although many choices. Although some of the stricter pressures that increased since the 2019 reforms might not have immediate impact fiscal measures and proposed reforms Budget. The latter included additional on GDP growth (expected around 1% in are likely to be unpopular and are only support to struggling state-owned the short term), they have the potential anticipated to pay economic dividends enterprises (SOEs), and a reversal of the to unlock higher and job-creating growth in the medium term, they will assist in proposed savings from compensation outcomes in years to come. boosting certainty, upping productivity measures such as early retirement. A number of short, medium and longer- and reducing inefficiencies in order to term interventions were proposed in a create the necessary conditions for detailed August 2019 Treasury publication. growth. 5
Making an impact that matters | Budget 2020/21 Is a reduction in the corporate income tax rate on the cards? By Le Roux Roelofse, Director: Global Business Tax Services and National Technical Leader, Deloitte Africa Tax & Legal A reduction in the headline CIT rate could well be a net positive for South Africa. The headline Corporate Income Tax (CIT) rate • A decrease in the tax buoyancy in the past of 28% may well be reduced by one or perhaps four years, from 1.4 in 2014/15 to 1.2 in two percentage points. Our prediction is 2018/19, indicates lower compliance levels informed by the following factors: in a difficult economic environment. The tax buoyancy ratio is a measure of the change • South Africa’s CIT rate is uncompetitive when in tax revenue to the change in the tax base measured against some of our major trading or GDP. A buoyancy ratio of 1 means that tax partners. In its 2018 Budget Review, National revenues keep up with economic growth. Treasury noted by way of example that the United States has reduced its rate from 35% We are of the view that a reduction in the to 21%, the United Kingdom from 30% to 19%, headline CIT rate could well be a net positive the Netherlands from 26% to 21% (currently for South Africa. It would make South Africa’s 25%) and China’s rate is 25%. According to CIT rate more competitive in relation to the National Treasury, “at 28% South Africa is country’s main trading partners, provide a cash becoming an outlier, providing an incentive for injection to struggling corporate taxpayers, and companies to shift profits abroad and pay lower increase the tax buoyancy ratio. The Minister of taxes elsewhere”. Finance may therefore just be tempted to lower • According to Tax Statistics 2019, published the CIT rate. by National Treasury and the South African Revenue Service (SARS), CIT’s contribution to the total tax take has declined from 26.7% in 2008/09 to 16.6% in 2018/19, and the CIT- to-GDP ratio has reduced from 6.9% to 4.4% during this period. This decline is attributed to “sluggish economic growth, structural challenges in some sectors of the economy, low confidence levels and political uncertainty”. It is clear that companies are struggling to remain profitable and that the declining CIT collections are not attributable to too low CIT rates. 6
Making an impact that matters | Budget 2020/21 Committed to the success of your business Regulatory change, increased transparency, technology advancements—everything about the way tax departments operate is in flux. At the same time, tax leaders are still held to traditional expectations of planning and reporting tax, managing controversy and risk— and doing it all for “less”. By focusing on process, technology, resources and governance, Deloitte helps you build a strong foundation for, and lead, an effective tax operating model. Our goal is improvement and insight. We help you achieve the control and confidence you need to lead through uncertainty. Confidence to lead through uncertainty www.deloitte.com/za/tax © 2020. For information, contact Deloitte Touche Tohmatsu Limited. Tax & Legal 7
Making an impact that matters | Budget 2020/21 The impact on the fiscus of the country’s sluggish economic growth By Botlhale Joel, Director: Global Business Tax Services and Financial Services Industry Leader, and Kabelo Malapela, Director: Global Business Tax Services and Financial Services Industry Tax Specialist, Deloitte Africa Tax & Legal ...one begins to understand the logic for the deep structural reforms delineated by the Minister of Finance, Tito Mboweni, in his 2019 Medium-Term Budget Speech. While the majority of South Africans were • Corporate Income Tax (CIT), VAT and Looking at the facts and figures above, battling load-shedding woes and heading personal income tax accounted for 80% one begins to understand the logic for off for their long anticipated and well- of total revenue collected with the fuel the deep structural reforms delineated earned summer vacations in December, levy and other specific customs and by the Minister of Finance in his 2019 the South African Revenue Service (SARS) excise duties contributing approximately Medium-Term Budget Speech. Given the published its 12th annual Tax Statistics for 19% of revenue, with the remaining 1% slow pace at which these reforms are 2019. The report is compiled together with made up by other taxes. being implemented, the bleak economic National Treasury and covers all taxes, growth outlook projected for South Africa • The number of companies registered from corporate income tax, all the way to and the pressure from rating agencies for for corporate income tax has declined the Health Promotion Levy or what most meaningful reform, all eyes will be on the from 3.2 million in 2017/18 to 2 million of us know as “sugar tax”. Minister’s 2020 Budget Speech on the way 2018/19. forward. In short, the report makes for grim • CIT collections as a percentage of GDP reading, collection targets have been declined slightly from 4.7% for the three Thinking back to Minister Mboweni’s list missed, taxpayer compliance has declined fiscal years 2015/16 - 2017/18 to 4.4% of the 10 “important growth ingredients”, and the SARS is constrained in its capacity mainly as a result to contractions in what appears to still lack the necessary to collect taxes, however, these are hardly some sub-sectors of the manufacturing focus is the much needed support to newsworthy and the majority of South industries such as petroleum, basic iron small business, as a means to supporting Africans are aware of the current state of and steel, as well as metal which were our young, growing population to become affairs that we find ourselves in. affected by power outages in quarter 1 entrepreneurial and help South Africa of 2019. get to similar growth levels as the likes of The devil, as they say is in the detail, as Kenya, Ghana and Ethiopia. It would again • Personal income tax was the single one starts delving into the report (of appear that we are still missing a beat in largest contributor accounting for more more than 300 pages), the impact of the terms of addressing the growing threat than 38% of revenue. It is interesting country’s sluggish economic growth over of youth unemployment in our country to note that personal income tax the past five years on the fiscus becomes by seemingly driving the focus on getting contributed R279.4 billion more than glaringly evident. Further, given the youth employed as opposed to helping corporate income tax in 2018/2019. economic forecast for 2020, a turnaround them become the entrepreneurs and may not be around the corner as many • The number of VAT vendors registered employers of the future. had hoped. for VAT increased by 3.8% while registered importers and exporters was Below is an outline of some of the key up 2.5% and 2.3%, respectively year-on- figures of the SARS report: year. • SARS collected R1 287.7 billion against a revenue collection target of R1 302.2 billion resulting in a deficit of R14.5 billion. 8
Making an impact that matters | Budget 2020/21 The implications of the recently published NHI Bill and what it means for the country By Ashleigh Theophanides, Director: Life Sciences and Healthcare Industry Leader and Rachaad Omar, Associate Director: Life Sciences and Healthcare, Deloitte Africa The lower than expected inflation levels and the slowdown in the economy means that trying to stimulate the economy is going to be a key priority for the forthcoming budget. South Africa’s National Health Insurance There is no specific large-scale The implementation phases of NHI (NHI) Bill 2019, was introduced to the investment/budget directed towards NHI according to the Bill is based on timelines National Assembly on 8 August 2019 or the public sector health. South Africa’s that don’t link back to any measurable and is bound to create debate. It is level of public health spending, per capita milestones and outcomes. Further expected that there will be various areas and as a percentage of government’s thought and clarity around this is needed. of uncertainty created by this Bill. It does, overall spending, is comparable to that of however, create a roadmap for the way other upper middle-income countries. The While the Bill has provided greater clarity forward on NHI with greater detail on the conflicting objectives that the government around certain aspects of NHI, it has operational processes and structure of currently finds itself in, from free higher introduced other uncertainties. These NHI, making this proposed system seem education and bailing out of various SOEs, uncertainties need to be ironed-out less of a pipe-dream and more of a reality. including Eskom, means that additional in order to get better buy-in from all The lower than expected inflation levels funding directed explicitly at healthcare is participants in the healthcare sector. and the slow down in the economy means less likely. that trying to stimulate the economy The one aspect that the government has is going to be a key priority for the The White Paper estimates a funding reiterated recently and is evident from forthcoming budget. The recent reduction shortfall of R 72 billion for NHI by the Bill and public discussions is that the in the repo rate by 25 bps to 6.25% in 2025/2026, when NHI is likely to be process forward is one healthcare system January is an attempt to do just that. launched. This is based on an assumption for everyone and not a pseudo public/ Further cuts can be expected in the first of 3.5% annual economic growth. The private system. This is different from quarter and last quarter of 2020 as well. recently published NHI Bill has highlighted previous thinking where it was anticipated the key sources of the funding as that the private sector will assist the public As was seen from the last budget, the key being money appropriated annually by sector to become sustainable over time spending areas for government over the Parliament from the following key sources: and that people would be free to choose past year has been on social services. R general tax revenue, reallocation of between the two systems. The evidence 1.10 trillion of the R1.83 trillion government funding for medical scheme tax credits of failed SOEs in South Africa are likely to expenditure has been directed to to NHI; payroll tax and a surcharge on create huge apprehension as to the future learning and culture, health, community personal income tax. success of this NHI system proposed in development and social development. this manner. More work is required by While this is significant, the year on year Section 33 of the Bill is bound to create both government and all stakeholders increase directed towards healthcare high levels of uncertainty around the role to alleviate the fears of the public and from 2018/19 and projected to 2021/2022 of medical schemes post implementation propose a detailed road-map that is clear, remains at a modest average annual rate of NHI. The complementary services deliverables driven, well-defined and of 7%. that medical schemes may provide is not sustainable. clearly defined nor is the benefit package that NHI will provide. REFERENCES 1. South African Health Review 2019/National Health Insurance: vision, challenges and potential solutions 2. Minister of Health: National Health Insurance Bill 3. Department of Health: White Paper on National Health Insurance 4. SA National Treasury: RSA Budget 2019 Highlights 5. Trading Economics: South African Interest rates //tradingeconomics.com 9
Making an impact that matters | Budget 2020/21 Is another VAT increase looming? By Severus Smuts, Director: Indirect Tax Leader, Deloitte Africa Tax & Legal It has been two years since the Minister of accommodation are exempt from VAT and Whilst the VAT rate increase may be Finance announced a 1% increase of value- therefore a rate increase will have minimal welcomed by some with the view of added tax (VAT) as part of government’s impact on those items. improving our economy, the overwhelming efforts to contain a budget deficit. majority will experience the hardship of However, in light of the current financial We also expect guidelines to be issued on having to pay more for basic necessities. demands, has this VAT rate increase made certain topical areas of VAT such as: Also, businesses will once again need to a big enough financial impact or is a big amend systems and review contracts. • Electronic invoicing; deficit once again on the cards? • Foreign donor funded projects; We will not be surprised if another VAT rate hike is announced. For obvious socio- • The VAT treatment of partnerships and ... we will not economic reasons a rate increase would joint ventures; as well as be surprised if need to go hand in hand with VAT relief for • Transitional rules concerning existing poorer households such as, an expanded section 72 rulings (special arrangements another VAT rate list of zero rated food items and other necessities as well as an increase in the for taxpayers approved by the South Africa Revenue Service) in view of the hike is announced. social grant. As it stands, public transport recent changes to this provision. by road and rail, education and residential Will the personal tax rate be increased? By Jaco la Grange, Associate Director: Global Employer Services, Deloitte Africa Tax & Legal Although tax receipts are lower than Other proposals which should also be expected, an increase in the marginal tax considered are: rate for individuals is not expected. This – an increase in the residential would be in line with findings of the Davis accommodation exemption – which has Tax Committee that an increase in the top been done year-on-year in the past; and marginal tax rate would not yield substantial – an increase in the R1 million exemption additional tax revenue and may well provide from tax in respect of remuneration further impetus to increasing the number of earned for services rendered outside individuals emigrating from South Africa. South Africa. That said, in line with the trend over the last The interest exemption will not be increased, few years, the ‘tax bracket creep’ relief is however, the tax free investment amount likely to be at the lower end of the tax table and the R350 000 maximum tax deduction and be focused on the below 30% tax rate. for retirement fund contributions, would require revision upwards. 10
Making an impact that matters | Budget 2020/21 A new tax is born By Suzanne van der Merwe, Director: Indirect Tax, Deloitte Africa Tax & Legal In South Africa, like many other countries, The 3% French DST applies to revenue we are now familiar with value-added derived from the provision of, for tax (VAT) on electronic services, example, online placement of advertising The nature introduced in 2014. The measures aim and the sale of collected user data, the to tax consumption of services provided facilitation and provision of underlying of business electronically from outside South Africa to a South African recipient. supplies of goods or services directly between users, etc. This is in some ways has changed The rules were amended significantly in very similar to the VAT base and looks to levy tax based on the location of dramatically and 2019 and we anticipate will be further refined to cater for this rapidly changing the customer. The above digital tax will the digital economy remain in place and will accrue until an and agile environment. Of particular international agreement in this regard is is impacting us all, interest is the interpretation of the group reached. company exclusions and the complexities individuals and created by intermediary services. The nature of business has changed dramatically and the digital economy businesses alike. The There is also much debate regarding the extent of human intervention required for is impacting us all, individuals and businesses alike. The way in which value way in which value a service to fall outside the ambit of that of an electronic service for VAT purposes. chains operate and how value is created chains operate and has transformed significantly. As can Another area worthy of an electronic be seen from the above, this makes how value is created tweet or two is whether business to determining taxing rights extremely business (B2B) transactions as well as complex. Tax legislation needs to has transformed business to consumer (B2C) transactions should be governed by the South African cater for the pace set by this rapidly changing landscape, which requires significantly. electronic services VAT legislation. Some significant consensus, collaboration and jurisdictions have opted for an election consideration. process where the local business in a B2B transaction self-accounts for the VAT on the electronic service it receives. These are just some of the concepts that have to be analysed when determining whether to levy VAT on transactions that take place in the digital economy. VAT on electronic services should, however, be distinguished from digital services tax (DST). France became one of the first countries to introduce DST. Although the legislation is not subject to any time limitation, it is temporary since the DST will be applicable only until a consensus is reached at the Organisation for Economic Co-operation and Development (OECD) level. 11
Making an impact that matters | Budget 2020/21 Transfer pricing - Important considerations for minority shareholders By Billy Joubert, Director: Transfer Pricing Leader and BEPS Specialist, Deloitte Africa Tax & Legal We have, in practice, encountered many • The arrangements negotiated as part of situations where transfer pricing rules apply to local entities which are majority owned by a setting up LocalCo result in it earning profits which are higher than those regarded as In practice the foreign shareholder, but with a minority local shareholder or shareholders. This scenario arm’s length in terms of the MNEs global transfer pricing policy. Notwithstanding existence of happens regularly in South Africa, significantly being required to effectively give away more transfer pricing due to our BEE rules, but is by no means than an arm’s length level of profits from unique to South Africa. There are often local the local entity, the MNE decides to proceed rules can serve ownership requirements which apply in order for multinational enterprises (MNEs) to obtain, with setting up LocalCo because of the wider commercial interests of the group. to protect the in new territories, rights such as mining rights, broadcasting licenses, banking licenses etc. • A significant long term intra-group interests of arrangement (for example, a franchise fee) In some cases the local shareholder may be the government of the relevant country (or a is agreed as part of the process of setting local minorities legal entity owner by the government). In other up the local entity. Due to economic factors, the arm’s length amount to be retained by since they are cases it may be a local resident or residents. the MNE outside the country (for example, the franchise fee) subsequently becomes designed to In practice the existence of transfer pricing rules can serve to protect the interests of local lower than the amount agreed when setting ensure an arm’s up LocalCo. The MNE is unwilling to adjust minorities since they are designed to ensure an arm’s length return for the local entity (LocalCo) the franchise fee downward since this would length return result in the local shareholder effectively from intra-group transactions. Therefore, the local shareholder may well be reassured that earning higher profits that those which for the local they are not being prejudiced by intra-group were envisaged when the local shareholder originally invested in LocalCo. entity (LocalCo) pricing arrangements since these need to be shown to be arm’s length. • LocalCo requires additional shareholder from intra-group However, the interaction between local funding. It cannot afford an additional interest cost. Therefore it is proposed to the local transactions. ownership and transfer pricing rules can shareholder that the funding be provided by be complex. Situations which we have way of an injection of additional share capital. encountered in practice include the following: However, the local shareholder is unable (or unwilling) to inject the additional share capital • The MNE’s overriding transfer pricing policy required in line with its existing shareholding. is such that local distributors are set up The MNE, on the other hand, cannot subscribe as limited risk distributors (LRDs). In other for additional shares in LocalCo because words, the local entity has limited profit (and this would result in it acquiring too great loss) potential. This is a significant underlying a shareholding, thereby diluting LocalCo’s dynamic in determining the value at which a shareholding. Therefore the MNE decides that, local shareholder may invest into LocalCo. in order to stabilise the operations of LocalCo, • Due to an updated benchmark search, after a it has no choice but to provide the funding by number of years, the target profit margin for way of an interest free loan. LocalCo is revised upwards or downwards. This will correspondingly affect the return of the local shareholder and may mean that the local shareholder ends up receiving more (or less) than the extent of the profits anticipated when they made the original investment into LocalCo. 12
Making an impact that matters | Budget 2020/21 Therefore transfer pricing rules can • On the other hand, as already noted, impact on local ownership structures (and vice versa) in many different ways. transfer pricing rules may be reassuring for minority shareholders since they An important final Therefore this aspect needs to be carefully considered. The precise action to be taken assist in discouraging adverse pricing practices within an MNE. Therefore a point is that the depends on the specific facts, but a few local minority shareholder may regard existence of local overriding guidelines are as follows: transfer pricing rules as protecting its • Local shareholders, at the time of making interests. ownership rules – an investment into a LocalCo, need to • The possibility of subsequent revisions and the impact of be aware of the existence of underlying of the transfer pricing policy (in line with transfer pricing policies within the MNE the ongoing evolution of the MNEs global these on transfer and how these may potentially impact on transfer pricing policy) also need to be the returns which they earn. discussed and considered. This means prices – needs to • The effect of transfer pricing policies that the consequences of such revisions can be provided for in the agreements be disclosed and can be an issue of crucial significance to the relationship between the MNE and concluded between the shareholders. analysed in the the local shareholder. It is crucial that awareness of the transfer pricing policies An important final point is that the transfer pricing existence of local ownership rules – and be created at the time when the upfront negotiations with the local shareholder the impact of these on transfer prices – documentation of needs to be disclosed and analysed in the are conducted. This is because the subsequent discovery by the local transfer pricing documentation of the MNE. the MNE. This is obviously of particular importance shareholder that, for example, its profit where the local ownership arrangement potential from the investment in LocalCo has the effect of requiring a deviation from is limited, can result in disillusionment the normal transfer pricing practices of the and a loss of trust in the integrity of the group. MNE. Broadening the tax base by limiting tax deductions for interest charges By Lance Collop, Associate Director: Global Business Tax Services, Deloitte Africa Tax & Legal There is a strong possibility that the tax A general cap of this nature would be in base could potentially be broadened line with global trends to prevent tax base by expanding the rules that limit the erosion in accordance with BEPS action plan deductibility of interest, possibly by of the Organisation for Economic introducing a general cap on all interest Co-operation and Development. incurred to a certain percentage of taxable profits in a given year. 13
Making an impact that matters | Budget 2020/21 State of carbon tax By Raynard Maneschijn, Senior Manager: Global Investment and Innovation Incentives, Carbon Tax Specialist, Deloitte Africa Tax & Legal South Africa’s carbon tax regime is taxpayer has an approved Tier 3 reporting regime will work. beginning to take shape, with several sets methodology, and in all other cases of legislation being finalised or published section 4 (2) would apply. Many of the major concerns raised by for public comment in the past few There are certain specific cases where stakeholders, at the last session hosted months. In this article, we provide our the fuel energy content values provided by National Treasury in March 2019, analysis on the various changes and new for use with section 4 (2) of the CTA and have not been addressed. Specifically, information that has been made available. those used for reporting to DEFF are we still believe that the regulations different. The impact of this misalignment are unnecessarily wider in scope than The Taxation Laws Amendment Act is that emissions reported to DEFF, and they need to be, dealing with both the (TLAA), which was gazetted on 15 January those reported to SARS may not be the generation of offsets and the use of 2020, made several technical changes to same. offsets in the South African carbon the Carbon Tax Act (Act 15 of 2019) (CTA). tax regime, where it is only the latter The two most noteworthy changes are Allowances that should be pertinent under these those to the tax base, as well as to the Originally process emissions received a regulations. allowance mechanisms. 70% allowance, and due to a technical error in the drafting, fugitive emissions Further, we note that COP25 failed to Tax base received only a 10% allowance. With the produce a rulebook and replacement for The most noteworthy change in the amendments contained in the TLAA, the Cleaner Development Mechanism TLAA is to the carbon tax base. Which is a 60% basic allowance now applies to (CDM), which may come to an end in defined in sections 4 (1) and 4 (2) of the all greenhouse gas (GHG) emissions December 2020. The development of CTA. Originally the tax base was defined sources. Further to this, process and local offset methodologies seems to still as the sum of greenhouse gas emissions fugitive emissions sources will receive an be a process in its infancy, with only a as determined by a Department of additional 10% allowance. framework currently being considered. Environmental Affairs (DEA) (now This means that offset producers will Department of Environment, Forestry Section 12L likely have limited options in the short and Fisheries [DEFF]) approved reporting Section 12L has been amended so that to medium term to generate offsets methodology. the incentive can be claimed for years effectively. of assessment ending before 1 January The original definition would therefore 2023. This prolongs the period for Draft benchmark and trade exposure allow DEFF results to be used by the which taxpayers will be able to obtain regulations South Africa Revenue Service (SARS) in an incentive for measured and verified Draft regulations regarding the Z-factor verifying carbon tax submissions. This was energy savings. To date, this incentive benchmark as well as the trade exposure possible as annual emissions reported to has rewarded energy efficient companies allowance were published for public DEFF under the National Greenhouse Gas with a total of more than R2-billion in comment on 29 November 2019. Emissions Reporting regulations (NGERs) tax deductions, although the application in March, would match those reported to process remains stringent. The benchmark allowance regulations SARS in July. are relatively straightforward, however Carbon offset regulations one important point to note is the However, it was understood from These regulations were gazetted as requirement for a measured and verified changes incorporated in the TLAA, as final on 20 November 2019. There have emissions intensity to be used. Currently, well as stakeholder sessions attended been several technical changes to the a relatively stringent measurement and with National Treasury, that section 4 regulations, but no major changes to verification process by a third party South (1) would only be applicable where a the process and scope of how the offset African National Accreditation System 14
Making an impact that matters | Budget 2020/21 (SANAS) accredited entity is required to SARS rules claim the section 12L energy efficiency incentive. The use of the terminology in The SARS rules providing for carbon tax (licensing and payment) were finalised We still believe the context of carbon tax may indicate National Treasury would require a and gazetted on 23 December 2019. The licensing period has opened from that the similar process to claim the benchmark 2 January 2020, and the first carbon tax regulations are allowance, although no explanation payments are due between 1 and 30 July for this term is provided in the draft 2020. The return forms have however not unnecessarily regulation, and it may still be changed. been finalised. wider in scope The trade exposure regulations are complicated by the possibility of a single The most noteworthy change to the revised SARS rules is that they provide for than they need taxpayer operating in multiple sectors. To accommodate this, the regulations provide a consolidated licensing approach. Rather than having to license each individual to be, dealing a formula for determining a weighted facility that performs a GHG emitting with both the average trade exposure. The regulations activity, a carbon taxpayer will apply for also make provision for a company specific a consolidated license for all its activities generation of trade exposure calculation, which is a function based on the monetary value of a over which it has operational control. This should simplify the licensing process for offsets and the taxpayers’ exports and imports compared to the total sales values of the taxpayer. entities that have a large number of small emissions sources to consider. use of offsets in This would allow a company that is uniquely trade exposed, in a sector which the South African is not, to obtain the allowance. However, carbon tax regime. there are a number of technical challenges in these regulations which may delay its finalisation. 15
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Making an impact that matters | Budget 2020/21 Illicit trade flows: The broader impact on supply chains By Riaan Smit, Associate Director: Global Business Tax Services, Deloitte Africa Tax & Legal Reporting on illicit trade flows often focus disastrous financial implications. Certain on the fiscal losses that results from the illicit trade flows, such as the amount of members of this industry, in particular the industrial bunkering industry and the Our recommendation excise revenue lost through the smuggling of cigarettes or alcohol products. Other non-refining fuel export industry, that are subject to refund claims from SARS, can is for SARS to topics that are considered include have their working capital depleted while engage with the proliferation of organised crime waiting for the refunds to be effected. and health risks such as counterfeit legitimate industry medicines. In reaction, some major international bunkering suppliers stopped selling “duty to design a strict, An important result from illicit trade flows that is often neglected is the impact on free” bunkering supplies to foreign going vessels resulting in international shipping but fair, transparent the supply chain and related costs to legitimate business. lines bypassing South Africa as a refuelling point. This in turn has a negative effect on and predictable related industries such as ship chandlers. compliance In an attempt to curb the illicit trade flows, the South African Revenue Service Our recommendation is for SARS to framework that (SARS) introduced more and stringent compliance requirements on the import, engage with legitimate industry to design a strict, but fair, transparent and balance the priorities export and manufacture of “exposed” industries, such as petroleum, liquor and predictable compliance framework that balance the priorities of legitimate traders of legitimate traders tobacco. while curbing illegitimate trade flows. We would also recommend that SARS while curbing Certain of these compliance investigate and implement systems to illegitimate trade requirements, such as the “track and not only control and verify the import trace” initiative in the tobacco industry and export of certain products, but also flows. are, with good reason, welcomed by the facilitate the submission and payment of industry members. Other legislative refund claims. amendments, or SARS policy changes, results in an enormous administrative Another proposed solution is the burden on legitimate business and may controlled but aggressive roll out of become so complex that compliance internationally recognised programs like becomes extremely difficult and costly. Approved Economic Operator (AEO) that will allow SARS to focus its efforts where In certain industries, particularly it is most needed and allow legitimate petroleum, these ever changing, complex business to control its compliance cost compliance requirements may have and working capital. 17
Making an impact that matters | Budget 2020/21 Good faith does not exempt taxpayers from paying understatement penalties to SARS By Hermana Mausling, Senior Manager: Tax and Mia Heymann, Assistant Manager: Legal, Deloitte Africa Tax & Legal The Tax Administration Act contains an understatement penalty regime which could, at times, result in severe penalties for taxpayers. The Tax Administration Act, 28 of 2011 “… the bona fide inadvertent lack of reasonable care by a taxpayer (the TAA) contains an understatement error has to be an innocent in completing its return will not excuse penalty regime which could, at times, a taxpayer from being liable to pay misstatement by a taxpayer on result in severe penalties for taxpayers. understatement penalties. Broadly speaking, where a taxpayer has his or her return, resulting in an understated its tax liability (as a result of understatement, while acting Although the Guide is not binding on a failure to submit a return, an omission in good faith and without the taxpayers, SARS or the courts, and is from a return, an incorrect statement intention to deceive.” merely of persuasive value, SARS has in a return or the failure to pay the recently started implementing the narrow correct amount of tax if no return was In the Guide, SARS states that it disagrees interpretation of bona fide inadvertent required) which lead to any prejudice with, and will not follow, the application error as set out in the Guide, as opposed to the South African Revenue Service of the law in ABC Holdings (Pty) Ltd v to the tax court’s interpretation of the (SARS) or the fiscus, it will be liable for an The Commissioner for the South African phrase in ABC Holdings (Pty) Ltd v The understatement penalty as calculated Revenue Service (ITI13772), “which it is Commissioner for the South African in terms of the understatement penalty entitled to do as tax court judgements, Revenue Service (ITI13772). percentage table in section 223 of the TAA although often instructive, have no (in addition to the underlying tax due). binding effect.” SARS is of the view that Accordingly, in the event that a taxpayer’s However, relief from the understatement the tax court lost sight of the fact that an interpretation of a provision in a tax penalty is provided if the understatement error cannot have good or bad faith and act is contrary to that of SARS’, and this arose as a result of a bona fide cannot have the intention to deceive. interpretation leads to an understatement inadvertent error made by the taxpayer. as defined in the TAA, it is expected that SARS interprets the phrase in light of SARS will levy an understatement penalty The TAA does not define the phrase bona the Supreme Court of Appeal’s (the SCA) notwithstanding that the taxpayer might fide inadvertent error and, prior to SARS’ judgment in Natal Joint Municipal Pension have acted in good faith and without the Guide to Understatement Penalties, which Fund v Endumeni Municipality, where intention to deceive. was first issued by SARS’ legal counsel the SCA held that the proper approach on 29 March 2018 (the Guide), taxpayers to the interpretation of documents is Although SARS’ interpretation of the frequently relied on the judgment of to read the words used in the context phrase bona fide inadvertent error in the the tax court in ABC Holdings (Pty) Ltd v of the document as a whole and in the Guide is, in our view, too restrictive, we The Commissioner for the South African light of all relevant circumstances. Taking expect SARS to continue to only provide Revenue Service (ITI13772) for the correct into account the purpose and context relief from understatement penalties if interpretation of the phrase. The tax court of the understatement penalty regime, the understatement arose as a result of held as follows at paragraph 45: SARS concludes that the only errors that an involuntary typographical mistake by could constitute bona fide inadvertent the taxpayer in its return. errors are involuntary typographical mistakes. SARS further notes that a 18
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