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 Tax & Legal - Deloitte
Balancing today’s demands with
tomorrow’s opportunities
Budget 2020/21
Pre-Budget Commentary
South Africa             Tax & Legal
Balancing today's demands with tomorrow's opportunities - Budget 2020/21 Tax & Legal - Deloitte
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
Balancing today's demands with tomorrow's opportunities - Budget 2020/21 Tax & Legal - Deloitte
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

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Balancing today's demands with tomorrow's opportunities - Budget 2020/21 Tax & Legal - Deloitte
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.

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Balancing today's demands with tomorrow's opportunities - Budget 2020/21 Tax & Legal - Deloitte
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

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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

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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.

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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.

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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.

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   © 2020. For information, contact Deloitte Touche Tohmatsu Limited.                            Tax & Legal
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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.

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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
Making an impact that matters | Budget 2020/21

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                                                                        16
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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