Factors affecting tax planning
In South Africa, 19% of tax revenues for the 2014/2015 year are expected to be collected from companies, compared to 27% from VAT and 34% from individuals. With the country desperately looking for new sources of tax revenue to fund its economic recovery and meet growth projections, it is not surprising that loopholes developed through aggressive tax planning structures are on SARS’ radar.
The new debt reduction rules are an example of SARS’ efforts to reduce the tax loopholes created by complex legal structures in an effort to reduce tax liabilities. Barry Visser, Associate Director Grant Thornton Johannesburg, explains the effects of these new rules by reviewing their potential effect on the Datakor tax court case, where the company’s creditors relinquished their claim against Datakor in exchange for preference shares in the company.
Christel du Preez, Senior Tax Manager Grant Thornton Johannesburg considers the complexity introduced by inclusion of Section 12P into the Income Tax Act in respect of the taxation of government grants.
Mike Betts, Tax Partner Grant Thornton Cape highlights the impact of SARS’ latest efforts to reduce cheque payments and the new requirements for payment by electronic funds transfer (EFT) on taxpayers.
Lastly, AJ Jansen van Nieuwenhuizen, Tax Partner Grant Thornton Johannesburg looks at the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan and the potential shake-up it could mean for businesses.
Datakor case is still alive for new debt reduction rules
By Barry Visser, Associate Director: Tax, Grant Thornton Johannesburg
Old debt reduction rules
The matter of CIR v Datakor Engineering (Pty) Ltd 1998 (4) SA 1060 (SCA) related to a company (Datakor) that entered into an arrangement whereby Datakor’s creditors relinquished their claims against it in exchange for preference shares in the company. It was held that the discharge of a contractual obligation, to pay a debt, through the issue of shares, amounted to a compromise. The court concluded that the compromise benefited the company as it was absolved from its obligation to settle the debt.
The Datakor decision was made based on the prevailing legislation at the time, section 20(1)(a)(ii) of the Income Tax Act No58 of 1962 (the Act), which provided that the benefit received from the creditor due to compromise, would reduce the company’s assessed loss.
New debt reduction rules
Section 20(1)(a)(ii) has been repealed and new provisions have been inserted into the Act that deal with the cancellation and reduction of debt. For this purpose, section 19 of the Act must be read together with section 8(4)(a) Act and paragraph 12A of the 8th Schedule to the Act, collectively representing the so-called “new debt reduction rules”.
The new debt reduction rules apply where a debt that is owed by a person is reduced by any amount.
It is considered that the Datakor case may still be relevant in terms of the current legislation. Where a company’s creditors relinquish their claims against the company, in exchange for preference shares in that company, the relinquishing of their claims constitute a reduction of debt.
However, “reduction amount” is defined in relation to a debt owed by a person to mean “any amount by which that debt is reduced less any amount applied by that person as consideration for that reduction”.
It follows that the new reduction rules will apply because no amount has been applied as consideration against the debt.
If it is considered that the company is also setting-off the claim for payment in respect of the preference shares against the creditor’s claim, an amount as consideration against the debt must then have been applied.
The question that arises is what constitutes an “amount” in respect of the preference shares?
In the Datakor case, it was stated that the mere substitution of a creditor’s claim with a share, even a redeemable preference share, amounts to a concession. An enforceable obligation is replaced with something of a completely different nature. In the case of debts, all the assets of the company are available to satisfy the claims of creditors whereas, in the case of redeemable preference shares, only profits available for dividends or the proceeds of a fresh issue of shares may be used to redeem the shares. The right to redeem vests in the company and the creditor cannot enforce a ‘right’ to redemption.
It is considered that the conversion of a creditors’ claim into a preference share effectively translates into a dilution of that former creditor’s rights and it is likely that a Valuator could arrive at a different/lower value of the preference shares’ rights than the face value of the debt.
Recent amendments to the Act introduced various anti-avoidance provisions where there is a mismatch of values where shares are issued for consideration. However, it appears that the drafters of the amendments appear to have overlooked certain issues, for example where shares are issued for no consideration or where there is set-off or no asset acquired in exchange for shares issued. Therefore, case law would have to be considered and the advice from a tax specialist becomes essential to determine the extent to which debt reduction rules will apply where debt is converted into share capital.
Further reading: VAT implications on waived or reduced debts and business rescue plans.
Tax implications of expenditure funded by government grants
By Christel du Preez, Senior Tax Manager, Grant Thornton Johannesburg
Section 12P was introduced into the Act to deal with government grants received by taxpayers and applies to years of assessment commencing on or 1 January 2013. As a result, taxpayers are now facing potentially complex rules that could have an adverse effect on their tax planning efforts.
Following the introduction of Section 12P, the Act no longer deals with:
- grants or scrapped payments identified by the Minister of Finance;
- amounts received by a registered exporter through a rebate or other assistance under an export incentive scheme; and
- State subsidies received in terms of the Critical Infrastructure Programme (CIP), or the Small/Medium Manufacturing Development Programme.
What are the tax implications for taxpayers?
Taxpayers that receive government grants that are either listed in the Eleventh Schedule to the Act or identified by the Minister of Finance by notice in the Government Gazette, will be exempt for income tax purposes.
However, no tax deductions will be allowed against such exempt grants and a comprehensive set of so called “anti-double-dipping” rules will apply.
Examples of these rules are set out as follows.
Grants received to acquire, improve or reimburse expenses for trading stock
In such instances, the grant amount must be subtracted from the cost price of the trading stock. Any excess, i.e. if the grant exceeds the cost price of the trading stock, will result in a reduction of other tax deductible expenditure.
Grants received for the acquisition or improvement of an allowance asset or to fund expenditure in order to acquire or improve an allowance asset
The grant amount must be subtracted from the cost of the allowance asset. This means that the base cost of the asset will be reduced and as such, tax allowances claimed in respect of the asset will be limited to the reduced base cost.
Furthermore, should the entire amount of a government grant not be used to acquire an allowance asset, any excess will be deemed to be a recoupment for income tax purposes. It is important to note that the grant will first reduce the cost of the asset, and any excess will then be regarded as a recoupment.
Grants used to fund the acquisition, creation or improvement of a “non-allowance” capital asset
In these circumstances, the base cost of the asset will be reduced by the grant received, which will then affect the capital gain if the asset is disposed in the future. If the grant amount exceeds the cost of the asset, the base cost of the asset will be limited to zero.
If none of these rules apply, a taxpayer will be required to reduce its other tax deductible expenditure. Any excess in the current year will be carried forward to reduce tax deductible expenditure in the following years of assessment.
Taxpayers should therefore be cognisant of the adverse tax implications associated with expenditure funded by government grants. As these rules could become complex it is recommended to speak to a tax advisor.
Further restrictions on cheque payments to SARS
By Mike Betts, Tax Partner, Grant Thornton Cape
The advent of electronic payment facilities has drastically reduced the use of cheques as a means of payment and for various reasons, mainly relating to security concerns, SARS has gradually introduced measures designed to discourage cheque payments.
This initiative was intensified on 30 May 2014 when SARS issued a notice that affects anyone who is not using e-filing to make payments to them. Under the new stipulations, unless requested otherwise by a senior SARS official:
- Taxpayers who have had two or more cheque payments to SARS returned as ‘refer to drawer’ in the past three years, will not be permitted to pay SARS by cheque in future.
- All payments must be supported by a SARS payment advice notice (PAN) that is less than seven days old (see further explanation below).
- A separate cheque is required for each tax type, with the exception of payroll related taxes for which one cheque combining the payment of PAYE, SDL and UIF will be acceptable, subject to the monetary limit indicated below.
- The aggregate daily limit for cheque payments at any SARS branch or by post is R50,000 in respect of the following tax types:
- Estate duty
- Income tax, including administrative penalties, assessed tax, corporate income tax, dividends tax, provisional tax and turnover tax
- Mineral and petroleum resources royalties
- Mining royalties
- Other mining leases
- Employees tax, including PAYE, SDL and UIF
- Value added tax
- Withholding tax on royalties
- Cheque payments of up to R500,000 will however, still be permitted in respect of the following tax types:
- Donations tax
- Amounts withheld from payments to non-resident sellers of immovable property
- Assessed tax payable by non-resident owners or charterers of ships or aircraft.
These limits apply regardless of the number of tax periods and/or tax types that have to be accommodated on any one day. Therefore, for payments exceeding these amounts, taxpayers should use another payment method. If they are limited to cheque payment as the only option, they must commence the payment process well in advance to ensure they settle the full amount due by the due date.
For tax types not specifically referred to above, cheque payments in excess of R500,000 will not be accepted in accordance with recognised banking practice. Securities transfer tax and transfer duty should be paid electronically via e-filing. There has been no change to the payment rules that apply to customs and excise tax – the only tax type for which cash payments are still accepted – provided payment is made at a Customs branch, and the payment amount is less than R 100,000 per cheque payment.
No instruction has yet been issued regarding withholding taxes in respect of interest and service fees paid to non-residents. Unless this is clarified before 1 January 2015 when the withholding tax on interest comes into effect, taxpayers are advised to adopt the limits applicable to dividends tax and withholding tax on royalties, as indicated above. The withholding tax on service fees is effective from 1 January 2016.
Cheque payments can be made at any SARS branch between 08:30 and 15:30 on weekdays (08:00 to 15:00 at a Customs branch) or by depositing a cheque, together with the relevant supporting documents, in a drop box before 15:00 on any business day. Where more than five different cheque payments are required, the drop box facility MUST be used. Where cheque payments are submitted by post, adequate allowance must be made for postal delays.
Introduction of payment advice notice (PAN)
From 24 May 2014 all payments to SARS by cheque, direct bank deposit or by way of electronic funds transfer (EFT) must be supported by a new form of remittance advice known as a PAN, which bears the 19 digit SARS payment reference that ensures payments are allocated to the correct account.
Payments made via e-filing on the credit push method will not be affected by this change. The notification by SARS advising taxpayers of the new requirement indicates that for over the counter payments at a bank and EFT payments, the necessary PAN can be obtained via the e-filing system. No information is provided as to how a PAN can be obtained by taxpayers who do not have access to e-filing. Contact Grant Thornton for help to obtain a PAN.
Getting to grips with Base Erosion and Profit Shifting (BEPS)
By AJ Jansen van Nieuwenhuizen, Tax Partner, Grant Thornton Johannesburg
The winds of change blowing through South Africa to expand its tax base and revenues are not unique. Countries around the world are looking for ways to improve their financial situation and their attentions are increasingly focused on company profits. Especially since the low levels of corporate tax which multinationals like Amazon, Apple, Google and Starbucks paid in the past hit world headlines in 2013 and the term Base Erosion and Profit Shifting (BEPS) became commonly used in government and business circles.
BEPS describes tax planning strategies that take advantage of gaps and mismatches in tax rules. These approaches make profits ‘disappear’ for tax purposes or divert income to locations where the prevailing rate of corporate tax is low, but where the company carries out little or no real activity.
Over the past few months, the Organisation for Economic Co-operation and Development (OECD) developed and published a BEPS Action Plan to overhaul the international tax system. The plan has been met by mixed reactions, but if it is adopted, even in an amended form, it will have far-reaching effects on all multi-national corporations, regardless of their size.
Read more about this plan and reaction to it from business and governments around the world.
Grant Thornton launched ‘Getting to grips with the BEPS Action Plan‘, a new report into what the planned overhaul of the international tax system means for businesses and how they can prepare. Download the report.