The Davis Committee’s interim report on VAT was released for public comment in July after it landed on Finance Minister Nhlanhla Nene’s desk in December 2014. Increasing the country’s VAT-rate has been a solution considered by business, tax professionals and tax payers for some time and is now supported by the Committee’s report, which also proposes that the concept of zero-rating certain foodstuffs should be limited to the current basket and not expanded in future. The report argues that zero-rating mainly benefits those who are relatively well-off and results in a loss of R19bn in tax revenue.
Our VAT collection system and compliance levels are considered quite advanced in world terms and it is a transparent form of taxation that raises roughly a quarter of the country’s tax revenue. Consider then that the “loss in revenue” due to zero-rating is almost 13 times more than the country’s estate duty collections (which is much harder and more complicated to earn), raising the VAT-rate seems like the obvious answer.
However, others view a VAT-rate hike as a direct attack on the pockets of the poor and some even predict the possibility of civil unrest if the proposal is adopted. A third school of thought suggests that instead of raising taxes, South Africa should rather focus on curbing excessive government spending and wastage.
Regardless of which solution or combination of solutions is implemented, national debt is growing and revenue is shrinking, leaving the Finance Minister, Treasury and taxpayers with equally little space to manoeuvre.
In another effort to bring taxpayers in line, Cape Town Tax Partner, Mike Betts, explains that deductibility of interest can be limited with the introduction of section 23M of the Income Tax Act.
Douglas Gaul, Tax Manager Grant Thornton Johannesburg cautions foreign entities that earn income in South Africa that they too may be expected to file tax returns.
Lloyd Ponter, a lone voice bringing good news, reminds employers that they still have the opportunity to benefit from the Employment Tax Incentive. Lloyd is a Tax Consultant at Grant Thornton Johannesburg.
And then, to conclude this edition of E-Taxline with a further discussion about VAT, Cliff Watson, who is a Tax Director from Johannesburg, specialising in Indirect Tax, looks into yet more changes in the process and requirements for claiming input VAT on imported goods.
Limitation on the deductibility of interest
By Mike Betts, Partner Grant Thornton Cape
The February edition of e-taxline, Ignore 1 January 2015 tax changes at your peril, dealt with some important amendments to tax legislation that came into effect on 1 January and 1 March 2015. Another amendment that came into force on 1 January 2015 and requires careful consideration is contained in section 23M of the Income Tax Act (’the Act’) and deals with limitations on interest deductions for certain loan transactions.
Specifically, if a resident taxpayer (the debtor) borrows funds from another entity (creditor), but the creditor is not liable for tax on the interest in South Africa and the parties are in a controlling relationship with each other, then the debtor’s interest deduction for tax purposes may be limited.
A ‘controlling relationship’ is defined as one where a person directly or indirectly holds at least 50% of the equity shares in a company or can exercise at least 50% of the voting rights in that company.
This limitation on the deductibility of interest serves as an effective transfer pricing tool, as it is intended to apply to creditors who are non-residents enjoying the exemption from income tax on the interest received in terms of section 10(1)(h).
The provisions of section 23M can also apply where:
- the creditor is not in a controlling relationship with the debtor but the amount advanced to the debtor was obtained from a person who is in a controlling relationship with the debtor
- the debtor is a non-resident who owes an amount which is effectively connected with a permanent establishment from which it operates in South Africa
However, the provisions of section 23M do not apply where:
- the interest incurred by the debtor is included in the net income of the creditor and the creditor is a controlled foreign company
- the interest is disallowed in terms of section 23N, which limits interest deductions arising as result of reorganisation and acquisition transactions
- the interest paid to the non-resident creditor is subject to withholding tax on interest (careful consideration must be given to the period between 1 January 2015 when section 23M became effective, and 1 March 2015 when the withholding tax on interest was introduced)
- the creditor’s advance to the debtor emanated from funds that were granted by a foreign bank that is not in a controlling relationship with the debtor and the rate of interest applied to the loan does not exceed the official rate defined in paragraph 1 of the Seventh Schedule to the Act, plus 100 basis points
- certain linked units acquired by long-term insurers, pension funds or provident funds before 1 January 2013 (but only up to 31 December 2015)
Where section 23M applies, the amount of interest incurred on the loan that may be deducted is determined by a specific formula. Any interest paid that is not deductible in one tax year can be carried forward for further consideration in a subsequent tax year.
The details of the formula and the calculations associated therewith are too extensive to incorporate in this article but any taxpayer who has borrowed funds from a non-resident who is a controlling shareholder or, in whom the taxpayer itself holds a controlling interest, is encouraged to contact Grant Thornton for assistance in determining whether or not the provisions of section 23M apply to the situation in question.
Foreign entities deriving income from South Africa must register as taxpayers
By Douglas Gaul, Tax Manager Grant Thornton Johannesburg
It has long been a requirement that a non-resident company, trust or other juristic person must file a tax return if it carried on a trade through a permanent establishment in South Africa, or derived any capital gain from a South African source.
Every year, the requirements for submitting income tax returns are published by way of a notice in the Government Gazette [ 649 kb ]and it is interesting to note that the requirements for submitting returns for the 2015 year now include non-resident companies, trusts or other juristic persons that derive income from a source in South Africa.
This means for example, that if a foreign entity sends an employee to South Africa to render services here, and the entity invoices a South African resident for these services, the foreign entity may be required to submit a tax return to SARS in respect of its South African-sourced income. This, despite the fact a double taxation agreement may otherwise have meant that the income would be exempt, simply because it does not have a permanent establishment here.
It is uncertain whether any consideration was given to the practical implications related to this requirement. For example, the foreign entity will have to register as a taxpayer before it is able to file a tax return, which in itself is no easy feat and requires amongst other stringent prerequisites, including the appointment of a public officer with a South African address.
In view of the complications, it remains to be seen to what extent non-resident entities will comply, assuming they are even aware of the need to do so. For assistance and advice, please contact Grant Thornton.
Employment Tax Incentive: Reminder
By Lloyd Ponter, Tax Consultant Grant Thornton Johannesburg
The Employment Tax Incentive (“ETI”) was introduced from January 2014 and is scheduled to end on 31 December 2016, when its effectiveness will be reviewed to determine whether it should continue beyond this date. Despite the possible termination looming, employers still have an opportunity to benefit from this incentive.
In summary, the ETI is available to “eligible employers” as defined in the Employment Tax Incentive Act and can be claimed in respect of “qualifying employees.” The ETI is aimed quite specifically at the private sector and its intention is to encourage the employment of employees of a certain profile. This includes employees who inter alia:
- earn R6,000 or less per month
- are between the ages of 18 and 30 years old
- are persons with a valid South African Identification Card, or who possess an asylum seeker permit; and
- were employed on or after 1 October 2013
Read our full explanation of how the ETI functions work here.
The ETI is claimed against an employer’s PAYE liability on its monthly EMP201 declarations. The quantum thereof, ranges between nil and R1, 000 per employee per month, in the first year of employment, and is effectively halved in the second year. Due to their low income, most qualifying employees wouldn’t be liable for PAYE and the ETI is therefore a claim against the employer’s overall PAYE liability. It has the potential to decrease the PAYE liability of some employers significantly.
Employers that haven’t claimed the ETI yet are still able to the claim the retrospective amounts in current tax periods, but must adhere to the relevant rollover provisions and other limitations. It is recommended that all employers, whether they have claimed the ETI or intend doing so in future, quantify their ETI roll over limitation on a six-monthly basis to avoid undue errors and resultant interest and penalties.
There are numerous requirements, provisos and pitfalls contained in the ETI Act which could result in an employer incorrectly claiming the allowance. Furthermore, employers are only entitled to claim the ETI if their tax affairs are in order failing which, there may be significant penalties. In such cases, we recommend that those employers quantify their errors and apply for relief in terms of the SARS Voluntary Disclosure Programme to avoid inter alia, “understatement penalties” levied under the Tax Administration Act, which can range anywhere from 0 to 200% of the prejudice to the fiscus.
Import VAT – When and how to claim
By Cliff Watson, Tax Director Grant Thornton Johannesburg
The question of when to claim the VAT paid when importing goods has been on the mind of all importers in recent years, as so many have been getting this wrong and suffering penalty and interest charges as result. The question has also been on SARS’ radar and became one of its focus areas when doing VAT audits. The main issue driving these concerns is that VAT legislation was amended twice in a 12-month period.
Situation prior to 1 April 2014
Up to 30 March 2014, a vendor was entitled to claim the VAT paid on the value of goods imported to South Africa only when the goods have been invoiced or paid, whichever was the earlier, during that tax period.
The documentary requirements to substantiate the VAT claim included submitting proof that the VAT amount was paid to SARS before submitting the VAT return relating to that claim. In essence, this meant that the vendor could claim the VAT in the tax period the goods were imported, while the clearing agent only paid Customs via its deferment account in the next tax period, but before the vendor submitted its VAT return.
Situation between 1 April 2014 and 1 April 2015
VAT legislation was amended from 1 April 2014, which further limited the period during which import VAT could be claimed.
Since the change in legislation, the import VAT could only be claimed in the tax period during which the goods were imported and provided the VAT was paid to Customs during the same tax period. Vendors using the services of a clearing agent could only claim the VAT in the tax period that the clearing agent paid the import VAT through its deferment scheme. Generally, this resulted in vendors only being able to claim VAT in the following tax period, which affected their cash flow negatively.
Situation after 1 April 2015
The VAT Act was again amended from 1 April 2015 to once again allow vendors to claim the VAT during the tax period when goods are imported and released in terms of the Customs and Excise Act.
However, the documentary requirements to substantiate the VAT claim again include proof that the VAT was paid to SARS before the vendor’s VAT return relating to that claim is submitted. In other words, vendors can claim the VAT during the tax period in which the goods are imported and released by Customs, but the VAT payment (either by the vendor, or via the clearing agent’s deferment account) can take place in the next tax period but before the vendor submits its VAT return.
Clarification of documentary evidence
The documentary requirements remained more or less intact but now include the bill of entry/release notification or other Customs prescribed documents, as well as the receipt for the VAT payment to SARS in respect of the import.
Practically, it remains a difficult task to obtain the payment receipts from clearing agents and vendors will have to gain the cooperation of their agents in order to avoid penalties and interest charges from SARS or any negative cash flow implications for not being able to claim the import VAT timeously.
If you’re uncertain about when or how to claim input VAT on imports, contact us for advice.