Main Tax Proposals

Overview

In the 2020 Mid Term Budget Policy Statement (MTBPS) delivered on 28 October by Minister Mboweni, it was announced that to achieve improvement in the revenue collections, the 2021 Budget will propose the tax increases.

Much to the taxpayers’ relief, Treasury has now withdrawn this announcement and no significant tax increases were proposed.

  • Business
    Business
    Corporate Income Tax (CIT) , limitation of interest deductions, limitations on the utilization of assessed losses and sunset dates for corporate tax incentives
  • International Tax
    International Tax
    Controlled Foreign Companies
  • Individual
    Individual
    Proposed taxes
BUSINESS TAX
Corporate Income Tax (CIT)

We welcome the Minister’s announcement on the proposal to reduce the corporate tax rate to 27% for companies with years of assessment commencing on or after 1 April 2022.

This means that the reduction will effectively be applied to a corporate taxpayer on their 2023 year of assessment. Unfortunately, the Minister warned that the reduction of corporate tax rates comes with the compromise on the implementation of curbing deductibility of interest and application of assessed losses.

Limitation of interest deductions

In order to combat the base erosion and profit shifting (BEPS)[1] by multinational corporations, the Government in its 2020 Budget proposed to restrict net interest expense deductions to 30 per cent of earnings for years of assessment commencing on or after 1 January 2021.

Shortly after the 2020 Budget, a discussion paper on Reviewing the Tax Treatment of Excessive Debt Financing, Interest Deductions and Other Financial Payments was issued for public comment.

After assessing the public comments and consultations, the government proposes to expand the scope of the current interest limitation rules to include some similar interest items, to adjust the fixed-ratio limitation for net interest expense to 30 per cent of earnings; and to restrict only interest incurred on connected party instruments.

As part of the COVID-19 tax relief measures, this proposal was postponed to 01 January 2022.

 

Limitations on the utilization of assessed losses

An assessed loss is created when the company’s tax-deductible expenses exceed its income.

The assessed loss is carried forward to the following year and is utilized to offset against taxable income in that year. In the 2020 Budget, the Government proposed broadening of the corporate income tax base by restricting the offset of assessed losses carried forward to 80 per cent of taxable income, for years of assessment commencing on or after 1 January 2021.

As part of the COVID-19 tax relief measures, this proposal was postponed to 01 January 2022. It will be interesting to see how cash management and financial statements of state-owned entities with large assessed losses will be impacted by this proposed change if implemented in the coming years.

 

Sunset dates for corporate tax incentives

In the 2021 Budget, the Government proposes the following sunset dates for corporate tax incentives:

With regard to B, C, D, E incentives, stakeholders are invited to motivate why these incentives should not be allowed to lapse on reaching their respective sunset dates. These motivations should be submitted to the National Treasury by 31 March 2021.

Capital Gain Tax (CGT)

CGT is triggered by disposal or deemed disposal of an asset. Following the reduction of the CIT rate, the effective rate of CGT will decrease from 22.4% to 21.6%.

With regard to B, C, D, E incentives, stakeholders are invited to motivate why these incentives should not be allowed to lapse on reaching their respective sunset dates. These motivations should be submitted to the National Treasury by 31 March 2021.

 

 

Capital Gain Tax (CGT)

CGT is triggered by disposal or deemed disposal of an asset. Following the reduction of the CIT rate, the effective rate of CGT will decrease from 22.4% to 21.6%.

INTERNATIONAL TAX

Clarifying the controlled foreign company diversionary rules

In 2011, the diversionary rules governing the outbound sale of goods by a controlled foreign company (CFC) were abolished because the transfer pricing rules could be applied instead.

In 2016, the government reinstated the diversionary rules for CFC outbound sale of goods due to their effectiveness in preventing base erosion and profit shifting. The 2016 diversionary rules for CFC outbound sale of goods now provide for an exemption if similar goods are purchased by the CFC, from unconnected persons to that CFC, mainly within the country in which the CFC is resident.

Certain taxpayers are circumventing these rules by merely entering into a contract of purchase and sale that implies that the purchase of goods took place in the country of residence of the CFC when this is not the case. To curb this abuse, it is proposed that these diversionary rules be amended.

Clarifying the interaction between provisions dealing with a CFC ceasing to be a CFC and the participation exemption

In 2020, changes were made to the Income Tax Act to reduce tax planning opportunities that may emerge from loop structures as a result of the relaxation of the approval requirement by the Reserve Bank.

An amendment was made in relation to gains on the disposal of shares in a non‐resident company to a non‐resident that was not taxed because of the participation exemption in paragraph 64B of the eighth schedule. This amendment has the effect that the participation exemption does not apply to the disposal of shares in a CFC to the extent that the value of the CFC’s assets is derived from South African assets.

However, section 9H provides that where a CFC ceases to be a CFC as a direct or indirect result of the disposal of all or some of the equity shares in that CFC, the capital gain or loss realised in respect of such disposal is disregarded if the participation exemption under paragraph 64B of the eighth schedule applies.

To address the interaction between section 9H and paragraph 64B, it is proposed that section 9H be amended so that a partial participation exemption in terms of paragraph 64B(6) of the eighth schedule would not affect the exclusion under section 9H(5).

Clarifying the rules dealing with withholding tax exemption declaration

The act contains provisions in part IV A and part IV B for withholding tax on royalties and interest respectively.

According to the rules dealing with withholding tax on interest, no withholding tax on interest applies if the foreign person submits a declaration that he/she is – in terms of an agreement for the avoidance of double taxation – exempt from the tax. A similar declaration does not exist for withholding tax on royalties.

To address the anomaly, it is proposed that the tax legislation be amended.

Base erosion, profit shifting (BEPS) and digital services taxation

For any tax system to be effective, it needs to take into account the globalised nature of trade, investment and technological change.

South Africa is a party to many multinational tax processes and agreements, including international negotiations to finalise a treaty on base erosion and profit shifting. This initiative aims to reduce tax avoidance by multinational companies and ensure that national tax bases are not eroded.

As of January 2021, 92 countries, including 13 African states, had signed the relevant agreement. South Africa has signed but not ratified its participation, which requires parliamentary approval. In addition, the government proposes to renegotiate some existing bilateral tax treaties with those countries that are not signatories to the agreement.

South Africa is a member of the Steering Group of the Inclusive Framework, which is examining income tax challenges associated with the digitalisation of the economy.

In June 2019, the Group of 20 endorsed a work programme with the commitment to deliver a consensus‐based solution by the end of 2020. However, the pandemic has delayed this process. Work continues towards developing a consensus by mid‐2021.

Should these efforts fail, South Africa will consider the appropriateness of a unilateral approach

Value Added Tax

VAT is levied at the standard rate of 15% on the supply of goods and services by registered vendors.

No changes were proposed.

Dividends Tax

Dividends tax is a final tax on dividends at a rate of 20%.

No changes were proposed.

INDIVIDUAL TAX

The personal income tax brackets will be increased by 5 per cent, which is more than inflation. This will provide R2.2 billion in tax relief. Most of that relief will reduce the tax burden on lower and middle-income households.

Tax rates from 1 March 2021 to 28 February 2022: Individuals and special trusts

Rebates

Tax threshold

2021 BUDGET REVIEW - INTERNATIONAL TAX

Tax Statistics

2021 tax-to-GDP ratio

The tax-to-GDP ratio, which gives a sense of the tax burden, shows tax revenue as a percentage of gross domestic product (GDP). The higher the percentage, the higher the amount of tax collected relative to the size of the economy.

How does South Africa compare with other countries in terms of the tax-to-GDP ratio? Data is available from both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).

Is having a high tax-to-GDP ratio a good or a bad thing? It depends on each country. For a nation that has a high ratio but where taxpayers are receiving good value for money, a high tax burden might not be that detrimental. Countries such as Denmark, Sweden and Finland have high tax-to-GDP ratios, but these nations report the highest standard of living.

A very low tax-to-GDP ratio can be problematic as it may be a sign of an inefficient tax system. A government will struggle to provide services, build infrastructure or maintain public goods if it fails to collect taxes during periods of strong economic growth. Indonesia, for example, has in recent years committed itself to raise its tax-to-GDP ratio from 10% to 15%.

The tax-to-GDP ratio alone provides no indication of good governance, the efficiency of the taxation system in the country, nor the way in which taxes are used or distributed.

Within the 2020 Budget Review, it was stated that substantial tax increases were unlikely to be effective. South Africa already had a relatively high tax-to-GDP ratio compared with other countries at a similar level of development. New tax increases at that time could have harmed the economy’s ability to recover and this remains the position currently.

In the 2020 budget review, the projected tax-to-GDP ratio was expected to equal 26.3 per cent over the next three years. South Africa had a relatively high level of tax to GDP compared with other upper-middle-income countries. Higher levels of economic growth were required for further tax increases to be effective in consolidating the public finances or financing additional expenditure.

The 2021 Budget Review states that a gradual recovery in revenue is expected over the medium term. The tax-to-GDP ratio now stands at 24.6 per cent. A strong and sustained economic rebound is required for this ratio to return to pre-COVID-19 levels of 26.3 per cent of GDP.

 

2021 debt-to-GDP ratio

According to the 2020 Supplementary Budget Review, gross national government debt was projected to increase from R3.26 trillion (63.5 per cent of GDP) in 2019/20 to R3.97 trillion (81.8 per cent of GDP) in 2020/21. By the end of 2022/23, gross loan debt was expected to amount to R4.83 trillion or 86 per cent of GDP.

According to the 2021 Budget Review, in recent months, faster revenue growth has provided the government with the space to support the economy and the health sector, while narrowing the consolidated budget deficit more rapidly than projected in October 2020.

The consolidated budget deficit is projected to narrow from 14 per cent of GDP in 2020/21 to 6.3 per cent of GDP in 2023/24. Gross debt is projected to stabilise at a lower level of 88.9 per cent of GDP in 2025/26.

Impact of COVID-19

Over the past decade, increased government spending has failed to promote growth. Since 2008, real spending growth has averaged 4.1 per cent annually, well above annual real GDP growth of 1.5 per cent. Yet despite high levels of expenditure, supported by increased debt accumulation, growth has not recovered to pre-2008 levels.

Last year, the consolidated fiscal deficit was projected at 15.7 per cent of GDP, up from 6.4 per cent of GDP in 2019/20. The debt stock was expected to reach nearly R4 trillion, or 81.8 per cent of GDP, in 2020/21. Over the medium term, debt-service costs have been the fastest-growing item of spending. Failure to address the deterioration in the fiscal position could lead to a sovereign debt default, which would result in a reversal of many gains of the democratic era.

As per the 2021 Budget Review, the COVID-19 pandemic has had a severe impact on tax revenue collection. Given largely predicted shortfalls in revenue for 2020/21 and over the next three years, the 2020 Medium Term Budget Policy Statement (MTBPS) confirmed that tax increases totalling R40 billion would be required over the next four years to help stabilise public debt and return the public finances to a sustainable position. These increases were first announced in the June 2020 special adjustments budget.

Gross tax revenue for 2020/21 is now expected to be 10.6 per cent lower than in the previous fiscal year and R213.2 billion lower than projected in the 2020 budget due to the pandemic. However, as a result of the recovery in consumption and wages between October and December 2020, and a boost to corporate income tax receipts from the mining sector, 2020/21 revenue collections are expected to be R99.6 billion above the 2020 MTBPS estimate.