A welcome introduction of an internationally-competitive international shipping tax regime is proposed in terms of the draft Taxation Laws Amendment Bill, 2013 ("Bill").
Currently, international shipping transport conducted by South African companies is subject to a corporate income tax rate of 28%, with limited incentives such as a depreciation allowance for capital investments. Internationally, the trend is towards reduced taxation for shipping companies through a tonnage tax or a total exemption for shipping activities. In light of these trends, a new shipping tax regime is proposed by the Bill to provide tax relief for qualifying South African shipping companies.
The proposed relief will apply to an "international shipping company", being a South African resident company that holds share(s) in one or more ships that are registered in South Africa in terms of the Ship Registration Act, 58 of 1998 and utilised in the international transportation of passengers or goods for reward ("South African ship").
The receipts and accruals derived by the international shipping company from the operation of a South African ship will be exempt from income tax. Furthermore, capital or revenue gains or losses realised from the sale of a South African ship engaged in international shipping will be disregarded. However, as a result of the income and capital gains tax exemptions, South African ships will no longer be depreciable. Other ships will remain depreciable over a five-year period at a rate of 20% per year.
Any dividend paid by the international shipping company will be
exempt from dividends tax, provided that the dividend is derived
from income generated from the operation of a South African
ship. Similarly, any interest paid to a foreign person by the
international shipping company in respect of a debt used to fund
the construction or improvement of a South African ship will be
exempt from the withholding tax on interest (the 15% interest
withholding tax will become effective on 1 January 2015).
The officers and crew of a South African ship will further be exempt from tax on their salaries, irrespective of the number of days spent abroad.
In respect of a foreign company which constitutes a controlled foreign company ("CFC") (by virtue of the extent of its South African resident shareholders), it is proposed that a South African ship engaged in international traffic will specifically constitute a "foreign business establishment" for purposes of that exemption in the CFC rules. Income attributable to such a ship will therefore effectively not be taxable in the hands of the South African resident shareholders.
In summary, these amendments will effectively provide international shipping companies operating South African ships with exemptions from income tax, capital gains tax, dividends tax and the cross-border withholding tax on interest. In terms of the Bill, the proposed amendments will come into operation on 1 January 2014 and will be effective for years of assessment beginning on or after that date. It should be noted that the Bill is subject to change and that the proposals outlined above may still be amended before being tabled in the National Assembly, which is scheduled to take place on 23 October 2013.
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