The Minister of Finance Mr Pravin Gordhan delivered South Africa's much anticipated 2012 Budget speech to Parliament this afternoon. This year's budget has introduced some interesting and surprising tax amendments. The main tax proposals specifically relevant to the corporate sector are discussed briefly below.
Dividends Tax/ Foreign Companies/ STC Credits
From 1 April 2012 Secondary Tax on Companies ("STC") will be replaced by a new withholding Dividends Tax regime. The Budget proposes an unexpected increase in the withholding Dividends Tax rate due to equity reasons from the original 10% to a 15% rate. The increased withholding tax rate has led to collateral amendments. Foreign companies that have South African sourced income are subject to tax at a 33% rate and it is proposed that the rate will be reduced to 28%. As such foreign companies and domestic companies will be subject to the same corporate tax rate of 28% but no dividend tax will arise for the foreign companies' shareholders. Gold companies currently have a choice of two gold formula rates that they may apply; the standard formula or the higher formula. Companies that opted to use the higher formula were exempt from STC. Due to the repeal of STC, the higher formula will become superfluous.
The initial 5 year transition period in respect of STC credits has been reduced to 3 years, due to the delayed implementation of the Dividends Tax regime.
Final Withholding Taxes
Presently international investors are subject to a final withholding tax on royalties and from 2013 will be subject to a final withholding tax on interest, unless a tax treaty provides otherwise. Government proposes to coordinate and streamline procedures and as such a uniform final withholding rate of 15% will be adopted.
Capital Gains Tax
The Budget proposes an increase in the inclusion rates for Capital Gains Tax ("CGT") which had remained unchanged for the past 10 years. The inclusion rate for individuals and special trusts will increase to 33.3% (from 25%), resulting in an effective tax rate of 13.3%. The inclusion rate for other entities (companies and other trusts) will increase to 66.6% (from 50%), raising the effective rate for companies to 18.6% and other trusts to 26.7%. The new rates will be effective from 1 March 2012.
Limiting excessive debt in businesses / Debt cancellations
Government will issue a revised set of reclassification rules that will deem certain debt to be equivalent to shares (equity). In 2013 Government will consider introducing an 'across-the-broad' percentage ceiling on interest deductions in an attempt to limit excessive debt financing. It is proposed that interest on debt used to directly acquire a controlling share interest of at least 70% will be allowed. The deductibility of the interest arising from the debt acquisition will be subject to the same control measures applied to section 45 acquisitions.
Government proposes to introduce a simplified regime with regard to debt cancellations and restructurings. This initiative seeks to reduce the tax impact on the debtor when the debt is unilaterally reduced or cancelled without full consideration and also to reduce adverse tax consequences being triggered when the debt relief merely restores the debtor to the position of solvency.
Interpretative guidance as well as legislative refinements relating to the tax treatment of contingent liabilities arising from the sale of business operations will be issued in 2012.
Electricity Levy / Fuel Levy / Road Accident Fund Levy
There is a proposed increase in the electricity levy of 1c/kWh, increasing the levy to 3.5c/kWh. The additional revenue generated will fund energy efficiency initiatives such as the solar water heater programme. Government has also proposed to increase the general fuel levy and the Road Accident Fund levy by 20c/l and 8c/l respectively from 4 April 2012.
Employee Share Schemes
Employee share schemes which are structured as employee share trusts in which the trust holds the shares for the benefit of the employees will be reviewed during 2012. The review seeks to eliminate loopholes and possible double taxation over the next two years.
The VAT zero-rating of interest earned on loans to non-residents will be repealed in order to create parity with residents with regard to Vat treatment.
Energy projects such as wind, solar and hydroelectric facilities qualify for an accelerated depreciation on a 50:30:20 basis. The accelerated depreciation will be extended to cover foundations and supporting structures.
Tax Administration Bill
The Tax Administration Bill has been approved by Parliament. The Bill incorporates the common administrative elements of the current tax law into a single piece of legislation.
The Bill is expected to be promulgated this year.
The details of the proposed tax amendments outlined above will be contained in the Taxation Laws Amendment Bill 2012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.