Most Read Contributor in South Africa, September 2016
In the field of international taxation, the question of foreign
exchange fluctuations is of particular importance because of the
variety of currencies used worldwide and the requirements by local
tax authorities generally to use the domestic currency for tax
reporting in the home country.
Section 24I of the Income Tax Act 1962, (Act No 58 of 1962)
("the Act") contains explicit and comprehensive rules
designed to deal with the tax consequences of foreign-exchange
issues. The Taxation Laws Amendment Bill 2012 proposes that part of
the rules contained in section 24I be amended to ensure that
currency gains or losses in respect of debt, and the effective
hedge, between related entities will be deferred until realisation.
If enacted, the new regime will replace the current system for
taxing currency gains and losses arising in the case of related
companies which is divided into two sets of rules that depend on
different effective dates.
Financing transactions are particularly affected by foreign
exchange fluctuations as the foreign exchange component, coupled
with the financing transaction's potentially long period,
can significantly influence whether such transactions generate an
overall profit or loss. Although the foreign exchange component of
a global gain or loss will always remain second to the overall
amount, the effects of increased volatility in the currency markets
and the quantitative easing measures recently taken in several
jurisdictions to alleviate the effects of the recent liquidity
crisis should not be underestimated.
The new regime will, as is the case with most fiscal provisions,
be subject to a number of requirements, conditions and limiting
factors. The first requirement tests the relationship between the
entities which must be 'related' to each other.
Entities that form part of the same group of entities for
International Financial Reporting Statements (IFRS) purposes will
be considered related. It should be noted that an IFRS group is
broader than a group as defined under the Act. In particular, an
IFRS group requires a more than 50 per cent threshold as opposed to
the ITA's 70 per cent threshold. It is not necessary that
the related entities present consolidated financial statements for
them to form part of the same group of entities.
Once the entity test is met, the next requirement tests the
nature of the instrument between the related entities. The new
regime is limited to debt between group entities where the debt is
a claim for which settlement is neither planned nor likely to occur
in the foreseeable future as contemplated in IFRS thereby excluding
short-term and trade receivables / payables, or in respect of a
forward exchange contract or a foreign option currency contract
which is designated as an effective hedge under IFRS.
The new regime will apply in respect of any year of assessment
commencing on or after 1 January 2013. Therefore under the new
system that will be implemented in terms of the TLAB, all remaining
suspended currency gains and losses that occurred in years of
assessments on or before 8 November 2005 will be triggered for
realisation on the date the new system is implemented. All
exchange item transactions that occurred post 8 November 2005 will
be deemed to be realised at the end of the year of assessment
preceding the effective date.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).