In a slightly surprising, but nevertheless welcome, South African 2020 Budget Speech today, the Honourable Minister of Finance announced that there would be no significant tax increases to the major taxes for the forthcoming tax year. Widely anticipated increases to value-added tax ("VAT"), income tax, capital gains tax and estate duty did not materialise. In addition, there is a commitment to the gradual reduction of the corporate tax rate in the interests of global competitiveness, but this is to be accompanied by more immediate limitations to corporate income tax deductions, which will be outlined below.
More broadly, the minister forecast that the economy would grow at the weak rate of 0.9% over the next year, while inflation was projected at approximately 4.5%. The expected shortfall between revenue and expenditure will inevitably increase our national debt.
Corporate income tax
- a discussion document released for comment (closing date 17 April 2020) will discuss a proposal to restrict net interest expense deductions to 30% of earnings for years of assessment commencing on or after 1 January 2021. This measure is addressed in the context of base erosion and profit shifting by multinationals, but it is not completely clear that it is limited to cross-border transactions. We will comment further on the discussion paper in due course.
- certain tax incentives are to be closed off in future. Some of the incentives mentioned include those dealing with airport and port assets, rolling stock, loans for residential units, the section 12I tax incentive for industrial policy projects and the urban development zone incentive. The urban development zone incentive will be extended for one year while it is reviewed. The incentive for special economic zones will not be expanded beyond the current six approved zones.
- the off-set of assessed losses carried forward will be limited to 80% of taxable income for years of assessment commencing on or after 1 January 2021.
- for banks, alleged avoidance involving effective conversion of income to dividends by covered persons will be addressed.
- anti-avoidance rules will be extended relating to transfer of collateral in securities lending arrangements.
- venture capital companies will receive attention regarding continuation beyond the sunset date of 30 June 2021 and clarifying certain anomalies.
- mining companies will receive attention in relation to allowable mining capital expenditure, and removing the discretion of the Minister of Finance in relation to ring-fencing capex per mine.
- various aspects of Real Estate Investment Trust ("REIT") taxation will be addressed including:
- updating the listing criteria;
- excluding preference share and non-equity shares; and
- addressing taxation of foreign dividends received by a REIT
The South African Revenue Service's ("SARS'") ability to issue estimated assessment will be extended to circumstances where a taxpayer has failed to supply relevant requested material on more than one occasion without adequate response.
Consideration is being given to an extension of SARS' ability to withhold a refund under certain circumstances (including possibly criminal investigations) to all taxes.
- deductions in respect of secured debt arrears owing to non-bank taxpayers who do not apply IFRS9 is to be revised.
- for banks, the determination of deductions for impairments under IFRS 9 is to be reviewed.
- changes will be made to avoid anomalies for lessors (both bank and non-bank) applying IFRS9 in relation to certain lease receivables.
- carbon tax will increase by 5.6% for the 2020 calendar year. Government will review the design of the carbon tax after it has been in operation for at least three years.
- purchase tax on motor vehicle emissions will increase for passenger cars to 120 per gram and to 160 per gram for double cab vehicles. The threshold for passenger vehicles will be adjusted from 120 grams to 95 grams. These will take effect from 1 April 2020.
- the incandescent light bulb levy will increase from ZAR8 – ZAR10 from 1 April 2020.
- the plastic bag levy will be increased from 12 cents to 25 cents per bag effective 1 April 2020.
- not strictly a green tax: heated tobacco products are to be taxed at a rate of 75% of the cigarette excise rate with immediate effect and electronic cigarettes are to be taxed in 2021. No details have been announced yet.
- Government is preparing to publish an environmental fiscal reform review paper which will explore potential new environmental taxes and reforms such as:
- restructuring the general fuel levy;
- road pricing charges;
- annual carbon tax on vehicles;
- reviewing inefficient fossil fuel subsidies including zero-rating of transport fuels;
- considering product taxes on electrical and electronic waste; and
- reviewing the tax treatment of company cars to incentivise the use of more fuel efficient vehicles.
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