The 2018 Budget Review contains a number of proposals that will impact businesses operating in South Africa. From an operational perspective, the transition to a VAT rate of 15% may provide some challenges. In addition, an outlook on the South African corporate tax rate and a number of proposals specifically aimed at transactions undertaken by business are presented in the Budget Review.

The 2018 Budget Review presents the National Treasury's perspective on the economic outlook of South Africa as well as an indication of the instruments that it will use to manage the country's budget. This newsletter provides a brief overview of some of the tax proposals contained in the 2018 Budget Review that are likely to impact businesses operating in South Africa.

Increase in the VAT rate

With effect from 1 April 2018, the VAT rate will increase to 15%. Although the burden of this tax will generally be borne by the consumer, businesses, as the suppliers of goods and services, must administer the tax. As a result, accounting systems would need to make provision for the transition to a rate of 15%. In the process of the transition, some issues such as claiming input tax on invoices issued earlier while the rate was still 14% and amendment of or accounting for pricing previously agreed at a rate of 14% should be considered. The cost structure of businesses that are not entitled to claim input tax (for example, educational institutions that make exempt supplies) will however be impacted directly by the change.

Views on the corporate tax rate

As part of the rationale for the increase in VAT rates, the Budget Review provides some insight into the views of the National Treasury on the levels of other taxes and the possibility of future rate increases. This discussion alludes to the fact that corporate tax rates in advanced and middle-income countries are generally falling, which may put pressure on South Africa's long-term competitiveness in this space. In recent years, a number of measures have been implemented to protect the South African corporate tax base from erosion of profits to lower tax jurisdictions. It is however also acknowledged in that discussion that despite these anti-avoidance measures being introduced, policy decisions that do not undermine investment and competitiveness are required. This implies balanced and well targeted anti-avoidance measures. It would appear that in light of this analysis by the National Treasury there is limited room, if any, to increase or even maintain the current corporate rates.

Other specific tax proposals

Amendments, primarily aimed at businesses, are proposed for the 2018 legislative cycle include:

  • The debt relief rules introduced in 2017 have unintended consequences that must be addressed. This is likely to include the wide definition of what constitutes a debt compromise event that has a tax implication.
  • The interaction between the recently introduced dividend-stripping and share buy-back anti-avoidance rules and the corporate roll-over relief will be reviewed. Currently, the anti-avoidance rules apply, even if the transaction qualifies for roll-over relief.
  • It is proposed that criteria will be included in the legislation to determine the amount of the allowance for doubtful debts that taxpayers may deduct (in terms of section 11(j) of the Income Tax Act).
  • Amendments relating to the correction of tax invoices (for VAT purposes) is proposed. The draft proposals normally appear around midyear (June/July) in the draft amendment bills and are then refined into the amendments acts during the second half of the year. (February 2018)

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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.