Tax Carve Out For Foreign Funds
In the 2012 Budget Review it was stated that a specific carve out will be created for foreign funds which have active South African investment managers who provide guidance regarding African assets. It was stated that the investment managers’ presence in South Africa may trigger various tax risks. Taxand South Africa explains the reasoning behind the new amend.
In particular, South African investment managers may cause the effective management of the foreign fund to be in South Africa, resulting in the foreign fund being brought into the South African tax net and therefore being subject to tax on a world-wide basis. This is because South Africa taxes “residents” on their world-wide income, whereas non-residents are taxed only on income sourced in South Africa.
A foreign fund is effectively managed in South Africa as a result of the activities of the local investment manager, it would be regarded as being a resident for income tax and as such, be subject to tax on its world-wide income.
In order to mitigate this tax risk, the investment manager’s ability to make decisions may have been limited, undermining the very purpose of utilising a South African investment manager. Alternatively the investment manager may have been forced to relocate abroad.
The National Treasury has attempted to address this issue by proposing amendments to the definition of a “resident” in section 1 of the Income Tax Act.
In terms of the proposed amendment, the “effective management” test in relation to the “foreign investment entity” will not take into account financial services or any incidental services.
Multinationals with a presence in South Africa should be aware that, although this carve-out removes the potential for worldwide taxation due to the full and free use of a South Africa investment manager; it does not address the local tax implications which arise as a result of receiving South African sourced income. As such, the income of the foreign fund may be brought into the South African tax net if the source, by virtue of the activities of the investment manager, is located in South Africa.