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Proposed changes to the South African international shipping tax regime
A welcome introduction of an internationally competitive international shipping tax regime has been proposed in South Africa in terms of the draft Taxation Laws Amendment Bill 2013. Taxand South Africa discusses how this new regime will benefit the industry.
Currently international shipping transport conducted by South African companies is subject to a corporate income tax rate of 28%, with limited incentives such as a depreciation allowance for capital investments. Internationally the trend is towards reduced taxation for shipping companies through a tonnage tax or a total exemption for shipping activities. In light of these trends, a new shipping tax regime is proposed by the Bill to provide tax relief for qualifying South African shipping companies.
The proposed relief will apply to an “international shipping company”, being a South African resident company that holds share(s) in one or more ships that are registered in South Africa and utilised in the international transportation of passengers or goods for reward.
The receipts and accruals derived by the international shipping company from the operation of a South African ship will be exempt from income tax. Furthermore capital or revenue gains or losses realised from the sale of a South African ship engaged in international shipping will be disregarded. However as a result of the income and capital gains tax exemptions, South African ships will no longer be depreciable. Other ships will remain depreciable over a 5 year period at a rate of 20% per year.
Any dividend paid by the international shipping company will be exempt from dividends tax, provided that the dividend is derived from income generated from the operation of a South African ship. Similarly any interest paid to a foreign person by the international shipping company in respect of a debt used to fund the construction or improvement of a South African ship will be exempt from withholding tax on interest (15% interest withholding tax will become effective on 1 January 2015).
The officers and crew of a South African ship will further be exempt from tax on their salaries, irrespective of the number of days spent abroad.
In respect of a foreign company which constitutes a controlled foreign company (CFC), it is proposed that a South African ship engaged in international traffic will specifically constitute a “foreign business establishment” for purposes of that exemption in the CFC rules. Income attributable to such a ship will therefore effectively not be taxable in the hands of the South African resident shareholders.
Also published in Thomson Reuters' Taxnet Pro, 21 November 2013
In summary, these amendments will effectively provide international shipping companies operating South African ships with exemptions from income tax, capital gains tax, dividends tax and the cross-border withholding tax on interest. In terms of the Bill, the proposed amendments will come into operation on 1 January 2014 and will be effective for years of assessment beginning on or after that date. It should be noted that the Bill is subject to change and that the proposals outlined above may still be amended.