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Revised Currency Rules for Income Tax Act

South Africa

South Africa have revised the currency rules for intra-group exchange items. Section 24I of the Income Tax Act 1962,("the Act") contains comprehensive rules designed to deal with the tax consequences of foreign-exchange issues. The Taxation Laws Amendment Bill 2012 proposes that some of these rules should be amended to ensure that currency gains or losses, in respect of debt, between related entities will be deferred until realisation. If passed, the new regime will replace the current system for taxing currency. Taxand South Africa explains what the new regime will mean for international businesses.

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 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. This excludes short-term trade receivables / payables.

Taxand South Africa explain revised rules for intra-group exchange items

Taxand's Take

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. 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 in some jurisidictions, should not be underestimated.

Your Taxand contacts for further queries are:
Mansoor Parker
T. +27 21 410 2500

Vereshnie Naidoo
T. +27 21 410 2500

Taxand's Take Author