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Tax highlights of the 2014 Budget proposals
The South African Minister of Finance read his Budget speech last week. It covered both immediate changes to the tax regime and areas that will receive attention over the coming 1 or 2 years. Taxand South Africa provides a summary of the key highlights for corporations.
Third party backed shares
- Several changes are proposed in relation to the tax treatment of third party backed shares. In general terms these relax the hurdles which the taxpayer must overcome to avoid falling foul of the anti-avoidance rules (which re-characterise dividends as interest). Briefly, the changes affect the re-financing of such shares or such shares used to acquire equity shares in exploration companies; and finally, limited pledges in respect of such shares.
Interest deduction for re-organisation and acquisition transactions
- The last few years have seen a number of different measures aimed at limiting the interest deductibility arising from such transactions. Currently we are moving from a discretionary to a formula based system. Certain proposals were made to revise the formula which will be used to calculate the allowable interest deduction.
- An apparent anomaly concerning the refund mechanism for non-cash dividends will be addressed.
Contributed tax capital
- Rules relating to the rollover of CTC will be introduced to cater for the conversion of deferred shares to ordinary shares.
- Certain insurance products may inadvertently fall within the ambit of section 24J which deals with taxation of interest and it is proposed that these policies will be excluded from the scope of these rules.
- A technical change will be made to deal with the determination of whether a company is a property company where foreign companies are involved.
- With regards to transfer pricing contraventions, the nature of the secondary adjustment is to be revisited so that it ceases to take the form of a deemed loan and instead will be deemed to be a dividend or capital contribution depending on the circumstances.
- The effective tax rate in respect of a taxable foreign dividend received by a controlled foreign company (CFC) in which resident individuals hold participation rights will be adjusted.
- Treasury acknowledged the difficulties arising in having to perform the hypothetical South African tax calculation to determine if the so-called high tax exemption for CFCs applies where the CFC has a foreign business establishment (FBE). The interaction between the FBE exemption and the high tax exemption will be revisited to address the practical difficulties
Also published in Thomson Reuters' Taxnet Pro, 6 March 2014
Multinationals with operations in South Africa should further investigate any applicable tax updates relevant to their situation in order to remain compliant. Close scrutiny should be paid to the transfer pricing contraventions and CFCs. It is important to note that these Budget proposals are open to change.