Proposed changes to the Income Tax Act, contained in the
2018 draft Taxation Laws Amendment Bill (DTLAB), were released
for comment on July 16 2018. This update focuses on certain
international tax-related proposals.
Foreign trusts with South Africa-resident
The South African Revenue Service (SARS) has previously
unsuccessfully attempted to broaden the controlled foreign
corporation (CFC) rules to target structures involving South
Africa (SA)-resident beneficiaries of foreign discretionary
trusts that hold a majority stake in one or more foreign
companies. There are no such proposed changes to the CFC rules
in the DTLAB, but it does include amendments aimed at ensuring
that certain foreign dividends and foreign capital gains
derived by such trusts will not qualify for any type of tax
exemption when distributed to SA resident beneficiaries.
Treaty relief and secondary adjustments
Since January 1 2015, a secondary adjustment under South
African transfer pricing rules has been deemed to be a dividend
in specie distributed by the South African taxpayer.
Dividends in South Africa are subject to 20% dividends tax
unless treaty relief applies. Despite this
characterisation, SARS has been adamant that secondary
adjustments are penalty provisions and do not qualify for
treaty relief. Although many of South Africa's tax treaties do
not explicitly include secondary adjustments in the definition
of 'dividend' in the dividend article, some do. Article 10(3)
of the treaty between South Africa and Ireland, for example,
includes in the dividend definition "any income or distribution
assimilated to income from shares by the laws of the
contracting state of which the company paying the income or
making the distribution is a tax resident".
To prevent taxpayers from arguing that this type of wording
clearly entitles them to treaty relief, SARS is proposing that
the definition of dividend in the Income Tax Act (which refers
to amounts transferred by a South African company in respect of
shares in that company) be changed so as to explicitly exclude
secondary adjustments. A secondary adjustment will still be
deemed to be a dividend, but only for dividends tax purposes.
It can no longer (in SARS's view) be argued to be "a
distribution assimilated to income from shares" for treaty
purposes. In addition, SARS is seeking to ensure that the
administrative requirements for claiming treaty relief are
framed in a way that will make it impossible for taxpayers
suffering secondary adjustments to comply with them.
These proposals are likely to result in criticism not just
from the South African companies affected but also from some of
South Africa's tax treaty partners which could justifiably
argue that these amendments are deliberate attempts to negate
treaty provisions negotiated in good faith.
Broadening of CFC 'high tax' exemption
No income will be imputed from a CFC if that CFC is subject
to an aggregate amount of foreign tax which is at least 75% of
the amount that would have been payable had the CFC been tax
resident in South Africa. The 2018 budget referred to the
possibility of dropping the 75% to a lower percentage, given
that South Africa's company tax rate of 28% is now high by
global standards. Disappointingly, no change has been made in
this context in the recent proposed amendments.
Anne Bennett (firstname.lastname@example.org)
Tel: +27 11 5305886