Medium term budget adjustments

• South Africa

• Tax planning and consultancy - Budget

02-11-2020

At the time that Minister Tito Mboweni delivered his budget speech in February 2020, the outlook was that the year ahead would bring its financial challenges and the proposed tax changes were going to be introduced bearing this in mind with the aim of improving tax revenue. All of these expectations have been dramatically affected by the worldwide pandemic and the severe economic implications both locally and offshore. There has been an adjustment in thinking and the outcome is that a number of the original suggested changes to the tax laws are not currently included in the latest draft tax bills which were first published at the end of July and have now been reissued with changes on 28 October 2020.

There is stated in the budget that improved tax collection and administration continues to be an important element in achieving fiscal consolidation. It is indicated that near-term objectives include:

• Finalising the tax gap study in December 2020 to quantify the difference between how much tax should be collected and how much is collected.

• Remaining focused on international taxes, particularly aggressive tax planning using transfer pricing.

• Increasing enforcement to eliminate syndicated fraud and tax crimes.

• Continuing to use third-party data to find non-compliant taxpayers.

• Collecting pay-as-you-earn and VAT debt and ensuring that outstanding taxpayer returns are filed and liabilities paid.

Taxpayers can therefore expect that there will be no lessening of any challenges made by SARS specifically in the context of the categories referred to above.

In addition to the abovementioned objectives, there are interesting developments relating to the investment into South Africa. At this stage, the statements are very general and do not provide precise details of how this will be implemented. The emphasis is from the perspective of the South African Reserve Bank and the current exchange control restrictions. It is proposed that Government will be accelerating the following measures to make it easier to invest in South Africa:

1. Inward Listing instruments: All debt, derivatives and exchange traded instruments referencing foreign assets, that are inward listed, traded and settled in Rand on South African exchanges, will be classified as domestic. The classification of all inward listed shares denominated in Rand remains domestic.

2. Loop Structures for FDI purposes: The full ‘loop structure’ restriction has been lifted to encourage inward investments into South Africa, subject to reporting to Financial Surveillance Department of the South African Reserve Bank as and when the transaction is finalised. This reform will be effective from 1 January 2021 for companies, including private equity funds, provided that the entity is a tax resident in South Africa.

3. Corporate foreign borrowings: All bond and note issuances by South African corporates offshore (excluding SOCs) with recourse to South Africa, will be subject to framework and reporting conditions determined by the South African Reserve Bank, which will replace the current prior-approval process.

There is also a proposal that stakeholders will be engaged in order to explore measures to strengthen South Africa as a gateway into Africa.

The exact form of these proposals will have to be elaborated and it is clear too that there will be consequential implications for taxpayers. For example, it will have to be understood as to how the loop structure will be treated from a tax perspective having regard to the current legislative provisions where offshore income is attributed to South Africa.

It will be interesting to observe the developments for creating the balance between promoting investments in South Africa and the tax treatment. It seems though that it will only be likely that we will get any clarity on the tax implications next year.