Tax legislation is drafted by the National Treasury and administered by the country’s tax authority, the South African Revenue Services (SARS). The tax authority is able, where necessary, to draft guidelines, practice notes and interpretation notes. It does not, however, have the power to draft legislation, and its role is limited to administration.
OBJECTIONS: If a taxpayer has any differences with SARS, they can lodge an objection with the authority. If their objection is not successful, a taxpayer can make an appeal to a tax court. The decision handed down by the tax court is binding on the parties before the tax court. However, it is not binding, but plays a persuasive role, in respect of other tax cases. A decision made by a tax court is subject to appeal at a high court by either party who is not satisfied with it. The decision of the high court is binding on tax courts and plays a persuasive role on other high court matters provided the facts are similar.
Judgments made by a high court must be applied by taxpayers and SARS in matters that are materially similar. The decision of a high court can be appealed at the Supreme Court of Appeal (SCA). The SCA is currently the highest court of appeal (excluding constitutional matters). Its judgments are final. With regards to the principle of precedent (also referred to as stare decisis), the ratio decidendi of SCA judgments would be law that is absolutely binding on lower courts, and must be applied by taxpayers and SARS in matters where the facts are not so materially different.
The guidelines, practice notes and interpretation notes drafted by SARS are not binding and can be challenged in South Africa’s courts. However, they do play a persuasive role in the interpretation of tax statutes by the country’s courts.
A taxpayer can apply for a binding tax ruling if they need to understand the view of SARS on an interpretation of a provision of the act to a proposed transaction. The ruling ceases to be effective upon the occurrence of any of the following circumstances: (a) If the provision of the act that was the subject of the advance tax ruling is repealed or amended, the advance tax ruling will cease to be effective from the date such repeal or amendment is effective; and (b) If a court overturns or modifies an interpretation of the act on which the advance tax ruling is based, the advance tax ruling will cease to be effective from the date of judgment unless: (i) The decision is under appeal; (ii) The decision is fact-specific and the general interpretation upon which the advance tax ruling was based was unaffected; or (iii) The reference to the interpretation, upon which the advance tax ruling was based, was obiter dicta. The minister of finance has recently announced a number of changes, which include reforms made to taxes on dividends, transfer pricing provisions and the withholding tax on interest.
DIVIDEND TAX: The National Treasury has recently replaced the secondary tax on companies (STC) with the dividend tax. The STC was a tax borne by the company, while the shareholders bear the dividend tax. According to the existing law, the dividend tax is at 10%. However, it was proposed by the minister of finance in a budget speech on February 22, 2012 that this rate will be changed to 15%, and will take effect from April 1, 2012. This means that the amendments to the current law, which are likely to be signed around December 2012 by the president, will have to be backdated to April 1, 2012.
The dividend tax has a number of administration requirements to be complied with. For example, a foreign investor, in their capacity as the beneficiary owner, should submit a declaration to the company acknowledging a dividend, stating that the dividend they receive is subject to a reduced rate as a result of the application of an agreement for the avoidance of double taxation. The investor should also provide that company with a written undertaking to inform it in writing should they cease to be the beneficial owner.
During the STC regime, a company was not subject to the STC on declared dividends provided it received dividends from its investment and that such dividends received had already been subject to the STC. The dividends received and utilised to shield the STC’s liability are referred to as STC credits. The new dividend tax regime states that companies which have STC credits will be able to shield dividend tax by these credits. However, there is a sunset clause for the STC credits: they will expire after five years. The minister of finance in his February budget speech also proposed that this five-year period will change to three years. This proposal was followed by a technical amendment to the existing legislation.
The dividend tax legislation provides that every person that controls or is regularly involved in the management of the overall financial affairs of an unlisted company, as defined in section 41, that is liable to withhold tax and that is a shareholder or director of that company is personally liable for the dividend tax, additional tax, penalty or interest for which that company or intermediary is liable. This is one of the provisions in the act where the corporate veil is lifted and directors are held personally liable for the liabilities of the company.
TRANSFER PRICING: The transfer pricing legislation was revised in 2011. In the past, SARS had powers to revise the tax calculation to include additional income or reduce certain expenses where it believed that the transactions between a South African resident and their connected persons were not conducted on an arm’s length basis. To the extent that it made such adjustments, it would generally treat any disallowed expense as a dividend. Therefore, the STC would be payable on the disallowed expenses.
In respect of the 2011 amendment, every taxpayer has an obligation to adjust their tax computation for income or expenses that are not arm’s length. The adjustment should be made only if the taxpayer has derived a tax benefit. In other words, if there is no tax benefit, there is no need to adjust the calculation, even if the transaction is not arm’s length. The term “tax benefit” is defined in section 1 of the Income Tax Act No. 58 of 1962 (the Act). Tax benefit includes any avoidance, postponement or reduction of any liability for tax.
WITHHOLDING TAX ON INTEREST: Taking effect from January 1, 2013, any foreign person who receives an amount of any interest that is regarded as having been received or accrued from a source within the country in terms of section 9(2b) will be subject to the withholding tax on interest at 15%. Foreign funders are likely to take this into account when they invest in South Africa. However, the interest rate could be lower than 15% for the majority of funders, as South Africa has double taxation agreements with most jurisdictions. In addition to this, foreign funders are likely to get tax credits in their own countries on any tax that they may have been required to pay in South Africa. There are certain debt instruments that are exempt from the withholding tax on interest. These instruments are listed in section 37K of the Act.