Tax experts have welcomed that National Treasury took account of comments by stakeholders on several proposals in the 2023 draft tax bills*. Some of the proposals were described as “impractical and unworkable”.
This was particularly true regarding the proposed requirement that all foreign employers must register as employers in South Africa and withhold employees’ tax (PAYE).
Read: Potential threat to South Africans who earn an income from foreign employers
Kyle Mandy, PwC tax technical director, says this would have meant that a foreign company employing a South African tax resident in a foreign country would have a PAYE obligation in South Africa.
It would also have meant that a foreign company employing a non-resident working in South Africa temporarily, where the company has no connection to South Africa, would have a PAYE obligation in South Africa.
“The amended requirement that the non-resident must conduct business through a permanent establishment in South Africa is far more pragmatic, as it would require that the foreign employer has some nexus to the country,” Mandy says.
Webber Wentzel partner Joon Chong says the proposal now clarifies that non-resident employers, banks, and payroll companies outside South Africa are not required to withhold and pay PAYE to the South African Revenue Service unless they have a permanent establishment in South Africa.
“This is welcomed, as it is generally difficult for revenue authorities to monitor the business operations and commercial decisions of non-resident entities operating outside their respective countries.”
Practice Note 31
The announcement by Sars that it intended to withdraw Practice Note 31 caused grave concern about the impact on legitimate back-to-back lending arrangements.
Read: Beneficial practices for taxpayers and tax practitioners remain … for now
A new section was proposed in the July draft bills to “minimise the impact of the withdrawal”. However, commentators noted that the relief in the proposed section 11G was “extremely limited”, as it only catered for back-to-back lending arrangements within a group of companies.
Trusts and natural persons who are partners in professional firms would not have been able to raise debt funding necessary for their businesses without the unjustified tax leakage that would arise in the absence of a concession similar to that granted by the Practice Note.
Limiting the relief to lending arrangements between groups of companies meant that many arrangements between parties where the lender holds less than 70% of the equity shares in the borrower were excluded. Among these are funding arrangements involving black economic empowerment partners and limited partners of private equity funds where the shareholdings are considerably lower.
Treasury accepted the comments and expanded the concession in section 11G to apply to any person who incurs interest expenditure in the production of interest income without regard to any shareholding threshold of any back-to-back lending arrangement.
Treasury also noted that further consultation on the amended provisions may be required and pushed the effective date of section 11G to 1 January 2025 in respect of the years of assessments commencing on or after that date. In the interim, Practice Note 31 will remain in effect until this newly proposed effective date.
The Coronation case
The Coronation case made headlines when the Supreme Court of Appeal (SCA) upheld an appeal from Sars about the interpretation of the controlled foreign company (CFC) rules governing the taxation of a foreign business establishment (FBE).
In the July draft taxation laws amendment bill, Treasury proposed amendments to the FBE definition that would have far-reaching tax implications for South African companies with offshore operations.
Read: Tax law change may shrink SA multinationals’ global footprint
The Constitutional Court has since agreed to hear Coronation’s appeal against the SCA decision. In the light of this development, Treasury has decided to withdraw the proposed amendment pending the Constitutional Court’s judgment.
Chong says multinationals need to ensure that if they intend to rely on the FBE exemption, they must meet all requirements of the FBE exemption as it currently reads in the Income Tax Act.
The FBE exemption applies when, among other requirements, the CFC has a fixed place of business of sufficient substance, carries on business for at least a year, is suitably staffed, and has the necessary equipment and facilities to carry on the primary operations of the business.
Overly broad wording
It is interesting that despite the victory, Sars and Treasury proposed overly broad wording in the July draft bill. “Primary operations” of the business of the CFC are now “all the important functions of that business for which the CFC is compensated”.
The proposed amendment in the July bill was also retrospective, which meant that CFCs with financial years ending on 29 February 2024, 31 March 2024, or 30 June 2024 would have been required to comply even though the proposal was only a draft, Chong says.
Mandy advised businesses to monitor the outcome of the appeal. “We understand that Sars is challenging taxpayers with similar fact patterns to that of Coronation. It would be prudent for taxpayers to proactively review any risks in this regard,” he says.
If the appeal is successful, there is a good possibility that Treasury may propose some changes once again. However, it is unlikely that any proposed change will be in the same vein as was proposed in the draft bill. “That proposal went too far. It was uncommercial and out of touch with business reality,” Mandy says.
Chong remarks on the fact that Treasury generally changes the relevant tax rules to protect the tax base whenever the courts find in favour of taxpayers.
“In the Coronation judgment, the SCA had already found in favour of Sars, so why change the FBE exemption and make it overly broad? Any uncertainty in tax rules adversely affects the competitiveness of South African multinationals operating outside South Africa,” Chong adds.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
* Note: On 25 October, National Treasury provided its response to the submissions on the 2023 Draft Revenue Laws Amendment Bill, 2023 Draft Revenue Administration and Pension Laws Amendment Bill, 2023 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2023 Draft Taxation Laws Amendment Bill, and 2023 Draft Tax Administration Laws Amendment Bill. Click here to download Treasury’s response document.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
