The Impact of South Africa’s Budget Proposals on International Tax

An article on the budget proposals for the TAG Alliance:

- Kemp Munnik.

23 March 2023

When Minister of Finance, Mr Enoch Godongwa, delivered his annual budget speech on 22 February 2023, he proposed some important changes that will have an impact from an international tax perspective. These include both corporate and employment tax. For international companies currently doing business – or considering doing business – in South Africa, these proposals will require careful scrutiny. Following below is a top-level breakdown of the proposals.

CORPORATE TAX

Contributed Tax Capital (CTC)

The CTC of a company is a notional tax concept that denotes an amount derived from the value of a contribution made to a company. An example would be the value contributed for the issuance of shares. A distribution to a shareholder could either be in the form of a dividend, which is normally subject to dividends withholding tax, or a return of CTC, which is not subject to dividend withholdings tax.

Currently, foreign companies interpose an intermediary company and move the tax residency to South Africa. This results in the market value of the intermediary company equating to the CTC of the company now tax resident in South Africa. Under current legislation, should the intermediary company return CTC to its foreign shareholder, no dividend withholding tax is applicable. National Treasury now proposes to introduce legislation to prevent such schemes.

Interest Limitation Rules – Section 23M

Section 23M of the Income Tax Act deals with the limitation of deductible interest incurred by a taxpayer on loans advanced to a person not subject to tax in South Africa. An example here would be that of a foreign creditor. This section aligns with Government’s Base Erosion Profit Shifting (BEPS) initiatives. At present, Section 23M reduces the interest by the amount of interest withholding tax that was paid on it. It is now proposed that the withholding tax reduction is only applicable where the interest is paid to a non-resident creditor.

Section 23M also provides various exemptions from the interest limitation rules. An example of one such exemption would be where funding has been sourced from a foreign bank. The new proposal is that should funding by the creditor be obtained from a South African bank, the exemption will also apply.

Currently, Section 23M allows for the losses made on foreign exchange instruments to be taken into account, while gains made on foreign exchange instruments by a taxpayer are not. It is now proposed that any such gains will be treated as interest received, and therefore will be taxable.

EMPLOYMENT TAX

Non-Resident Employers

In terms of current tax legislation, if a Non-Resident Employer (NRE) does not have an agent or a permanent establishment in South Africa, they are not required to register for income tax. Neither are they required to register as an Employer for employment tax purposes. Essentially, this means that the NRE does not have to deduct monthly Pay As You Earn (PAYE) from the remuneration paid to the South African individual. The individual is thus responsible for his or her own tax affairs.

In his budget speech, Minister Godongwa proposed that the NRE will now be obliged to register as an Employer with the South African Revenue Services (SARS). Subsequently, there will be a requirement for the NRE to deduct PAYE on a monthly basis and pay the tax over to SARS. The NRE will also be liable for skills development levies and unemployment insurance contributions, where applicable.

No detail has been provided as yet on how the NRE would have to register. As it currently stands, registration as an employer must be done through the e-Filing system.

As well as no detail having been provided as yet, is it also unclear as to when the abovementioned proposal would be implemented. However, we anticipate that more clarity should be forthcoming when the draft legislation is released in the anticipated June and July periods.

Multi-Lateral Instrument (MLI) Update

The MLI came into effect in South Africa from 1 January 2023. South Africa has listed a total of 76 jurisdictions with whom it would like to hold double taxation agreements.

How South Africa will implement the OECD/G20 Inclusive Framework, comprising Pillar One and Pillar Two remains to be seen. All indications are that South Africa might have to regard what is done in other countries before finalising any proposals.

Should any of the above tax proposals potentially affect either your existing clients that do business in South Africa or those clients that may be planning to do business here, it is important for them to understand what the implications might be for their businesses. I encourage you to contact us to obtain further information or gain greater clarity.

Regards,

Kemp Munnik