IN 2011, government introduced a special incentive in the form of a tax credit for withholding taxes imposed on South African tax residents by foreign countries in respect of services rendered in South Africa to clients who are residents in foreign countries.
This incentive is currently embedded in the Income Tax Act of 1962. Something that may come as a big shock to the tax community is the proposal in the 2015 budget speech to withdraw the relevant section. Stiaan Klue, chief executive of the South African Institute of Tax Professionals explains the rationale behind the incentive as follows:
South African tax residents are subject to the provisions of a double tax agreement, liable for income tax on their worldwide income. With the increased technology available to firms, it became an everyday occurrence for South African residents to render services virtually across the globe without having to leave their South African offices.
Because a double tax agreement would usually assign taxing rights to the country where the services were rendered (i e South Africa), the resident will usually be subject to tax on the resulting income in South Africa. However, various countries were imposing taxes on the income generated from such services which were not in accordance with the relevant double tax agreement.
This placed an additional burden on the South African resident, who was then required to pay income tax on the same receipt in two countries and who then afterwards had to apply to the foreign country for a refund of the tax incorrectly imposed.
This incentive was therefore introduced to compensate taxpayers for the compliance burden associated with these taxes incorrectly imposed by other countries and the South African Revenue Service, and National Treasury must be commended for being so generous. South Africa might just as well have turned a blind eye on the actions of the foreign countries, but it chose not to do so.
The mischief resulting in the withdrawal of the incentive was contained in the section which required the resident to submit to Sars proof of the foreign taxes withheld together with a FTW01 – Return of Foreign Tax Withheld - within 60 days after the taxes have been withheld by the foreign country.
It is a rare occurrence for foreign revenue authorities to provide proof of the withholding taxes to the residents within the 60 days, which resulted in the residents accordingly forfeiting the tax relief. National Treasury was therefore faced with two choices – it could either have increased the 60 days requirement to, let’s say, 120 days - or it could have repealed the incentive in its entirety, explained Klue.
However, it is a pity that the incentive is withdrawn in its entirety if a simple amendment to the section in question could have enhanced effectivenes. There is speculation that the increased pressure on government to generate more revenue could have resulted in this proposal.
"A bit of a bombshell"
Michael Honiball, Director and head of International Tax at Werksmans Attorneys, said:
"It's a short-sighted move and over the longer term will likely reduce tax receipts from South African companies doing business in Africa."
Honiball also said that the other Budget news that was "a bit of a bombshell" was that retirement annuities would no longer be completely exempt from estate duty.
"A few years ago, the Government seriously considered the complete abolition of Estate Duty, and even set up a Commission to consider the consequences. By now partially subjecting Retirement Annuities to Estate Duty, the Government has sent a strong signal that Estate Duty is here to stay." he noted.
This is in contrast to expectations of leniency towards self-sustaining retirements in line with government's plans to make saving easier evidenced by the introduction of Tax Free Savings and Investment Accounts.
Also a surprise was the hike in property transfer tax, now 11% for properties over R2.25m.
"This makes the tax on buying a high-value home in South Africa amongst the highest in the world and is effectively a tax on wealthy people".
Honiball noted the the tax increases today initially appear to be low with only a 1% increase in the top marginal rate but were actually " far wider than anticipated. The Minister has tapped many different tiers of income and sources of revenue ."