Taxation changes to keep the multinationals happy!

Almost a month has passed since finance minister Trevor Manuel delivered his 2008/2009 budget speech. Part of the minister ongoing challenge is to bring South Africa’s corporate taxation structures on par with those offered internationally. The idea is no

The move to 28% corporate tax

The big news from the latest budget was the decision to drop the corporate tax rate from 29% to 28%. Analysts had expected Manuel to make this change in the previous year – but are unanimous in welcoming the move now. D’Haese also commended Manuel’s recent budget announcement. “It brings the SA corporate rate (now at 28%) not far off average rates in the EU which range between 25% and 27%,” he said.

Other welcome relief came from the abolishment of the Secondary Tax on Companies (STC). Manuel’s announced on the death of STC during the previous budget in 2007/2008. The decision was taken to move South Africa’s corporate tax rules more in line with international norms. At the time, Manuel said a Withholding Tax on Dividends would be applied to replace STC. This effectively moves the tax liability from the company to the shareholder.

The changeover from STC to Withholding Tax has not yet been completed. Government still has to negotiate dual taxation agreements with a number of countries before the move to the new system can be completed.

Good news for life industry and smaller companies

Manuel also made some changes to the offshore investment limit for investment-linked long-term insurers. This limit was upped from 15% to 30%. The Life Offices’ Association (LOA) welcomed this change. LOA chief executive Gerhard Joubert said: “Not only does the raising of the offshore limits for long-term insurers level the playing field between collective investment schemes and investment-linked policies, but it also benefits policyholders because it provides them with greater scope to invest offshore, which is important in any well diversified portfolio.” A second win for the life assurance industry was the increase (from 15% to 20%) of the foreign exchange limit for underwritten business of long-term insurers.

Small companies received a raft of good news. Manuel announced a simplified tax package for small business with a turnover of less than R1m. These are in addition to the existing accommodations for small businesses with turnovers of less than R14m. FAnews Online hopes that the minister will relax the stringent conditions that have to be met to qualify for ‘small business’ status in future budgets.

The move to lower the compulsory registration for VAT has also been welcomed. Companies now only have to register for the tax when their turnover is expected to hit R1m in a particular year. This decision is long overdue and will remove the administrative burden from a number of smaller businesses.

More work to be done

Despite the improvements there are a number of other changes that Manuel could consider to improve South Africa’s global appeal. An important requirement of international companies is consistency of the interpretation of tax legislation. D’Haese says “There should be a Rulings Commission that is part of the tax administration and will issue independent binding rulings. This provides certainty for domestic and more importantly foreign investors.” This commission can issue rulings to potential investors in advance of them entering a country. The investor can then make the investment in confidence, knowing that the determination is binding on the local tax authorities.

D’Haese suggests some other breaks which would make the South African tax environment even more attractive to foreign companies. The first is the exemption of taxation on incoming capital gains. This means companies operating in South Africa could repatriate gains of a capital nature made offshore without incurring additional tax liabilities. He believes group taxation relief would also be welcome. Groups of companies could then offset losses at one company with profits at others. Companies could offset their profits at one company against losses at another. D’Haese notes: “Belgium, as in South Africa, does not offer this type of ‘set-off’ relief,”

Editor’s thoughts:
It seems South Africa’s corporate tax environment is moving in the right direction. Do you think our government should create more incentives for foreign firms investing in South Africa – or should he focus on improving conditions for local businesses? Send your comments to gareth@fanews.co.za, or respond below.