Even though South Africa’s tax legislation is already amongst the most sophisticated in the world, National Treasury is clearly not yet satisfied – perhaps correctly so – that we have installed all the critical hallmarks of a modern Western economy.
Perhaps two of the more prominent (as yet unfulfilled) objectives are the introduction of group taxation and the abolition of exchange control. Whilst it seems unlikely that these measures will be introduced this Wednesday, the 2008 Budget Speech must be seen in the context of setting the scene for these eventualities.
Group taxation refers to the idea that all the companies in a ‘group’ should be taxed essentially as a single consolidated taxpayer. At present, all companies in South Africa are taxed as separate stand-alone taxpayers, which means that losses in one company cannot be used to offset the taxable profits in another company. Certainly, from a commercial perspective, investors, consumers, executives, and the average lay-person, all see a group of companies as a single entity and do not make much distinction between the separate companies within the group. In most modern tax jurisdictions, this concept is also reflected in the tax law even though the actual mechanism differs from country to country. In some regimes for example, the entire group is ‘consolidated’ to the extent that one single tax return is submitted for the entire group, whereas in other locations each company retains its separate identity but is permitted to ‘surrender’ its losses to other profitable companies in the same group.
That South Africa is moving in the direction of group taxation now seems to be accepted by most. It follows that many of the year-to-year changes must be seen as setting the scene for group taxation. The 2007 amendments, for example, saw the introduction of more restrictive definition of “group of companies” in a number of critical contexts which not only tempers the existing corporate re-organisation rules (as they are sometimes called) but also encourages South African groups to restructure into a ‘tighter’ more tax-neutral formation. The new “group” definition envisages a group comprised entirely of SA-resident fully tax-paying companies that, it must be said, would be ideally suited to tax consolidation. Admittedly, the first attempt at redefining the new ‘proudly South African’ group ended up excluding fully tax-resident companies that might simply have a foreign incorporation.
Similarly, the abolition of exchange controls is also commonly seen as a matter of ‘when’ rather than ‘if’. So again, many of Wednesday’s announcements must be seen as preparing the way for an economy without exchange controls. A great bug-bear from the 2007 Budget is the (not yet applicable) new section 23I of the Income tax Act which seeks to regulate the tax deductibility of payments of royalties from South Africa. Interestingly, the regulation of royalty outflows has traditionally been the job of the SA Reserve Bank.
However, as with the new section 23I –set to be come law in 2009– the devil will be in the detail. Taxpayers would generally be only too happy to say goodbye to exchange control and to welcome group taxation, but National Treasury must focus on plugging the leaks that might be caused by these changes. The unfortunate reality is that Mr Manuel and his team have a reputation for erring on the side of caution to an extreme that often results in unintended outcomes. So we should be expecting a 2008 Budget that continues to advance the ‘big picture’ of a less-regulated system that better reflects the modern reality of doing business in the global village. But many of us will be contemplating the short-term fall-out from the detailed rules designed to shepherd the transition.
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