PwC International Tax Expert praises STC abolition

PwC International Tax Expert praises STC abolition - but more is needed for SA to compete effectively in the global tax environment
 
Tax experts have unanimously applauded the abolition of Secondary Tax on Companies (STC) and its replacement by a withholding tax on dividends. Serge de Reus - Director, Corporate International Tax at PricewaterhouseCoopers Johannesburg office - says that very few countries have STC and it confuses foreign investors. "It was abolished in the UK some time ago and exists today only in India and the Baltic state of Estonia. The abolition is a logical step in the advancement of SA's tax legislation and will promote international investment interest in the country."

On the disappointing side in last months budget, de Reus highlights a noticeable absence of tax incentives for both foreign multinationals setting up regional head offices in South Africa and for South African based multinationals that have to compete internationally with other multinationals resident in countries with a more investor friendly tax climate. "Global companies who want to penetrate the rest of Africa see an office in SA as the initial point of entry. One should look to Europe to learn how a region can attract direct foreign investors with tax benefits. EU countries compete against each other in offering tax incentives to incoming foreign corporates. Belgium was very tax friendly to foreigners and offered them a different tax regime in order to entice them there. Ireland is also a famous example. In the 90s, the Irish government reduced the corporate income tax rate significantly. This attracted countless foreign groups. If we adopt a similar practice in SA, any opportunity cost to SARS would be more than recovered through economic stimulation, VAT from corporate and consumer spending, income tax on employees, expenditure on offices and housing etc. We need concessions that make us more internationally competitive." De Reus says that "a tax deduction for interest expenses relating to the acquisition of shares will be a true incentive. Both South African based groups and foreign groups will benefit from this. It will enable South African based groups to compete globally with competitors resident in the many countries that allow taxpayers to deduct interest expenses in relation to the acquisition of shares. Foreign groups might decide to base their regional holding company, and potentially their regional head office, in South Africa if South Africa allows them to claim a tax deduction for funding costs in relation to (foreign) shareholdings.
 
A rather revolutionary tax change that de Reus would like to see is the introduction of the "fiscal unity" concept. A group of companies is taxed as one combined unit, with the profits and losses of several entities being set off against each other. From a tax perspective, the group is seen as one integral unit.

"A move to the fiscal unity concept would be favourable for local and international investors in SA. When an investor acquires a local target company, a local holding company structure is often formed to house the debt needed to fund the purchase price. This holding company structure would incur funding losses from the interest expense but the target company reports operating profits. Ideally the loss and profit in the two separate entities should be netted off, referred to as a debt push down structure, as is often allowed in other tax jurisdictions."

De Reus has more on his wish list for local tax legislators and would like the abolition of the distinction between capital and revenue. "It would become so much easier and transparent if all profits would be taxed at the same flat rate as done in other countries. Different rates allow for arbitrage opportunities as the playing fields are not equal. We should have one standard rate for all corporate profits of any kind, potentially with safeguards such as basket classifications to avoid profits and losses from different types of operations or disposals being set off against each other."

De Reus also highlights that SA tax authorities may need to re-consider the international concept of "effective management" which determines where a company is resident and in which jurisdiction it should be taxed. "The international trend, supported by case law in various territories, is to classify a company's residence according to where the board of directors meets and strategic decisions are made. SARS has a different approach. SARS determines a companys place of residence by looking at the place where the company is managed on a regular or day-to-day basis. They ignore the place where overriding control is exercised or where the board of directors meets and instead focus on where the policy and strategy decisions of the board are implemented. SA tax authorities should ideally move across to the international approach as their definition can, for example, be very confusing in cases where a company has operations through branches in various countries."

De Reus says the ultimate objectives of an international tax expert are twofold. Firstly, he considers it the duty of the advisor to assist and actively guide clients in being compliant with the ever changing legislation which gets more and more complex. Secondly, he considers it a challenge to make the most of legitimate opportunities for his global clients using local legislation as well as mismatches between legislation across jurisdictions.

De Reus is currently re-establishing a sizeable international tax practice at the PwC SA office using both local staff and international secondees. De Reus is from the PwC Rotterdam (Netherlands) office and has advised South African multinationals on all aspects of international tax.