Tax changes needed before SA will appeal to multinationals

South Africa is well-located to be a hub for foreign companies setting up operations and head offices here and moving into Africa. But it needs to relook at certain aspects of its tax regime in order to entice the multinationals.

Wilfried D’Haese, PricewaterhouseCoopers tax partner in Belgium, said, on a recent visit to SA, that the company rate cut in the budget was a positive sign. “It brings the SA corporate rate, now at 28%, not far off average rates in the EU which are around 25-27%.”

Another factor that multinationals look at is the stability of the tax regime. “They don’t want it being regularly overhauled and need to know that tax incentives will be available for several years.” D’Haese says the SA system in this regard is acceptable.

Foreign companies also want well-understood and consistently interpreted tax legislation. “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. SA has recently introduced such a system which is a step in the right direction. Ideally, the Rulings Commission should look at rulings submitted from a business perspective in order to be perceived as business orientated.’

D’Haese says that the Netherlands has such a system and Belgium introduced this three years ago. “Rulings are issued in advance of the investment being made and are binding on the tax administration.”

Another shortcoming of SA is exchange control regulations and restrictions on currency transfers. “The OECD operates without limitations. The withholding taxes on outgoing repatriations should be minimal. A key feature that makes a destination appealing is a low –preferably no- withholding tax on dividends. The taxation costs associated with repatriation need to be as minimal as possible.”

Serge de Reus, PwC tax partner from the Netherlands, presently based in Johannesburg, says the recent budget could have done more on exchange controls relaxation. “More flexibility should be given on inward bound transactions, particularly with regard to administrative procedures. This will make South Africa an easier understandable and as a result more attractive jurisdiction for inbound investments by foreigners”

One impediment in SA is that for a group structure, financing costs are not tax-deductible when a company acquires other legal entities. Costs of funding are deductible when the assets are bought, but the legislation is not accommodating towards acquisitions through share purchases.

D’Haese recommends exemptions on incoming capital gains and the introduction of group taxation relief where some legal entities are profit-making and others are posting losses. “Belgium, as in South Africa, does not offer this type of set-off relief.”

He commends the abolition of STC, replaced with a shareholder dividend tax. “This is far more acceptable to the international community.”