The tabling of the TLAB and TALAB in Parliament follow on from the publication of the 2019 Draft Taxation Laws Amendment Bill (Draft TLAB) and the 2019 Draft Tax Administration Laws Amendment Bill (Draft TALAB), which were published on 21 July 2019 and the public consultation process, during which the public was given an opportunity to make submissions on the Draft TLAB and Draft TALAB. We reported on the publication of the Draft TLAB and Draft TALAB in our Tax & Exchange Control Alert of 25 July 2019. In the latter alert and in our Tax & Exchange Control Alerts of 1 August 2019, 22 August 2019, 13 September 2019 and 19 September 2019, we discussed some of the proposed amendments in the Draft TLAB and Draft TALAB, including those pertaining to the controlled foreign companies (CFC) provisions in the Income Tax Act No 58 of 1962 (IT Act).
Pursuant to the public consultation process, National Treasury (NT) prepared a response document on the Draft TLAB, Draft TALAB and the 2019 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which was published on 18 September 2019 and sets out its responses to the key issues raised during the public consultation process (Response Document). In this week’s Alert, we briefly discuss NT’s response to some of the submissions made by the public regarding the proposed amendments to the CFC provisions and to the provisions regarding public benefit organisations (PBOs) in s30 of the Act.
As discussed in our Tax & Exchange Control Alert of 25 July 2019, NT proposed reducing the comparable tax exemption threshold in s9D of the Act from 75% to 67.5% as the current threshold of 75% is no longer comparable and therefore provides little or no assistance to cater for South African CFCs in the current world order.
According to the Response Document, one of the submissions NT received argued that It has become globally acceptable that a corporate tax rate of 15% and higher is not considered to be “low”. Using 15% as a reasonable benchmark, it is the taxpayer’s view that an appropriate comparable tax exemption would be 53.5%.
NT did not accept this submission and in the Response Document it is explained that currently, South Africa’s major trading partners in which the majority of CFCs are located are covered by the proposed comparable tax exemption of 67.5%. The Response Document further states that the comparable tax exemption will be assessed each financial year in order to determine its competitiveness and comparability, and if necessary legislative changes will be proposed based on such assessment.
Public benefit organisations
As stated in the Response Document, the Act currently affords SARS the discretion to retrospectively approve an organisation as a PBO in terms of s30(3B) of the Act. Once approved as a PBO, the receipts and accruals of such entity are exempt from income tax provided that certain conditions in s10 of the Act are met. In the Draft TLAB, it was proposed to delete s30(3B) and to remove obsolete transitional measures initially introduced to provide organisations that were exempt from the Act under the repealed legislation the opportunity to re-apply for exemption under s30 of the Act. Organisations were granted until December 2004 to re-apply for exemption under s30.
The Response Document indicates that one of the submissions NT received indicated that the deletion of s30(3B) will have adverse financial effects for such entities, as they have limited resources available which makes it difficult for them to deal with tax technical issues timeously.
According to the Response Document, NT noted this submission and explained that the granting of retrospective approval to PBOs that have been in existence for several years has the consequence that previously taxed receipts and accruals become exempt. This results in refunds having to be paid by SARS with interest, in some cases dating back to years that have already prescribed. NT indicated that as opposed to deleting s30(3B) of the Act, PBOs seeking retrospective approval as exempt entities shall be granted such approval if they meet certain requirements, and only at the discretion of SARS.
Pursuant to the publication of the Response Document and based on what is stated therein, NT will amend the Draft TLAB and Draft TLAB, following which the Minister will likely table these amended versions of the bills in Parliament on 30 October 2019.