how revenue proposals could affect investors
28 November 2007
 
As anticipated, secondary tax on companies has been reduced from 12.5% to 10% from  1 October 2007. However, the tax base in respect of this tax has been broadened and it will be imposed on a broader base of distributions by a company including, for example, unrealised profits and previously exempt capital profits.

Shares which are held for at least three continuous years and are disposed of after that period will now qualify for statutory capital treatment. This applies to both listed and unlisted shares. However, it does not apply in respect of sales of foreign shares. Various other restrictions apply, for example, where shares are held in companies holding mainly real estate.

The legislation makes reference to private equity transactions and, in particular, "carried interest". It points out that "carried interest" represents a form of services which should be taxed at ordinary rates as opposed to capital gains tax rates. However this is not included in the draft legislation.

If payments made for intellectual property are made to a licensor which does not receive such payments as "income" for South African tax purposes, licensees will be denied deductions in respect of such payments. This applies in respect of "affected intellectual property" which includes intellectual property owned by a resident. However, the licensee will be permitted a limited deduction if withholding tax is imposed on the license payments.

South Africa's transfer pricing rules have also been amended to apply more widely in respect of cross-border licensing arrangements.

South Africa's domestic law tax credit provisions are fairly limited and, for example, do not apply where the foreign taxed income qualifies as being "sourced" in South Africa. These provisions will be amended to allow for a tax deduction (as opposed to a credit) in respect of foreign tax suffered on income which does not qualify for the domestic law credit provisions.

There are many other significant changes in the legislation and taxpayers dealing with South Africa should take careful note of all the various provisions in the bill.

Edward Nathan Sonnenbergs,  Peter Dachs

written for:  www.internationaltaxreview.com