February 25, 2021
South Africa's Minister of Finance delivers 2021 Budget Review
On 24 February 2021, South Africa's Minister of Finance, Tito Mboweni, delivered his 2021 Budget Review.
In order to support economic recovery, the South African Government did not introduce measures to increase tax revenue. Tax increases initially proposed in the June 2020 special adjustments budget (which included a proposal to increases tax revenue by R5 billion in 2021/2022) have been withdrawn.
This Alert summarizes the key highlights from the Minister's Budget Review.
The corporate income tax rate will be lowered to 27% for companies with years of assessment commencing on or after 1 April 2022. This will be done alongside a broadening of the corporate income tax base by:
- Strengthening existing interest limitation rules
- Restricting the offset of assessed tax losses carried forward
- Limiting or allowing certain tax incentives to lapse
Tax incentives specifically mentioned in the budget include:
- The research and development incentive due to expire on 1 October 2022. A discussion paper inviting public comment on the future of the incentive will be issued.
- The venture capital company incentive (section 12J) will not be extended beyond 30 June 2021.
- A sunset date of 28 February 2022 has been introduced for tax incentives dealing with airport and port assets, rolling stock and loans for residential units.
- The urban development zones and learnership tax incentives will be extended for two years while their reviews are completed.
- The timeframes of compliance requirements for industrial policy projects (section 12I) will be extended due to business-related disruptions caused by the COVID-19 pandemic.
Other notable corporate tax proposals include:
- Amending the definition of contributed tax capital (CTC) to clarify the principle that shareholders within the same class of shares should share equally in the allocation of CTC as a result of a distribution.
- Amending the hybrid debt anti-avoidance rules to deem the receipt of interest on a hybrid debt instruments to be a dividend in specie.
- Clarifying that where interest is waived, cancelled, extinguished or converted into shares it is subject to the normal recoupment rules and thus excluded from the application of the debt relief rules.
- Refining the corporate reorganization rules including:
- Amending provisions to allow a taxpayer to treat a capital gain (triggered in terms of the anti-value shifting rules) as additional base cost when applying the corporate reorganization rules
- Clarifying the rules that trigger additional consideration in an asset-for-share transaction when a debt is assumed by a company
- Clarifying the early disposal anti-avoidance rules in intra-group transactions
- Clarifying the interaction between early disposal anti-avoidance rules and de-grouping anti-avoidance rules in intra-group transactions
- Extending the reversal of the nil base cost rules to apply on the sixth anniversary of an intra-group transaction
- Clarifying the interaction between the early disposal anti-avoidance rules and the nil base cost anti-avoidance rules
- Refining the provisions relating to unbundling transactions
- Clarifying rehypothecation of collateral within collateral arrangement provisions
- Introducing amendments to address the tax treatment of the transfer of liabilities as part of a short-term insurance business.
- Introducing a new levy that would apply to the Financial Service Industry given the implementation of the Twin Peaks Regulatory System.
- Refining a deduction formula for taxable long-term insurer policyholder funds.
- Confirming the tax implications related to the deposit insurance scheme once it is established to protect depositors from bank failures.
- Clarifying the controlled foreign company (CFC) diversionary rules.
- Clarifying the interaction between provisions dealing with a CFC ceasing to be a CFC and the participation exemption.
- Introducing an exemption declaration for withholding taxes on royalties.
Personal income tax brackets and rebates will be increased by the identified inflation rates, effective from 1 March 2021.
In this coming fiscal year, the South African Revenue Service (SARS) will establish a dedicated unit to improve compliance of individuals with wealth and complex financial arrangements. This first group of taxpayers have been identified and will receive communication during April 2021.
SARS will also focus on consolidating wealth data for taxpayers through third-party information. This will inter alia assist in assessing the feasibility of a wealth tax.
Other notable personal income tax proposals include:
- Reviewing the nature of long-service awards for fringe benefit purposes.
- Introducing amendments to the definition of an "employee" in the Employment Tax Incentive Act to curb abuse in the employment tax incentive.
- Clarifying the timing of disposal rules in respect of an asset acquired from a deceased estate.
- Introducing amendments to address schemes where a service provider (e.g., employee or independent contractor) cedes the right to receive/use an asset to a family trust for no consideration.
- Strengthening anti-avoidance rules in respect of the transfer of low-interest/interest-free loans between trusts.
- Introducing a proposal to allow flexibility to acquire various annuities with a retirement interest on retirement.
- Introducing a proposal to tax individuals on deemed withdrawals of a retirement interest when an individual ceases to be a tax resident.
- Introducing proposals to allow tax-free transfers into more or similarly restrictive funds by members who have already opted to retire.
- Introducing a proposal to treat self-insured risk benefits as a defined contribution component for purposes calculating the value of the taxable benefit in respect of employer contributions.
Value-Added Tax (VAT)
The VAT rate remains unchanged at 15%.
Other notable VAT proposals include amendments:
- To make provision for micro-insurers that conduct a micro-insurance business.
- To determine an equitable value and rate of claw-back for developers who temporarily let residential immovable property.
Other indirect taxes
Key indirect tax proposals include:
- Increasing the carbon tax rate by 5.2% to R134 per ton of carbon dioxide equivalent for the 2021 calendar year.
- Increasing fuel levies by 27 cents per liter (i.e., 15 cents for general fuel levy, 11 cents for Road Accident Fund levy and 1 cent or carbon fuel levy).
- Introducing an above-inflation increase of 8% on sin taxes (i.e., wine from R4.39/li to R4.74/li).
- Decreasing the plastic bag levy of 12.5 cents per bag for bio-base plastic bags.
An additional spending allocation of R3 billion will be provided to SARS to "modernise its technology infrastructure and systems, expand and improve the use of data analytics and artificial intelligence capabilities, and participate meaningfully in global tax compliance initiatives."
SARS is also expanding its specialized audit and investigative skills in the tax and customs areas to renew its focus on the abuse of transfer pricing, tax base erosion and tax crime.
Key tax administration proposals include:
- Extending third party reporting to include receipts issued for tax-deductible donations.
- Aligning the period allowed to claim a refund of dividends tax for cash and in-kind dividends.
- Introducing an amendment to enable SARS to raise a penalty on an alternative basis on the non-submission of six-monthly employees' tax returns.
- Proposing removal of the requirement to submit a first provisional tax payment and return where the duration of a provisional taxpayer's year of assessment does not exceed six months.
- Improving the advance tax ruling process for binding rulings.
- Establishing a review of the voluntary disclosure program.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Advisory Services (Pty) Ltd.