In the budget speech of February 2019, Minister Mboweni presented that there will be a number of proposed changes in the Tax act which are sure to have a significant effect on businesses.Interestingly, there were no changes in the corporate tax rate (remaining at 28%), capital gains tax, or Vat (valued added tax).Proposed changes will aim to eliminate loopholes in the legislation that some taxpayers have taken advantage of.
Some of these include:
- Share buybacks:This is where a target company distributes a significant number of shares to its current company shareholder and then also distributes shares to a third party, resulting in dilution of the value of the shares being held in the current company. This enables the shares to be bought back at a later stage at a lower value. The new legislation will aim to address how long shares can be held until sold.
- Controlled foreign companies:The perceived abuse of the legislation by the taxpayer comes into question when a controlled foreign company is interposed in the supply chain between South African parties and non-South African suppliers and a back to back sale ensues. In order to avoid the complexities involved in back to back sales (which can make the authenticity of the sale questionable) between group companies (i.e. The SASOL OIL case), measures are being implemented to prevent a case like this from reoccurring.
- Debt funded share acquisitions: the legislation will aim to address shareholders claiming special interest deductions for new companies. New companies will therefore be deemed to be non-operable until a specified time and any deductions made will therefore be limited.
- Venture capital companies:There has been some abuse shown on behalf of taxpayers undermining aspects of the venture capital regime in order to benefit from substantial tax benefits. The investigation of which, and said amendments to the legislation thereof, is currently ongoing.
- Base erosion profit shifting:These are strategies employed to avoid the tax rates of higher tax jurisdictions by shifting profits to lower tax jurisdictions. This has led to more intense scrutiny of cross border transactions.
- Transfer pricing: These changes are still in the process of being made in order to curb any potential abuse by taxpayers. Measures and amendments are being put into place regarding setting the price for goods and services sold between legal entities within an enterprise.
These amendments to the budget will ensure that a systematic inventory is followed which will hopefully eliminate any dubious behaviour on the part of certain taxpayers.They aim to make way for fairer and effective tax system for all businesses involved, as well as the country as a whole.
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