2021 TAXATION LAWS AMENDMENT ACT PROMULGATED
On 19 January 2022, the 2021 Taxation Laws Amendment Act was promulgated. There are some significant amendments that will impact corporate tax compliance.
STRENGTHENING OF RULES DEALING WITH LIMITATION OF CERTAIN INTEREST DEDUCTIONS
Section 23M of the Income Tax Act imposes a limitation on the amount of interest expenditure that can be claimed as an income deduction, where the underlying debt is owed to a person that is not subject to tax in South Africa.
The following amendments, effective for years of assessment commencing on / after 1 April 2022, were introduced to address certain shortcomings identified:
- The definition of interest was expanded to also include payments made under interest rate swap agreements, the finance cost element of finance leases and foreign exchange differences;
- The formula to determine the deductible interest amount was amended by replacing the current calculated percentage of adjusted taxable income by a fixed percentage of 30%;
- The circumvention of the interest limitation by using back-to-back loans that are essentially funded by a person not subject to tax in South Africa and that is in a controlling relationship with the beneficiary, was addressed by including indirect funding arrangements within the ambit of section 23M(2);
- The adjusted taxable income definition was amended to specifically take into account qualifying distributions made by REITs; and
- The provisions include amendments to account for the impact of tax treaties to ensure a more equitable treatment of all resident debtors, irrespective of the country through which payments are routed.
RESTRICTING SET-OFF OF BALANCE OF ASSESSED LOSSES
In line with the policy intent to broaden the corporate income tax base, the balance of assessed losses that can be carried forward by corporate taxpayers, are limited to the higher of R1 million and 80% of taxable income. The amendment will apply in respect of years of assessment commencing on / after 1 April 2022.
CLARIFICATION OF DEFINITION OF CONTRIBUTED TAX CAPITAL
It has come to the Legislator’s attention that some corporate taxpayers allocate contributed tax capital (“CTC”) based on an alleged share premium contributed by a particular shareholder, instead of allocating the CTC to all shareholders that hold shares of the same class.
To curb this abuse, the definition of CTC was amended to clarify that CTC should be allocated equally to all shareholders that hold a specific class of shares, in proportion to their respective shareholding percentages. The amendments will come into effect on 1 January 2023.
LIMITING POTENTIAL DOUBLE TAXATION UNDER THE HYBRID DEBT ANTI-AVOIDANCE RULES
The Income Tax Act contains provisions in section 8F and section 8FA to address the tax treatment of hybrid debt instruments. The general objective of these provisions is to limit the interest deduction that can be claimed where debt instruments or the associated returns display features akin to that of an equity instrument or the returns thereof.
The deeming provisions deem any returns from tainted instruments or tainted returns to be dividends in specie. This could result in the imposition of dividends tax where no exemption applies, while the payor cannot claim an income tax deduction for the interest paid and the recipient could be taxed on the amount received.
The Legislator acknowledged that the potential effect of these deeming provisions does not accurately effect the policy intent. Therefore, amendments have been made to clarify that the deeming provision should also include the recipient / holder of the affected instrument. The amendment will apply in respect of amounts incurred / accrued on / after 19 January 2022.
DEFINITION OF INTEREST UNDER DEBT RELIEF RULES
For years of assessment commencing on / after 1 January 2022, the debt relief provisions were amended to clarify that interest as contemplated in section 24J of the Income Tax Act falls within the ambit of the debt relief rules. These amendments have been implemented to address concerns about the meaning of interest in the context of debt to share conversions.
CORPORATE REORGANISATION RULES
A number of amendments have been made with respect to the corporate reorganisation rules, including:
- Clarifying provisions pertaining to the triggering of additional consideration in asset-for-share transactions when a debt is assumed by a company;
- Clarifying the anti-avoidance rules in respect of 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 early disposal anti-avoidance rules and the nil base cost anti-avoidance rules in intra-group transactions; and
- Refining the provisions applicable to unbundling transactions.
EXTENSION OF LEARNERSHIP TAX INCENTIVE
The current sunset date for the learnership tax incentive in section 12H of the Income Tax Act is 1 April 2022. The effectiveness of this tax incentive is currently being reviewed. In the interim, the tax incentive has been extended by another two years to 31 March 2024, to allow for the review to be completed. The proposed amendment will apply in respect of learnership agreements entered into on / after 1 April 2022.
REFINING COMPLIANCE TIMEFRAMES FOR INDUSTRIAL POLICY PROJECTS
Section 12I of the Income Tax Act provides a tax incentive for Industrial Policy Projects to support investment in manufacturing assets that contribute to the improvement of the productivity of the manufacturing sector. Approvals for new applications officially ceased on 31 March 2020.
However, the sunset date did not account for the adverse impact of the COVID-19 national lockdown on the manufacturing sector and beneficiaries’ ability to comply with the requirements of section 12I.
To account for the challenges that resulted from the COVID-19 pandemic, the Legislator has introduced legislative amendments to extend the compliance time period to account for the restrictions on economic activity that resulted in an inability to comply with the requirements of section 12I. The amendments are deemed to have come into effect on 1 January 2020.
CLARIFICATION OF RULES DEALING WITH WITHHOLDING TAX EXEMPTION DECLARATION
The Income Tax Act exempts a person from withholding tax on interest, where the foreign recipient has submitted a declaration that the amount is exempt from withholding tax as a result of the application of a tax treaty. The Income tax Act does not contain similar provisions in respect of dividends and royalties. For royalties and dividends paid on / after 1 January 2022, legislative amendments have been effected to allow for a similar declaration to be made in respect of royalties and dividends.
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