2023 DRAFT TAX AMENDMENT BILLS PUBLISHED

2023 Draft Tax Amendment Bills published

On 31 July 2023, National Treasury published the 2023 Draft Tax Amendment Bills for public comment.

For a summary of some of the proposed amendments that will impact corporate tax compliance READ MORE

REVIEWING THE PRINCIPLES OF THE DEDUCTIBILITY OF INTEREST

In 2022, SARS issued a notice of its intention to withdraw Practice Note 31 of 1994, being of the view that its provisions were being abused by taxpayers.

Practice Note 31 of 1994 provides a concession to taxpayers that accrue interest income by enabling them to obtain a deduction in respect of interest expenditure incurred in production of interest income without the taxpayer having carried on a trade. The deduction is limited to taxable interest.

National Treasury proposed that Practice Note 31 of 1994 should be withdrawn in respect of years of assessment commencing on / after 1 January 2024, and that it should be replaced by new legislative guidance to be contained in section 11G of the Income Tax Act. Essentially, section 11G will allow a company to claim a deduction for expenditure incurred in the production of interest income accruing from another company that forms part of the same group of companies, provided certain requirements are met.

CLARIFICATION OF THIRD-PARTY BACKED SHARES ANTI-AVOIDANCE PROVISIONS

The anti-avoidance provisions as contemplated in section 8EA of the Income Tax Act deem dividend yields of third-party backed shares to be treated as income, unless the funds derived from the issue of the third-party backed shares are used for a qualifying purpose.

National Treasury now proposes to introduce ownership requirements to address the tax consequences of a dividend declared by the issuer of a preference share, which was issued for a qualifying purpose, after the shares in an operating company financed by the preference share funding were disposed of by the shareholder in the operating company.

The proposed amendment will apply in respect of any dividend or foreign dividends received or accrued during a year of assessment ending on / after 31 July 2023.

THE DEFINITION OF CONTRIBUTED TAX CAPITAL

Contributed tax capital (“CTC”) is a calculated amount for tax purposes that is the amount of tax capital of a class of shares of a company, ensuring that no tax is paid on the return of that amount to shareholders.

To curb continued abuse of the CTC regime, National Treasury has proposed that the market value of shares in a foreign company for CTC purposes be limited when that company becomes a South African tax resident.

Legislative amendments will also be introduced to provide guidance on the translation of elements of CTC that are denominated in a foreign currency.

The proposed amendments will come into operation on 1 January 2024.

CLARIFICATION OF DEBT FORGIVENESS RULES

The debt forgiveness rules as contemplated in section 19 of the Income Tax Act and paragraph 12A of the Eighth Schedule to the Income Tax Act, deals with the tax implications of a concession or compromise resulting in a debt benefit.

The debt relief rules contain several exclusions. One of the exclusions is the dormant company exclusion, which applies when a debt is owed between companies that form part of the same group of companies. A debtor company is regarded as being dormant if it has not conducted trading activities in the year of assessment in which the debt benefit arose nor in the year of assessment preceding that year.

However, the dormant company exclusion does not apply if the debt was used to fund an asset that was subsequently disposed of in terms of a corporate reorganisation transaction or a debt that was incurred to refinance another debt owed between companies that form part of the same group of companies.

National Treasury intends to introduce legislative amendments to clarify the application of the dormant company exclusion to intra-group debt funding and corporate reorganisation transactions. The proposed amendment will apply in respect of years of assessment commencing on / after 1 January 2024.

REFINEMENTS TO THE ROYALTY RATE FOR OIL AND GAS COMPANIES

The applicable refined royalty rate has been based on a formula contained in section 4(1) of the Mineral and Petroleum Resources Royalty Act, No. 28 of 2008 (“the MPRRA”). The existing variable royalty rate adjusts based on the oil and gas company’s profitability, which is measured by dividing earnings before interest and taxes (EBIT) by gross sales. The rate applied to the royalty base (gross sales) ranges from a minimum of 0.5 per cent to a maximum of 5 per cent in the case of oil and gas companies.

National Treasury has proposed that, in respect of years of assessment commencing on / after 1 January 2024, the minimum royalty rate for oil and gas will be increased from 0.5 per cent to 2 per cent, with the maximum remaining at 5 per cent.

REFINEMENTS TO THE RESEARCH AND DEVELOPMENT TAX INCENTIVE

A number of amendments have been proposed with respect to the research and development incentive contained in section 11D of the Income Tax Act, including:

Adjustments to the definition of research and development;
Deletion of the exclusion for internal business processes;
Introduction of a six-month grace period for receipt of pre-approval applications; and
Extension of the sunset date in respect of applications received and expenditure incurred on / after 1 January 2024 up to and including 31 December 2033.

ENHANCEMENT OF RENEWABLE ENERGY PROVISIONS

Section 12B of the Income Tax Act provides for an accelerated depreciation allowance for qualifying assets that are used in the generation of renewable energy.

National Treasury has proposed a number of legislative amendments in order to increase the attractiveness of the current renewable energy tax incentive. These amendments include:

The removal of electricity generation limits;
Specific inclusion of supporting structures; and
Enhancement of the tax incentive rate to an upfront deduction of 125% of the cost incurred for qualifying new and unused assets brought into use for the first time on / after 1 March 2023 and before 1 March 2025.

CLARIFICATION OF THE FOREIGN BUSINESS ESTABLISHMENT EXEMPTION FOR CFCs

South African residents have to account for an amount equal to the net income of a controlled foreign company (“CFC”) as determined in line with the provisions of section 9D of the Income Tax Act. However, where an amount is attributable to a foreign business establishment (“FBE”), such amount is excluded from the net income amount of that CFC.

It has come to National Treasury’s attention that some taxpayers are retaining certain management functions but outsourcing other important functions for which the CFC is also being compensated by its clients. Consequently, National Treasury has proposed to introduce legislative provisions to confirm that the FBE exemption will only apply where all important functions for which a CFC is compensated are performed either by the CFC or by another CFC in the same group of companies that is located and subject to tax in the same country as the CFC’s fixed place of business.

The proposed amendment will come into operation on 1 January 2024 and apply in respect of foreign tax years of CFCs ending on or after that date.

if you require advice on the impact of the proposed amendments on your corporate tax compliance, corporate tax planning and mergers & acquisition tax, and please follow us on social media to keep track of tax-related developments.