An evaluation of interest deduction limitations to counter base erosion in South Africa

Background: The Organisation for Economic Cooperation and Development (OECD) made a number of recommendations in relation to interest deduction limitations as part of the Base Erosion and Profit Shifting (BEPS) project. In 2016 the South African National Treasury indicated that the interest deduction limitations contained in the Income Tax Act would be reviewed in the light of these recommendations. Aim: This paper aimed to describe funding structures of companies in South Africa liable for tax and how this relates to other characteristics, including ownership, of the companies. Setting: The research was performed using data from tax returns submitted by companies liable for income tax in South Africa. Methods: This paper reports on descriptive analyses of the research conducted. Results: The results showed that the mean interest-to-earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio for certain foreign-owned entities differed significantly from that of domestically owned entities. Conclusion: The results may present evidence of profit-shifting activities. They also highlight trends in interest-to-EBITDA ratios that may be of relevance for future legislative developments. Further related research is required if interest deduction limitations in the South African tax legislation are to be reviewed in light of the OECD proposals.

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The Taxation of Company Distributions in Respect of Hybrid Instruments in South Africa: Lessons from Australia and Canada

Potchefstroom Electronic Law Journal/Potchefstroomse Elektroniese Regsblad ◽

10.17159/1727-3781/2021/v24i0a6781 ◽

2021 ◽

Vol 24 ◽

pp. 1-36

Author(s):

Liezel G Tredoux ◽

Kathleen Van der Linde

Keyword(s):

South Africa ◽

South African ◽

Tax Avoidance ◽

The South ◽

Profit Shifting ◽

Tax Base ◽

Tax Legislation ◽

Unlimited Time ◽

Hybrid Instruments ◽

Returns On Investment

Tax legislation traditionally distinguishes between returns on investment paid on equity and debt instruments. In the main, returns on debt instruments (interest payments) are deductible for the paying company, while distributions on equity instruments (dividends) are not. This difference in taxation can be exploited using hybrid instruments and often leads to a debt bias in investment patterns. South Africa, Australia and Canada have specific rules designed to prevent the circumvention of tax liability when company distributions are made in respect of hybrid instruments. In principle, Australia and Canada apply a more robust approach to prevent tax avoidance and also tend to include a wider range of transactions, as well as an unlimited time period in their regulation of the taxation of distributions on hybrid instruments. In addition to the anti-avoidance function, a strong incentive is created for taxpayers in Australia and Canada to invest in equity instruments as opposed to debt. This article suggests that South Africa should align certain principles in its specific rules regulating hybrid instruments with those in Australia and Canada to ensure optimal functionality of the South African tax legislation. The strengthening of domestic tax law will protect the South African tax base against base erosion and profit shifting through the use of hybrid instruments.

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Benhaus - a landmark decision, one less hoop for contract miners but a clarion call for an overhaul of the South African mining regime

Journal of the Southern African Institute of Mining and Metallurgy ◽

10.17159/2411-9717/1031/2020 ◽

2020 ◽

Vol 120 (8) ◽

Author(s):

K. Thambi

Keyword(s):

South African ◽

Value Chain ◽

Income Tax ◽

Mining Industry ◽

Third Party ◽

Mining Activities ◽

The South ◽

Mining Operations ◽

Tax Legislation ◽

The Right

SYNOPSIS The mining industry has evolved, such that the means of production that were once in the hands of major players or power houses have become equally accessible to smaller entrants, i.e. junior mining companies and contract miners. Contract mining involves contractual relationships between mine owners or mineral right holders and third parties to conduct mining activities on behalf of the right holders. The current mining income tax legislation has been a considerable obstacle to contract miners. Under its terms, they have been viewed as mining on behalf of third-party mineral rights holders. As such, expenditure incurred in relation to contract mining activities was often disallowed by the South African Revenue Service (SARS). However, the recent judgement of the Supreme Court of Appeal, Benhaus Mining (Pty) Ltd v CSARS 2020 (3) SA 325 (SCA) (Benhaus), rightfully or wrongfully, appears to provide clarity regarding the fate of contract miners' involvement in the mining value chain. The taxpayer, a contract miner, was held to be conducting mining operations within the meaning of S15(a) read with si of the Income Tax Act 58 of 1962 (the Income Tax Act). This paper looks at how contract mining has traversed the mining tax landscape, the implications of the Benhaus judgment, and stresses the necessity for clear policy reform to the mining tax regime and equally to legislation framed to give effect to these policies. Keywords: Contract mining, owner mining, tax, DMRE, mining regime reforms.

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An evaluation of the income tax treatment of client loyalty programme transactions by South African suppliers

Journal of Economic and Financial Sciences ◽

10.4102/jef.v8i1.88 ◽

2015 ◽

Vol 8 (1) ◽

pp. 145-164

Author(s):

Sophia Brink

Keyword(s):

South Africa ◽

South African ◽

Income Tax ◽

International Literature ◽

Financial Loss ◽

The South ◽

The Past ◽

Loyalty Programme

The popularity of client loyalty programmes has increased drastically over the past few years, with more than 100 suppliers in South Africa currently making use of them. Despite the fact that client loyalty programmes have been prevalent in South Africa since the 1980s, the South African Revenue Service has issued no specific guidance on the income tax treatment of client loyalty programme transactions. The main objective of the research was to determine whether South African client loyalty programme suppliers treat client loyalty programme transactions correctly for income tax purposes. In order to meet this objective, available local and international literature were analysed to determine the proposed income tax treatment of a client loyalty programme transaction expenditure incurred by supplier for purposes of the client loyalty programme. The proposed correct income tax treatment was compared with a survey circulated to a population of client loyalty programme suppliers in South Africa. The comparison indicated that in practice the Income Tax Act No. 58 of 1962 is treated differently from the proposed treatment. This incorrect tax treatment could result in possible financial loss to the client loyalty programme supplier as taxpayer.

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Capital structure determinants in South Africa: A quantile regression approach

Journal of Economic and Financial Sciences ◽

10.4102/jef.v9i1.42 ◽

2017 ◽

Vol 9 (1) ◽

pp. 275-290 ◽

Cited By ~ 3

Author(s):

Tendai Gwatidzo ◽

Miracle Ntuli ◽

Mthokozisi Mlilo

Keyword(s):

South Africa ◽

Capital Structure ◽

Quantile Regression ◽

South African ◽

Predictor Variables ◽

Regression Approach ◽

The Mean ◽

Using Data ◽

Different Levels

Using data on 239 listed South African firms and covering the period 1996-2010, we apply a quantile regression approach to investigate the effect of capital structure determinants on leverage. The paper’s main contribution is to assess the effect of the predictor variables across the distribution of leverage. That is, does the effect of a capital structure determinant vary at different levels of leverage? With the exception of asset tangibility and age, whose effect increased with leverage, our results suggest that the importance of leverage determinants does not vary with leverage. This is an important result, as it suggests that for the case of South Africa, studies that estimate the correlates of leverage at the mean are still valid and appropriate.

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An analysis of the applicability of the OECD Model Tax Convention to non-OECD member countries: The South African case

Journal of Economic and Financial Sciences ◽

10.4102/jef.v10i1.6 ◽

2017 ◽

Vol 10 (1) ◽

pp. 83-93

Author(s):

Lee-Ann Steenkamp

Keyword(s):

South Africa ◽

South African ◽

Legal Status ◽

Action Plan ◽

Primary Objective ◽

The South ◽

Tax Treaties ◽

Profit Shifting ◽

Treaty Negotiations ◽

Specific Position

Most tax treaties (including South Africa's) are based on the OECD Model Tax Convention on Income and Capital and the related Commentary (the 'OECD Model'). Notwithstanding the uncertainty surrounding its legal status, the courts in many countries use the OECD Model in the interpretation of their tax treaties. The OECD launched an action plan on Base Erosion and Profit Shifting ('BEPS') in 2013, which is aimed at improving international tax cooperation between governments. In South Africa, the importance of combating BEPS is highlighted by the fact that the Davis Tax Committee has appointed a sub-committee specifically to address concerns pertaining to BEPS. South Africa's participation in the BEPS project and its tax treaty negotiations with other countries, especially OECD member states, are of the utmost importance to South Africa's National Treasury. Consequently, it is the primary objective of this article to analyse the applicability of the OECD Model to non-OECD member countries, with particular emphasis on South Africa. It will be argued that, if the treaties of non-member countries are in conformity with the OECD Model and no specific position has been taken, the non-members also accept the provisions of the Model and the Commentary as an interpretative aid.

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A Framework For The Income Tax Deductibility Of Intellectual Property Expenditure Incurred By South African Taxpayers

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v12i3.7680 ◽

2013 ◽

Vol 12 (3) ◽

pp. 373

Author(s):

Rudi Oosthuizen

Keyword(s):

South Africa ◽

Intellectual Property ◽

South African ◽

Income Tax ◽

Case Law ◽

Recent Case ◽

Tax Legislation ◽

Tax Deductions ◽

The Right ◽

The Cost

Taxpayers who use intellectual property (such as patents and trademarks) in their trade in the production of income may obtain the right of such use in a number of different ways. The nature of the transaction granting the taxpayer the use of intellectual property items determines the tax treatment thereof. Taxpayers may be able to claim deductions for the cost of using these items in terms of specific income tax sections or the general deduction formula as outlined by the Income Tax Act 58 of 1962. There are also a number of other sections in the Act which may affect the timing and extent of the deductions allowed. This article investigates the various income tax deductions which may be available to taxpayers in South Africa who make payments in respect of intellectual property. It considers the effect of important recent case law and changes to tax legislation on the timing and extent of these deductions and suggests a framework which can be applied to assist the taxpayer in understanding the structure of such deductions.

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Exploring the South African tax consequences of a residential property lottery

South African Journal of Economic and Management Sciences ◽

10.4102/sajems.v21i1.1951 ◽

2018 ◽

Vol 21 (1) ◽

Author(s):

Silke De Lange ◽

Danielle Van Wyk

Keyword(s):

South Africa ◽

South African ◽

Income Tax ◽

Capital Gains ◽

Residential Property ◽

Research Approach ◽

Exploratory Research ◽

Capital Gains Tax ◽

The South ◽

Residential Properties

Background: Disposing of a residential property by way of a lottery sounds peculiar, but a number of these transactions relating to residential properties in South Africa have recently taken place. As this is not an ordinary way of disposing of and acquiring residential property, it is submitted that it is necessary to explore the tax consequences resulting from such a transaction. Aim: The objective of this article is to explore some of the most pertinent South African tax consequences of such a residential property lottery transaction, from the viewpoint of the owner (‘seller’) who disposes of the residential property and the winner (‘purchaser’) who acquires the residential property in terms of the lottery. Setting: This article examines existing literature in a South African income tax environment to explore the tax consequences resulting from a disposal and acquisition of residential property by way of a lottery. Methods: A non-empirical study, which entails the study of the various South African tax provisions and an application thereof to the facts of the lottery transaction, was conducted. A doctrinal research approach was followed within the realm of exploratory research. Results: Disposing of and acquiring residential property by way of a lottery results in a number of actual tax consequences, as well as a number of uncertainties regarding taxes (referred to as uncertain considerations). Conclusion: The conclusion is reached that the possible tax consequences of such a transaction can create tax risks or can result in unintended tax consequences relating to inter alia income tax (including capital gains tax), transfer duty and donations tax. The insights provided in this article do not always result in conclusive answers but they may, however, result in further research to be conducted, and a number of such areas for further research were identified. Should residential property lottery transactions occur more frequently in South Africa in future, it is recommended that the South African Revenue Services (SARS) issues clear guidance on the tax treatment from the perspective of the owner and the winner of such a transaction to ensure that any uncertainties are dealt with correctly.

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DEVELOPING THE SUBSTANCE OVER FORM DOCTRINE IN TAXATION AFTER THE JUDGEMENT IN COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE v NWK

Pretoria Student Law Review ◽

10.29053/pslr.v12i.1891 ◽

2018 ◽

Author(s):

Johan Coertze

Keyword(s):

South Africa ◽

South African ◽

Income Tax ◽

The South ◽

True Nature ◽

Type Of Abuse ◽

The Law

In 1936 Lord Tomlin in IRC v Duke of Westminster (hereafter ‘Duke’)1 concluded that it is trite law that every man (and woman) is entitled to arrange his or her affairs as to pay the least amount of tax under the appropriate statutes. This sentiment has been a cornerstone of South African tax jurisprudence and was again repeated in Commissioner for the South African Revenue Service v NWK Ltd (hereafter ‘NWK’).2 This broad liberty in arranging one’s own tax affairs has, however, led some taxpayers to dress up their transactions and hide their’ true nature as to ‘either … secure some advantage which otherwise [the law] would not give, or to escape some duty which otherwise the law would impose’.3 The most prominent tool the courts can use to try and curb this type of abuse is the General Anti-Avoidance Rules (hereafter ‘GAAR’) in Section 80A to 80L of the Income Tax Act 58 of 1962 (hereafter ‘the Act’), other specific anti-avoidance provisions in the Act4 and the substance over form doctrine (hereafter ‘the doctrine’). This article is a reflection on the taxation in South Africa, but specifically anti-avoidance provisions as provided by legislation.

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Reportable arrangements: Tax partner perceptions of some problematic terminology

Journal of Economic and Financial Sciences ◽

10.4102/jef.v7i1.135 ◽

2014 ◽

Vol 7 (1) ◽

pp. 145-186

Author(s):

Lee-Ann Steenkamp ◽

Peter Cramer

Keyword(s):

South Africa ◽

South African ◽

Income Tax ◽

Reporting System ◽

The South ◽

Literature Study ◽

Public Comment ◽

Research Findings ◽

Partner Perceptions

The South African Revenue Service (SARS) implemented a more aggressive reporting system in 2008 by introducing new reportable arrangements ('RA') provisions in the Income Tax Act. In March 2010, SARS issued a revised Draft Guide to Reportable Arrangements for public comment. More than three years after its release, there is still no finalised, updated guide available to address the 'new' RA provisions. Determining when arrangements should be reported to SARS therefore remains both problematic and onerous. It is the purpose of this article to examine some of the problematic terminology in an attempt to afford South African taxpayers greater clarity in the identification and disclosure of RAs. The research findings are tested through a survey conducted among tax partners and directors at a sample of 40 leading audit and legal firms in South Africa. The majority of respondents agreed with the conclusions drawn from the literature study.

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A Post-Implementation Analysis Of The South African Mineral Royalty Regime

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v29i3.7770 ◽

2013 ◽

Vol 29 (3) ◽

pp. 641

Author(s):

Pieter Van der Zwan

Keyword(s):

South African ◽

Income Tax ◽

Mining Industry ◽

Mineral Resources ◽

Fair Share ◽

Font Size ◽

The South ◽

The Past ◽

Tax Legislation ◽

Mineral Wealth

The landscape of the South African mining industry has changed significantly over the past twenty years and has in recent times attracted attention by calls for nationalization of the industry. One of the proposed areas to address the concerns resulting in these calls for nationalization has been to consider whether the South African mineral royalty regime can be improved. The objective of this article is to evaluate whether the South African royalty regime effectively balances the objectives of the stakeholders in the industry and to recommend improvements where this balance may not be achieved. The analysis performed indicated that the introduction of the royalty regime increased the overall government take from the mining industry significantly and that the competitiveness of the South African mining industry as an investment destination need to be assessed. It was further found that the linkage between the royalty formula and the income tax legislation distorts the royalty levied in relation to the mineral resources that are depleted. It is submitted that the regime can be improved by defining a profitability indicator specifically for the purposes of determining mineral royalties. Lastly, it is recommended that measures to improve accountability in respect of the utilization of the royalties collected need to be considered as the lack of such measures may contribute to the perception that the nation does not receive its fair share of the mineral wealth.

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