The 2019 Tax legislative amendment cycle kicks-off

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The 2019 tax legislation amendment cycle commenced on 25 June, when National Treasury issued the initial batch of the Draft Taxation Laws Amendment Bill which covers specific provisions that require further consultation. National Treasury will be publishing the full text of the 2019 Draft Taxation Laws Amendment Bill for public comment in mid-July 2019. One of the topics for amendment in the first batch deals with apparent abusive arrangements aimed at avoiding the anti-dividend stripping provisions.

 

Anti-avoidance rules dealing with dividend stripping were first introduced in 2009. Dividend stripping occurs when a shareholder company intending to divest from a target company avoids capital gains tax that would ordinarily arise on the sale of shares. This is achieved by the target company declaring a large dividend (to the shareholder company) before the sale of its shares to a prospective purchaser. This pre-sale dividend (normally exempt from dividends tax in the case of a company-to-company declaration) decreases the value of shares in the target company. As a result, the shareholder company sells the shares at a lower amount, avoiding the burden of capital gains tax in respect of the sale of shares.

 

In 2017 and 2018, several amendments were made to strengthen the anti-avoidance rules dealing with dividend stripping. Currently, certain exempt dividends (called extra-ordinary dividends), received by a shareholder company are treated as taxable proceeds in the hands of the shareholder company, as long as the shares in respect of which extra-ordinary dividends are received, are disposed of within a certain period, thereby eliminating the planning opportunities that dividend stripping presented.

 

National Treasury has indicated that it has come to Government’s attention that specific alleged abusive tax schemes aimed at circumventing the anti-avoidance rules dealing with dividend stripping arrangements are currently in the market. Essentially, a substantial dividend distribution by the target company to the shareholder company is done, combined with the issuance (by the target company) of its shares to the purchaser. The result is a dilution of the shareholder company’s effective interest in the shares of the target company that does not involve the disposal of those shares by the shareholder company. The shareholder company retains a negligible stake in the shares of the target company without triggering the current anti-avoidance rules.

 

In terms of the proposed amendments, the anti-avoidance rules will no longer apply only at the time when a shareholder company disposes of shares in a target company, as is currently the case. Furthermore, if a target company issues shares to another party and the market value of the shares held by the (current) shareholder company in the target company are reduced by reason of the shares issued by the target company, the shareholder company will be deemed to have disposed of and immediately reacquired its shares in the target company, thus creating value-shifting. This happens despite actual disposal not taking place, which could lead to adverse capital gains tax consequences.

 

It is expected that the proposed amendments, currently open for public comment, will be met with some severe criticism from the industry, especially since several legitimate BEE schemes could be impacted if the proposals are accepted as currently proposed.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Tax season 2019: What can you expect?

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SARS recently released two media statements, in which it notes several improvements made to eFiling for the 2019 tax season, including the issue of customised notices indicating specific documents required in the event of an audit or verification and a simulated outcome issued before a taxpayer has filed.

 

What is the tax season?

 

Tax season is the period in which individual taxpayers file their income tax returns to ensure that their affairs are in order. Although the majority of taxpayers who earn a salary have already paid tax through monthly pay-as-you-earn tax (PAYE), which was deducted from their salary by their employer and paid over to SARS, employees may still have an obligation to file a tax return if they earn above the filing threshold (see in more detail below). Once SARS reconciles what was paid over by the employer with what a taxpayer declares on their tax return, an assessment is issued which may result in the taxpayer needing to pay an additional tax to SARS, or is due a refund, or neither.

 

Taxpayers who are natural persons and meet all of the following criteria need not submit a tax return for the 2019 filing season:

 

  • Your total employment income for the year before tax is not more than R500 000;
  • Your remuneration is paid from one employer or one source (if you changed jobs during the tax year, or have more than one employer or income source, you must file);
  • You have no car or travel allowance, a company car fringe benefit, which is considered as additional income;
  • You do not have any other form of income such as interest, rental income or extra money from a side business; and
  • Employees tax (i.e. PAYE) has been deducted or withheld

 

Although you are not required to submit a tax return if you meet the above criteria, it is always good practice to ensure that you have a complete filing history with SARS. If your tax records do ever become important in future (such as in the case of remission of penalties, tax clearance certificates, etc.), you do not want to be in a position to have to prove that you were not liable to file a return in a particular year. The administrative burden in the current year certainly outweighs the potential issues down the line.

 

Important filing dates

 

  • eFiling opens on 1 July 2019 and closes on 4 December 2019.
  • Manual filing at branches opens on 1 August 2019 and closes 31 October 2019.
  • Provisional taxpayers have until 31 January 2020 to file via eFiling.

 

There is already a steady increase in the number of taxpayers in queues at SARS branches – it is therefore advised that you engage with your tax practitioner as soon as possible, to plan for tax season 2019.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

VAT Regulations dealing with the supply of electronic services

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Since 2015, foreign suppliers of electronic services (such as audio-visual content, e-books etc.) in South Africa are deemed to operate an enterprise for VAT locally. Although the regime has been in place for several years, new regulations in this regard are continuously published, the latest being on 18 March 2019, with an effective date of 1 April 2019. Along with the new regulations, SARS has published a “FAQ” document that addresses some of the questions that vendors and the public at large are likely to have about the implications of the updated regulations and recent legislative amendments. Below, we explore some of the more pertinent matters that SARS addresses in the “FAQ” document. 

What are electronic services? Electronic services mean any services supplied by a non-resident for consideration using –

·         an electronic agent;

·         an electronic communication; or

·         the internet.

 

Electronic services are therefore services, the supply of which –

·         is dependent on information technology;

·         is automated, and

·         involves minimal human intervention.

 

Simply put, this means that from 1 April 2019, you will have to pay VAT on a much wider scope of electronic services. The regulations now include any services that qualify as “electronic services” (other than a few exceptions) whether supplied directly by the non-resident business or via an “intermediary”.

 

Some examples include:

·         Auction services;

·         Online advertising or provision of advertising space;

·         Online shopping portals;

·         Access to blogs, journals, magazines, newspapers, games, publications, social networking, webcasts, webinars, websites, web applications, web series; and

·         Software applications downloaded by users on mobile devices.

 
What is specifically excluded from the ambit of electronic services in the updated regulations?

 

 Excluded from the updated regulations are –

·         telecommunications services;

·         educational services supplied from an export country (a country other than South Africa), which services are regulated by an education authority under the laws of the export country; and

·         certain supplies of services where the supplier and recipient belong to the same group of companies.
What is the reason for the updated regulations?

 

 The original regulations limited the scope of services that qualified as electronic services, and which must be charged with VAT at the standard rate. The intention of the updated regulations is to substantially widen the scope of services that qualify as electronic services, so that all services supplied for a consideration (subject to a few exceptions), which are provided by means of an electronic agent, electronic communication or the internet, are electronic services and must be charged with VAT at the standard rate.

 
Do the updated Regulations make a distinction between Business-to-Business (B2B) and Business-to-Consumer (B2C) supplies?

 

 No, there is no distinction between B2B and B2C supplies, therefore, B2B supplies will be charged with VAT at the standard rate. This outcome was intentional as the South African VAT system does not fully subscribe to the B2B and B2C concepts.

 
What are some examples of supplies that are not electronic services?

 

 ·         Certain educational services

·         Certain financial services for which a fee is charged

·         Telecommunications services

·         Certain supplies made in a group of companies

·         The online supply of tangible goods such as books or clothing

·         Certain supplies or services that are not electronic services by their nature, but where the output and conveyance of the services are merely communicated by electronic means, for example:

o    a legal opinion prepared in an export country, sent by e-mail; and

o    an architect’s plan drawn up in an export country and sent to the client by e-mail.

 

Given the much wider scope of application for electronic services, both local and foreign vendors need to ensure that VAT is levied at the appropriate rate on the supply of electronic services – and local vendors, where relevant, need to retain the necessary supporting documents to substantiate any input tax claims.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Simulation

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In addition to specific anti-avoidance provisions and the general anti-avoidance provisions (GAAR) in the Income Tax Act,[1] the South African Revenue Service can apply another established principle to attack the validity of transactions and arrangements, namely the common law doctrine of simulation, or the plus valet doctrine. This is a fundamental principle of the South African common law that concerns itself with the true legal nature rather than the outward form of a transaction, essentially considering the substance of a transaction, rather than its form.

 

Application of the doctrine was recently under the spotlight again in the Supreme Court of Appeal in the matter of Sasol Oil v CSARS (923/2017) [2018] ZASCA 153 (9 November 2018). Sasol successfully appealed a judgment by the Gauteng Tax Court, which found that certain back-to-back transactions by entities in the Sasol Group were simulated and not genuine. Instead of Sasol in South Africa purchasing oil directly from a Sasol company incorporated in the Isle of Man, a UK company was interposed between the local entity and the Ilse of Man entity, the effect of which was that certain controlled foreign company rules in South Africa did not apply.

 

The court analysed statements from witnesses in the Sasol Group to determine what the reasons and commercial rationale were for the interposed UK entity. These witness accounts appear to have been crucial (if not the deciding factor) in the decision of the court that the transactions were not simulated or dishonest. In writing for the majority, Lewis JA found that:

 

“The transactions had a legitimate purpose. There was nothing impermissible about following…advice, and so reducing Sasol Oil’s tax liability. The transactions were not false constructs created solely to avoid…taxation.”

 

What is arguably more interesting, is the basis on which the minority found that the transactions were indeed simulated. Mothle JA, considering the same evidence, found that the transactions lacked commercial rationale, and this appears to be one of the main reasons for his dissent, demonstrated by the quotes below:

 

“At the risk of repetition, the…structure perpetuated duplication, with the identified inherent risk of absence of a commercial justification.”

 

“I would find that Sasol Oil failed to demonstrate to the Tax Court the commercial justification for interposing SISL (UK company) in the supply chain.”

 

“The failure to provide commercial justification for SISL revealed the absence of bona fides behind the transactions and as such, the additional assessments were justified.”

 

In the present case, Sasol was successful in proving the commercial rationale for their arrangement to the court. The important takeaway for taxpayers from the judgement is that the facts and circumstances of arrangements should be carefully documented when entering into transactions. Supporting documents, such as minutes of meetings, business plans and even internal notes could all prove to be vital in the assessment if a transaction is genuine, and not simulated.

 

[1] No. 58 of 1962

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SARS releases new ruling on documentary requirements for VAT purposes

Tax , ,

In February 2015 the South Atlantic Jazz Festival (Pty) Ltd successfully appealed a judgment of the Tax Court to the Full Bench of the Western Cape High Court (reported as ABC (Pty) Ltd v CSARS [2015] ZAWCHC 8). That judgment dealt with documentary proof required by the Commissioner for SARS to substantiate input tax claims submitted by taxpayers for VAT purposes, and specifically the scope of the provisions of section 16(2)(f) of the Value-Added Tax Act, 89 of 1991.

 

Since the judgment documentary proof linked to VAT input claims have been a focus of Government, with both the subsequent amendment of section 16(2)(f) as well as the introduction of section 16(2)(g). Especially the latter provision is important here and deals primarily with what documentary evidence will suffice as substantiating proof for VAT input claims submitted by a VAT vendor in the absence of for example an invoice received from the supplier, a bill of entry or credit note. The question in ABC above for example was whether a signed agreement could under these circumstances suffice as substantiating proof for an input tax claim submitted.

 

Section 16(2)(g) now reads that “… in the case where the vendor, under such circumstances prescribed by the Commissioner, is unable to obtain any document required in terms of [section 16(2)] (a), (b), (c), (d), (e) or (f), the vendor is in possession of documentary proof, containing such information as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished…”

 

SARS has now released a binding general ruling (BGR36) on 24 October 2016 dealing with those circumstances under which the Commissioner will allow a VAT vendor to use alternative documentary proof to substantiate the vendor’s entitlement to an input tax deduction as contemplated in section 16(2)(g). In order to obtain the Commissioner’s approval to use alternative documentary proof in substantiating a deduction under section 16(2)(g), a VAT vendor must apply for a VAT ruling or VAT class ruling.

 

In terms of the ruling, a VAT vendor may only apply for approval under section 16(2)(g) to rely on documentary proof, other than the documents prescribed under section 16(2)(a) to (f), if the vendor

 

  • has sufficient proof that it made reasonable attempts to obtain the documentary proof required by the Commissioner under section 16(2)(a) to (f);
  • was unable to obtain and maintain the documentation prescribed under section 16(2)(a) to (f) due to circumstances beyond the vendor’s control (see below); and
  • no other provision of the VAT Act allows for a deduction based on the particular document in the vendor’s possession.

 

BGR36 continues to list those circumstances when it would be considered to have been beyond the VAT vendor’s control to provide the otherwise required documentation:

 

  • When the supplier has failed to issue a tax invoice, debit note or credit note to the VAT vendor;
  • Where the supplier was contacted but failed to respond to the vendor’s request to be furnished with a complete tax invoice or correct document;
  • The supplier or vendor’s place of business has suffered damage as a result of for example a natural disaster, causing damage to its accounting records, with no possibility of the said records being retrieved or re-issued; or

 

(d) The supplier has been deregistered as a vendor.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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