South Africa Drafts Revamped Shipping Tax Regime
31 July 2013
Posted by: Author: Lorys Charalambous
Author: Lorys Charalambous (TaxNews.com)
The draft Taxation Laws Amendment Bill, 2013, released by the South African Revenue Service on July 14, 2013, proposes the introduction of an internationally-competitive tax regime for ship operators that register vessels under the South African ensign.
The regime, proposed to be effective from January 1, 2014, would provide a number of tax concessions to resident companies that have registered at least one vessel that is flagged in South Africa under the Ship Registration Act 1998, which are designed for the international transportation of passengers or goods for reward.
The regime will include exemptions from income tax, the capital gains tax, the dividends tax as well as cross-border withholding tax on interest. Shipping companies will be afforded the added flexibility of using any functional currency for its day to day operations.
As a general matter, international shipping transport conducted by South African companies is largely subject to a corporate income tax rate of 28 per cent. The only incentives for international shipping are some depreciation incentives for capital investment in shipping transport.
The draft law notes: "Government has long been aware that the international trend has been toward greatly reduced taxation of international shipping transport due to the highly mobile nature of this activity. Many leading shipping centers now impose a tonnage tax regime in lieu of income tax. In the case of a tonnage tax, tax is calculated by measuring the tonnage of the ship rather than through reliance on profits with the tax essentially amounting to small license fee. Other countries exempt international transport shipping income altogether."
"In view of these trends, the 28 per cent South African rate is wholly uncompetitive and is cited as one of the reasons that South Africa can no longer attract ships to its flag despite South Africa’s strategic naval location."
The new regime boasts the following features:
Receipts and accruals in respect of income derived from South African-flagged ships of a qualifying shipping company will be treated as exempt income if that ship is engaged in the international traffic of passengers or cargo for reward by sea. The disposal of the ship is also exempt regardless of whether the gain generates ordinary revenue or capital gains.
Dividends paid by a qualifying shipping company will not be subject to the dividend tax if the dividend is derived from an South African-flagged international transport ship. Interest paid by shipping companies to foreign lenders in respect of debt obtained to finance the acquisition, construction or improvement of a South African-flagged international transport ship will be exempt from withholding tax on interest.
Given the proposed exemptions going forward, domestically flagged ships designed for international traffic for reward of passengers or goods will no longer be depreciable. Other ships will remain depreciable over a five-year period at a rate of 20 percent per year.
Under current law, the officers and crew of an international transport ship are exempt from tax on their salary if those persons are outside South Africa more than 183 days. In order to avoid potential issues of pay-as-you-earn withholding for employers of South African officers and crew, officers and crew of domestically-flagged ships designed for international traffic will be wholly exempt without regard to the days spent abroad.
Lastly, the draft law recognizes that the special rules for determining foreign business establishment relief for international shipping are too narrow, thereby giving rise to inadvertent controlled foreign company income. International transport ships should not lose the benefit of this relief merely because of occasional visits to South Africa, it says. The law therefore provides that any vessel used for transport that is engaged in international traffic will be treated as a foreign business establishment.
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