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Retroactive tax changes may create ‘windows of confusion’

23 November 2011   (0 Comments)
Posted by: SAIT Technical
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Retroactive tax changes may create ‘windows of confusion’

AMANDA VISSER - Business Day

Analysts say the retrospective nature of some of the provisions in the Taxation Laws Amendment Bill will affect transactions that have been concluded under current legislationThe retrospective nature of some of the provisions in the Taxation Laws Amendment Bill will affect transactions that have been concluded under current legislation and could lead to unexpected tax costs and cause embarrassment and uncertainty to investors.

Doelie Lessing, a tax executive at Werksmans Tax, said taxpayers would have to battle with the effects of retrospective legislation and with confusing effective dates that create windows where there are no rules.Some provisions have been scrapped but the new rules are not effective the next day, in some cases creating a rule vacuum of months."There is already a lot of uncertainty in the business world.

More uncertainty in tax laws will not bode well for investments," she said.The Taxation Laws Amendment Bill was tabled in Parliament last week and gave effect to the proposals made by Finance Minister Pravin Gordhan in his February budget.A capital distribution under current legislation is not taxed, but under new legislation the distribution will be taxed as a dividend — leading to additional tax costs of thousands of rand. Another far-reaching change in the bill relates to transfer pricing rules.

The changes could create disincentives for companies in the same group to charge prices and interest that could be challenged in terms of the arm’s-length principle. David Warneke, a tax partner at BDO, said that where too much interest was charged in an intercompany loan, the tax authorities would disallow the difference between what was paid and what should have been paid in terms of an arm’s-length transaction.The legislator has even gone further. In a case where interest paid on a loan was R1000 more than one would have paid in an arm’s-length transaction, that amount will now give rise to interest income to be taxed.

Ms Lessing said that with the advent of the dividend tax in April next year, a new secondary transfer pricing mechanism will be introduced. That creates a situation where the amount of the transfer pricing adjustment is deemed as an interest-free loan. This, said Ms Lessing, in turn triggers a transfer pricing adjustment (on the deemed interest-free loan).

How long this spiralling effect will continue is not clear from the wording of the bill.Ms Lessing said there was concern about the sloppy nature of some other wording in the bill, resulting in uncertainty on the tax treatment of a controlled foreign company (CFC)."Currently, the legislation provides for a capital gains exit charge should a CFC cease its status as a CFC, as the CFC is deemed to have disposed of all its assets (on) the date immediately prior to cessation of its status as a CFC. This triggers capital gains tax." The change now reads that a CFC "that commences or ceases to be a resident will be deemed to dispose of all its assets on the date immediately preceding the commencement or cessation of its ‘residence’ status".

Ms Lessing said a CFC was by definition a non-resident company. "It will never be a resident — if so, it will not be a CFC — so how can it ever cease to be a resident?" On the current wording, the cessation by a CFC of its status as CFC would no longer trigger the capital gains exit charge.

Mr Gordhan said on Tuesday the bill provided for a reduction in transfer duty rates. Home purchases of up to R600000 are now exempt. Purchases of R600000 to R1m will be subject to a 3% charge as opposed to 5% before.


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