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‘Take a step back’ From Rapid Tax Changes

Tuesday, 27 August 2013   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BusinessDay)

The government has introduced a string of strict measures in its draft Taxation Laws Amendment Bill to curb the erosion of its tax base and profit-shifting by some multinationals, but many tax experts are not enamoured by the hastiness of these moves.

The provisions place South Africa ahead of the curve globally in curbing threats to tax revenue at a time when cash flows remain tight due to stagnant economic growth.

The concern is whether South Africa will still be attractive as an investment destination and experts have called for a delay of about a year before the cumbersome new rules are pushed through. The draft rules were open for public comment until August 5.

Based on the comments received, workshops or meetings will be held with stakeholders and then the Treasury and the South African Revenue Service will revise the bill before introducing it in Parliament. Several tax experts from PwC expressed their unease last week with the myriad proposed changes and suggested delaying some of the measures until there was "greater clarity" on what was happening in the global context.

The government has identified four "recurring concerns" relating to excessive deductible interest — hybrid debt, connected person debt, transfer pricing and acquisition debt. The measures to protect the tax base have been in the making for the past two years.

The Organisation for Economic Co-operation and Development (OECD) has been the driver behind measures to restrict base erosion and profit shifting — referred to as Beps — in developing countries for many years. The OECD has been at pains to say that the focus has been on double taxation and ways to avoid it for years, but the bee in their bonnet at the moment is double "non-taxation".

PwC tax partner Osman Mollagee says the notion of the world getting "a little bit upset with richer countries sucking profits out of poorer countries" has been around for some time.

"No one really paid a lot of attention then, but now that the likes of the US and UK are saying they (multinationals) are doing it to us as well, suddenly it becomes a big deal. We will see our African neighbours becoming bolder and harsher with the way base erosion and profit shifting will be policed," he says.

He admits that he is cynical about Beps. "Show me the graph — where has Europe lost revenue from corporate taxpayers in the last 10 years? Actually it has been quite stable. The information, on which a lot of the scare-mongering is based, is anecdotal in many instances," he says.

PwC tax partner Elandre Brandt says there are already significant tools available to the South African Revenue Service to prevent the erosion of the tax base, such as transfer pricing rules and general anti-avoidance provisions in the Income Tax Act.

"Along with the irritation of retrospective legislation, we no longer deal with general provisions in the act, but we have to deal with specific sections in the act with every single transaction. It has become an absolute impossibility to operate on this basis."

Mr Brandt says interest payments leaving South Africa do not end up in a tax haven in each and every instance. A "substantial number" of interest payments go to Australia, the US and Europe for perfectly legitimate business transactions.

He finds the notion that businesses will create debt in South Africa simply to extract the interest out of South Africa and to place it in low-tax jurisdictions slightly illogical.

"I do not, in principle, have a problem with the restrictions on interest deductibility, but I have a significant problem with the mechanisms put in place to determine the limitations, and a significant problem with the fact that our draft legislation has retrospective application," he says.

In one instance the proposed measures will take effect retrospectively from July 1 this year.

He says tax professionals advising potential investors in South Africa have to explain how the law stands now, how it may change, and to top it all will have retrospective provisions. "It places us in an almost impossible position," he says.

Kyle Mandy, head of PwC technical tax division, suggests that South Africa takes a step back.

He concedes that South Africa has difficult issues to address and that the government needs to protect its tax base. "There has been base erosion in many respects, and we have to acknowledge that. But we do not need a sledgehammer to squash an ant, and we do not want to take steps that will make South Africa less attractive as an investment destination by creating uncertainty and creating the potential for double taxation."

Mr Mandy says delaying base erosion measures by a year will certainly not result in severe negative consequences.

"There are some issues, such as replacing the subjective pre-approval process of interest deductions with something more objective, that is a given and can not wait. But, for the rest I think we need to take a step back," he says.



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