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Treasury offers tax deduction to SA firms in Africa

Monday, 19 October 2015   (0 Comments)
Posted by: Author: Linda Ensor
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Author: Linda Ensor (BDlive)

South African companies with operations elsewhere in Africa, such as telecommunications giant MTN, have reason to breathe a little easier having earned a tax respite, albeit considered minor by tax experts.

The Treasury has made a concession on the proposed repeal of foreign tax credits for fees on services provided by such companies, offering them a tax deduction instead.

The new tax measure is scheduled to take effect from January 1 and will affect, among others, all companies active in the telecommunications, banking and retail in African markets that they serve from centres in SA.

MTN warned last month that the proposed withdrawal of the tax credits would result in MTN’s shared service centre making a loss and could see it being relocated elsewhere. The removal of tax credits would also undermine SA’s ambition of becoming a hub for the African headquarters of other multinationals.

Treasury chief director Yanga Mputa said on Thursday that to mitigate double taxation, such companies could claim a tax deduction under section 6quat (1C) of the Income Tax Act.

Ms Mputa was giving a report to Parliament’s finance committee on the Treasury’s response to public submissions on the draft Taxation Laws Amendment Bill and Tax Administration Laws Amendment Bill, which will be tabled in Parliament in about 10 days’ time.

While tax experts welcomed the concession, they argued that it would provide only minimal compensation for income lost as a result of African countries not implementing the double taxation agreements they have with SA, and the imposition of a withholding tax on fees earned by SA-based service companies.

South African Institute of Chartered Accountants representative Peter Farber said the concession would still leave the taxpayer out of pocket, as the tax deduction would be far lower than the tax credit. He emphasised the need for the tax treaties to be enforced.

The Treasury’s rationale for the removal of the tax credit is that it violates international tax rules and tax treaty principles, it is a compliance burden for the South African Revenue Service (SARS), it has been abused, and was recommended by the Davis Tax Committee, which viewed it as a form of tax-base erosion. Some taxpayers had been improperly using the tax credits for other income, such as royalties and interest.

Ms Mputa said procedures set out in tax treaties to deal with disputes were the appropriate mechanism for companies to use. It was not appropriate for SA to subsidise countries that did not comply with their tax treaties.

The Treasury has rationalised and restated the details that taxpayers would have to provide SARS to justify their use of legal privilege to withhold documents. The Treasury has also decided to retain the existing three-year period in which taxpayers can request a correction to their tax returns instead of reducing it to six months as proposed in the bill.

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