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Tax ProposalsBUDGET 2011

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Contents

Overview ......................................................................................1

Main tax proposals ............................................................................................. 1

Relie or individuals ...................................................................1

Income tax relie or individuals .......................................................................... 1

Personal income tax rate and bracket adjustments ............................................. 2

Income tax payable by individuals younger than 65 years ................................... 3

Income tax payable by individuals aged 65 but below 75 years .......................... 3

Income tax payable by individuals aged 75 years and older ................................ 3

Medical deductions and conversion to medical tax credits .................................. 4

National health insurance ..........................................................4

Savings .........................................................................................4

Social security and retirement reorms ......................................5

Tax treatment o contributions to retirement unds ............................................. 5

Enhanced competition or provision o living annuities ....................................... 5

Review tax treatment o risk benets ................................................................ 5

Taxation o lump sum benets upon retirement.................................................. 6

Adjustment o monetary thresholds ..........................................6

Gambling .....................................................................................6

Business taxes ..............................................................................6

Dividends tax ..................................................................................................... 6

Closure o dividend schemes .............................................................................. 7

Internal company restructuring .......................................................................... 7

Venture capital company .................................................................................... 7

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Islamic nance ................................................................................................... 7

Research and development tax incentive ............................................................ 7

Promoting skills development and job creation .......................8

Learnership tax incentive .................................................................................... 8

Youth employment subsidy ................................................................................ 8

Industrial development zones ............................................................................. 8

International taxation .................................................................8

Gateway into Arica headquarter regime ......................................................... 8

Renement o controlled oreign company legislation ........................................ 8

Transer duty ...............................................................................9

Excise duties on tobacco and alcohol ........................................9

Ad valorem excise duties ............................................................9

Changes in specic excise duties ...................................................................... 10

Specic excise duties ........................................................................................ 10

Fuel taxes ...................................................................................13

Total combined uel taxes on petrol and diesel ................................................. 13

Environmental taxation ............................................................13

Carbon tax discussion paper ............................................................................ 13

Electricity levy .................................................................................................. 13

International air passenger departure tax ......................................................... 13

Tax administration ...................................................................14

Review o the turnover tax or micro businesses ............................................... 14

Tax payments by individuals with more than one source o income................... 14

Voluntary disclosure programme ...................................................................... 14

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Tax Administration Bill ...................................................................................... 14

Customs .......................................................................................................... 14

Audit ............................................................................................................... 15

Miscellaneous tax amendments ...............................................15

Employment, individuals and savings ................................................................ 15

Renement o employer-provided long-term insurance plans ........................... 15

Exemption or private employment compensation entities ................................ 16

Termination o the capital gain oreign currency rules ....................................... 16

Relie or long-term commuting by the judiciary ............................................... 16

Business ........................................................................................................... 16

Completion o dividends tax ............................................................................ 16

Revised tax rules or capital distributions and or pre-2001 capital gain assets .. 17

Transer o contingent liabilities ........................................................................ 17

Taxation o debt ............................................................................................... 17

Film incentive revision ...................................................................................... 18

Income tax relie or international shipping ...................................................... 18

Government grants to private stakeholders ...................................................... 18

International ................................................................................................... 18

Oshore cell companies ................................................................................... 18

Completion o the cross-border withholding tax............................................... 19

Tax treaty coordination o similar taxes ............................................................. 19

Company-structured management investment unds ....................................... 19

South Arican multinational oshore restructurings .......................................... 19

Currency transactions indirectly connected to certain oreign hedges ............... 20

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Value-added tax ............................................................................................... 20

VAT and transer duty nexus ............................................................................ 20

Synchronising VAT and customs or temporary import relie ............................. 20

Minimum exemption or imported services ....................................................... 20

Value correction or warehoused goods entered or home consumption .......... 21

Relie or outstanding debt between group members ....................................... 21

Removal o mining right conversion rules ......................................................... 21

Manuacturer/producer rebates or retail goods ............................................... 22

Revised starting date or alternative apportionment methods (administration) .. 22

Limiting month-end cut-o changes ................................................................ 22

Securities transer tax ....................................................................................... 22

Clariying the broker exemption ....................................................................... 22

Technical corrections ........................................................................................ 23

Tax policy research projects ......................................................23

Impact o tax proposals on 2011/12 revenue ..........................24

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Budget 2011 Tax Proposals 1

Overview

Raising sucient revenue to support projected expenditure on governmentseconomic and social priorities will require adjustments to the tax andexpenditure ramework over the medium to long term. This ramework

should contribute towards sustainable economic growth and job creation,while addressing the signicant disparities in South Arican society throughits redistributive unction.

The 2009 recession sharply reduced the income available or publicexpenditure, with nominal tax revenues declining in 2009/10. Revenueshave improved in 2010/11 and are expected to track modest real economicgrowth over the medium term. Recent data suggests a strong recovery incustoms duties and value-added tax (VAT) revenues during 2010/11, butthe recovery in corporate income tax revenue is lagging.

The 2011 Budget tax proposals are intended to broaden the tax base insupport o inclusive growth. Businesses will receive tax breaks to supportskills development and job creation, particularly or young workers. Variousloopholes will be closed and tax equity will be improved by reorming thetax treatment o contributions to medical schemes and contributions toretirement unds. The new dividends tax will be implemented, replacingthe secondary tax on companies. Consumption-related taxes, which alsoaddress environmental and health concerns, will be increased.

Main tax proposalsThe main tax proposals include:

Personal income tax relie o R8.1 billion A third rebate or individuals 75 years and older Conversion o medical tax deductions to tax credits Transer duty relie Higher taxes on uel Higher taxes on alcohol and tobacco Taxation o gambling winnings.

Relie or individuals

Income tax relie or individuals

The Budget 2011 proposes direct tax relie to individuals o R8.1 billionthrough adjustments to personal income tax brackets and rebates. Theseadjustments compensate or the eects o infation (scal drag).

In addition to the primary and secondary rebates, a third rebate oR2 000 per year is proposed or taxpayers 75 years and older, increasing

the tax threshold or eligible individuals to R104 261.

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Budget 2011 Tax Proposals2

Taxpayers with an annual taxable income o up to R270 000 will receive50 per cent o this relie, those with an annual taxable income betweenR270 000 and R580 000 receive 33 per cent, those between R580 000and R1 million receive 12 per cent and those with taxable income above

R1 million receive 5 per cent.Personal income tax provides the oundation or an equitable tax system. In2011/12, 14.3 per cent o individual taxpayers those with annual incomebetween R270 000 and R580 000 will account or 33 per cent o revenuesrom personal income taxes, and the 5.7 per cent o individuals with anannual taxable income above R580 000 will account or 39 per cent opersonal income tax revenues.

The primary rebate is increased to R10 755 per year or all individuals. Thesecondary rebate, which applies to individuals aged 65 years and over, is

increased to R6 012 per year. A third rebate, which applies to individualsaged 75 years and over, is introduced at R2 000 per year. The resultingincome tax threshold, below which individuals are not liable or personalincome tax, is increased to R59 700 o taxable income per year or thosebelow the age o 65, and to R93 150 per year or those aged 65 and over.The tax threshold or individuals aged 75 years and over is R104 261. Therates or the 2010/11 tax year and those proposed or 2011/12 are set outbelow.

2010/11 2011/12

Taxab le i ncome (R) Rates of tax T axable income (R) Rates of tax

R0 - R140 000 18% of each R1 R0 - R150 000 18% of each R1

R140 001 - R221 000 R25 200 + 25% of the amount R150 001 - R235 000 R27 000 + 25% of the amount

above R140 000 above R150 000







R552 001 and above R160 730 + 40% of the amount R580 001 R168 250 + 40% of the amount


Rebates Rebates

Primary R10 260 Primary R10 755

Secondary R5 675 Secondary R6 012

Tax threshold Third rebate R2 000

Bel ow age 65 R57 000 Tax threshold

Age 65 and over R88 528 Below age 65 R59 750

Age 65 and over R93 150

Age 75 and over R104 261

Personal income tax rate and bracket adjustments

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The proposed tax schedule compensates individuals or the eect oinfation on income tax liabilities and results in reduced tax liability ortaxpayers at all income levels. These tax reductions are set out below.

Taxable income

(Rands)

2010 rates

(Rands)

Proposed rates

(Rands)

Tax deduction

(Rands)

% reduction

60 000 540 45 -495 -91.7%

65 000 1 440 945 -495 -34.4%

70 000 2 340 1 845 -495 -21.2%

75 000 3 240 2 745 -495 -15.3%

80 000 4 140 3 645 -495 -12.0%

85 000 5 040 4 545 -495 -9.8%

90 000 5 940 5 445 -495 -8.3%

100 000 7 740 7 245 -495 -6.4%

120 000 11 340 10 845 -495 -4.4%

150 000 17 440 16 245 -1 195 -6.9%200 000 29 940 28 745 -1 195 -4.0%

250 000 43 890 41 995 -1 895 -4.3%

300 000 58 890 56 995 -1 895 -3.2%

400 000 93 640 90 745 -2 895 -3.1%

500 000 130 710 127 095 -3 615 -2.8%

750 000 229 670 225 495 -4 175 -1.8%

1 000 000 329 670 325 495 -4 175 -1.3%

Taxable income (Rands) 2010 rates

(Rands)

Proposed rates

(Rands)

Tax deduction

(Rands)

% reduction

100 000 2 065 -2 065 -100.0%

120 000 5 665 2 833 -2 832 -50.0%

150 000 11 765 8 233 -3 532 -30.0%

200 000 24 265 20 733 -3 532 -14.6%

250 000 38 215 33 983 -4 232 -11.1%

300 000 53 215 48 983 -4 232 -8.0%

400 000 87 965 82 733 -5 232 -5.9%

500 000 125 035 119 083 -5 952 -4.8%

750 000 223 995 217 483 -6 512 -2.9%

1 000 000 323 995 317 483 -6 512 -2.0%

Taxable income (Rands) 2010 rates

(Rands)

Proposed rates

(Rands)

Tax deduction

(Rands)

% reduction

90 000 265 -265 -100.0%100 000 2 065 1 233 -832 -40.3%

120 000 5 665 4 833 -832 -14.7%

150 000 11 765 10 233 -1 532 -13.0%

200 000 24 265 22 733 -1 532 -6.3%

250 000 38 215 35 983 -2 232 -5.8%

300 000 53 215 50 983 -2 232 -4.2%

400 000 87 965 84 733 -3 232 -3.7%

500 000 125 035 121 083 -3 952 -3.2%

750 000 223 995 219 483 -4 512 -2.0%

1 000 000 323 995 319 483 -4 512 -1.4%

Income tax payable by individuals younger than 65 years

Income tax payable by individuals aged 65 but below 75 years

Income tax payable by individuals aged 75 years and older

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Medical deductions and conversion to medical tax credits

Taxpayer contributions to medical schemes up to a specied monetarythreshold are tax deductible, as are qualiying out-o-pocket medicalexpenses. The 2011 Budget proposes to increase the monthly monetary

threshold or tax-deductible contributions to medical schemes rom R670to R720 or the rst two beneciaries, and rom R410 to R440 or eachadditional beneciary. This will become eective on 1 March 2011.

The monthly deductions or contributions to medical schemes and orqualiying out-o-pocket medical expenses will be converted into tax creditseective 1 March 2012. A tax credit provides or more equitable tax relie,as the relative value o the relie does not increase as the marginal tax rateo the individual increases, as is currently the case. A discussion documenton these credits will be published by the end o March 2011.

National health insurance

Government expects that national health insurance (NHI) will be phasedin over 14 years. While initial allocations are made in the 2011 Budget,the NHI system will require unding over and above current revenuesallocated to public health. Preliminary analysis indicates that the phasingin o a payroll tax (payable by employers), an increase in the VAT rate anda surcharge on individuals taxable income could be considered as undingoptions. The easibility and practicality o co-payments or user charges willalso be explored. Announcements about specic unding instruments willbe made in the 2012 Budget.

Savings

Interest income is not taxed up to a certain threshold. As rom 1 March 2011,government will increase the tax-ree interest-income annual thresholdrom R22 300 to R22 800 or individuals below 65 years, and rom R32 000to R33 000 or individuals 65 years and over. The oreign interest-income

threshold will remain at R3 700.Several countries use tax incentives to encourage people to save towardsspecic goals such as education, healthcare, housing or retirement, orto promote general savings. Government will explore two incentivisedsavings schemes one or housing (deposit or rst-time homeowners) andanother or higher education as alternatives to tax-ree interest-incomethresholds.

The possibility o a more consistent tax treatment o all orms o incomerom capital, such as interest, dividends and capital gains, will also be

considered.

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Social security and retirement reorms

Tax treatment o contributions to retirement unds

Taxpayers are allowed income tax deductions or contributions to pension

and retirement annuity unds. In addition, employers may contribute toretirement unds on behal o employees. These contributions by employersare not currently taxed in the hands o employees. Several changes areproposed to improve tax administration and promote greater equity in theincome tax system. From 1 March 2012:

An employers contribution on behal o an employee will be deemeda taxable ringe benet in the hands o the employee. Individuals willbe allowed to deduct up to 22.5 per cent o their taxable income orcontributions to pension, provident and retirement annuity unds.

To ensure greater equity, two thresholds will be established a minimumannual deduction o R12 000 and an annual maximum o R200 000.

The base on which contributions to retirement unds and other socialsecurity taxes is calculated will be streamlined.

To protect workers savings, government proposes to subject lump-sumwithdrawals rom provident unds to the one-third limit applying to pensionand retirement annuities. The implementation date o any changes in therules governing provident unds will be subject to thorough consultation

with trade unions and other interested parties, and vested rights will beprotected.

Enhanced competition or provision o living annuities

Living annuities can only be provided by long-term insurers. To encouragecompetition, government proposes to broaden the list o service providersallowed to provide these annuities to include collective investmentschemes and the National Treasurys retail savings bond scheme.

Review tax treatment o risk benefts

To ensure equity, the tax system should not treat lump-sum paymentsmore avourably than annuity payments. Government proposes that anycompensation rom the Road Accident Fund and its no-ault successor,whether as a lump-sum payment or an annuity, be exempted rom incometax. At the same time, alignment o the tax treatment o risk benets paidby private-sector unds will be investigated.

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Taxation o lump sum benefts upon retirement

As rom 1 March 2011, government will increase the tax-ree lump sumbenet upon retirement rom R300 000 to R315 000. The revised rates orthe taxation o lump sums upon retirement and involuntary retrenchments

are set out below.

Adjustment o monetary thresholds

In addition to the measures mentioned above, government proposes toincrease capital gains exclusion amounts as ollows as rom 1 March 2011:

For individuals and special trusts rom R17 500 to R20 000 annually

On death rom R120 000 to R200 000

On disposal o a small business when a person is over 55 years old romR750 000 to R900 000

The annual trading income exemption or public benet organisationswill increase rom R150 000 to R200 000, and or recreational clubs romR100 000 to R120 000.

Gambling

Government proposes that with eect rom 1 April 2012 all gamblingwinnings above R25 000, including those rom the National Lottery, be

subject to a nal 15 per cent withholding tax. Similar gambling taxes existin India, the Netherlands and the United States.

Business taxes

Dividends tax

The dividends tax will take eect on 1 April 2012, replacing the secondarytax on companies. The introduction o the tax should correct the impressionthat a tax on dividends is another tax on businesses: legally and economically,

it will be a tax on individuals and non-resident shareholders.

Proposed rates

Taxable lump sum Rate of tax

0 - R315 000 0 per cent of amount

R315 001 - R630 000 R0 plus 18 per cent of amount

exceeding R315 000

R630 001 - R945 000 R56 700 plus 27 per cent of amount

exceeding R630 000

R945 001 and above R141 750 plus 36 per cent of amount

exceeding R945 000

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Closure o dividend schemes

Several dividend schemes undermine the tax base. One method involvesthe use o dividend cessions, where taxpayers eectively purchase tax-reedividends without any stake in the underlying shares. Another scheme

involves the receipt o dividends rom shares in which the taxpayer has nomeaningul economic risk (e.g. has an osetting derivative position). Somearrangements make use o preerence shares that generate allegedly tax-ree dividends, while the dividends are indirectly generated rom interest-yielding debt. All these schemes will be closed by treating the dividends atissue as ordinary revenue.

Internal company restructuring

The Income Tax Act (1962) provides special rules or debt cancellation

and similar adjustments. Government will consider exempting otherwisetaxable gains or ordinary revenue imposed on the debtor i the debt iscancelled or reduced. Relie will be limited to insolvent debtors to ensurethat this does not give rise to tax avoidance.

Venture capital company

Many small and medium-sized businesses nd it dicult to access equitynance. This led government to introduce the concept o a venturecapital company into the Income Tax Act. The response to this vehicle hasbeen poor and the provisions will be reviewed.

Islamic fnance

The 2010 Budget announced that the taxation o Islamic nancial productswould be aligned with conventional nancial instruments. Provisions wereintroduced to cover several instruments. This year the rules will addressijara products, which act like commercial nance leases. Amendments tolegislation will acilitate the issue o Islamic-compliant government bonds.

Research and development tax incentive

The research and development (R&D) tax incentive is intended to encourageinnovation and job creation. Government proposes to streamline thecurrent incentive, introducing an approval process by the Department oScience and Technology beore a taxpayer can claim this incentive. Thisshould limit opportunities or retrospective reclassication o spending.

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Promoting skills development and job creation

Learnership tax incentive

The learnership tax incentive, designed to support youth employment,

will expire in September 2011. The tax expenditure associated with thisincentive is estimated to have amounted to R324 million in 2007/08, butits eectiveness is dicult to assess. Government proposes to extendthe incentive or ve years, subject to an analysis o its eectiveness bybusinesses, sector and training authorities, and the Department o HigherEducation and Training. The review will take place during 2011.

Youth employment subsidy

To support job creation, a youth employment subsidy in the orm o a

tax credit costing R5 billion over three years will be introduced. It will beadministered by the South Arican Revenue Service (SARS) through thePAYE system to limit abuse, ensure maximum liquidity and ease businesscompliance.

Industrial development zones

To support the objectives o the industrial policy action plan and theNew Growth Path, businesses making greeneld and/or browneldinvestments qualiy or tax relie. Greeneld investments in industrialdevelopment zones (IDZs) qualiy or additional relie. Government willconsider expanding incentives or labour-intensive projects in IDZs.

International taxation

Gateway into Arica headquarter regime

During 2010, tax rules were amended to enable regional investments tofow through South Arica without being taxed. These measures wereintended to encourage the development o regional investment banks andholding companies in South Arica. However, current rules could lead to

double taxation. There are also concerns about the manner o impositiono residence-based taxation. These concerns will be reviewed.

Refnement o controlled oreign company legislation

The main purpose o controlled oreign company rules is to prevent SouthArican residents rom shiting passive income oshore. Some provisionsare overly complex and can interere with normal business conduct, whileothers create unintended loopholes. Adjustments will ocus the ruleswithout compromising their purpose.

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Transer duty

Government proposes to increase the transer duty exemption thresholdrom R500 000 to R600 000. A rate o 3 per cent will be applicable to thevalue rom R600 001 to R1 000 000; an amount o R12 000 plus 5 per cent

to the value between R1.0 and R1.5 million; and an amount o R37 000plus 8 per cent to amounts above R1.5 million. This revised rate structurewill apply to properties acquired under purchase agreements concluded onor ater 23 February 2011. It will also be applicable to legal persons (closecorporations, companies and trusts).

Excise duties on tobacco and alcohol

The proposed adjustments to alcohol and tobacco taxes are as ollows:

The current indirect tax burden (excise duties plus VAT) as a percentageo the weighted average retail selling price or wine, clear beer andspirits at 23, 33, and 43 per cent respectively will be maintained or2011/12. Excise duties on alcoholic beverages will be increased bybetween 4.5 and 10.0 per cent.

The targeted total tax burden on tobacco products (excise duties plusVAT) is 52 per cent. Accordingly, the 2011 Budget proposes a 6 per centincrease on the excise duty or cigars, a 9 per cent increase or cigarettes,a 8.2 per cent increase or cigarette tobacco and a 10.3 per cent increase

or pipe tobacco.In the 2010 Budget, the Minister o Finance announced a review o theexcise duty structure or alcoholic beverages. A discussion document will

be published or public comment in July 2011.

Ad valorem excise duties

Passenger cars and light commercial vehicles are subject to a luxury excisetax that increases with the price o the vehicle. Government proposes toincrease the maximum nominal ad valorem excise tax rate on these vehicles

rom 20 per cent to 25 per cent.Ad valorem excise duties on monitors were abolished in 2004 based onthe assumption that they were used as computer screens. However, somemonitors are also used as televisions, which are subject to ad valorem tax.Ad valorem excise duties on monitors will be reinstated at a fat rate o7 per cent. These amendments will take eect on 1 April 2011.

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It is proposed that the customs and excise duties in the Customs and ExciseAct 91 (schedule 1, part 2 o section A) be amended with eect rom23 February 2011 to the extent shown below.

Changes in specifc excise duties

Specifc excise duties

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24

24

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Fuel taxes

Government proposes to increase the general uel levy by 10c/l on bothpetrol and diesel eective rom 6 April 2011. The RAF levy will be increasedby 8c/l to 80c/l on the same date.

Environmental taxation

Carbon tax discussion paper

As part o its response to climate change, government is consideringa carbon tax. A discussion paper entitled Reducing Greenhouse GasEmissions: The Carbon Tax Option was published or public comment in

December 2010. Comments are due by the end o February 2011. Thedesign eatures o a proposed tax and a schedule or its introduction willbe announced in the 2012 Budget.

Electricity levy

Government proposes to increase the levy applied to electricity generatedrom non-renewable and nuclear energy sources by 0.5c/kWh to2.5c/kWh rom 1 April 2011. Some o this revenue will be set aside to undthe rehabilitation o roads damaged as a result o the haulage o coal orelectricity generation. The increase should have no impact on electricity

taris, because it has already been taken into account in the NationalEnergy Regulator tari structure.

International air passenger departure tax

From 1 October 2011, the air passenger departure tax on fights to SouthernArican Customs Union member states and other international destinationswill increase rom R80 and R150 per passenger respectively to R100 andR190 per passenger.

Total combined uel taxes on petrol and diesel

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Tax administration

Review o the turnover tax or micro businesses

The turnover tax was implemented in 2009 to broaden the tax base and

simpliy tax or micro businesses with annual turnover up to R1 million.Only about 7 700 businesses have registered or this approach, o which88 per cent were previously registered or income tax. The tax rates will beadjusted rom 1 March 2011 so that a micro business only becomes liableto pay turnover tax i its turnover exceeds R150 000 (currently R100 000)a year.

From 1 March 2012, micro businesses that register or VAT will no longerbe barred rom registering or turnover tax. The three-year bar on voluntaryderegistration rom the turnover tax will also be lited. SARS will be

empowered to register unregistered micro businesses that it detects or theturnover tax.

Tax payments by individuals with more than one sourceo income

The Minister o Finance has received several letters rom widows andwidowers who have experienced increases in their tax liability subsequentto the death o a spouse. This happens in cases where the surviving spousereceives a pension rom the pension und o the deceased, rom which little

or no PAYE is deducted. SARS will contact such taxpayers and advise themto ask their insurance company or employer to deduct additional taxes.

Voluntary disclosure programme

To encourage taxpayers to come orward to regularise their tax aairswithout the imposition o additional tax, penalties and interest, the voluntarydisclosure programme that began in November 2010 will remain open until31 October 2011. More than 1 200 applicants have already come orwardunder the programme.

Tax Administration BillThe Tax Administration Bill, which incorporates several generic administrativeprovisions rom dierent tax acts into one piece o legislation, will beintroduced in the National Assembly during 2011.

Customs

SARS has launched its customs modernisation programme. Customs codesaligned with procedures prescribed in the Kyoto Convention have beenintroduced, and during 2011 automated inspection services and electronic

acquittals will be implemented. Later this year, two bills will be introduced

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Exemption or private employment compensation entities

Compensation or death or personal injury suered under contracto employment is largely regulated by the 1993 Compensation orOccupational Injuries and Diseases Act (COIDA). Most employees are

covered by the government-controlled Compensation Fund. In addition,contributions and payouts by two privately-owned entities (both o whichpredate the Compensation Fund) are equally covered by COIDA. Theprovision o the same income and VAT exemptions as the CompensationFund is being considered, as these entities are oering the same benets.

Termination o the capital gain oreign currency rules

To ensure theoretical consistency, capital prots rom oreign currencyadjustments should be ully taxed when they are realised. Because taxingcurrency based on realisation can be extremely onerous, a currency poolingconcept was introduced that deers any oreign currency capital gain/lossuntil that oreign currency is converted into a dierent currency. Despitethis deerral, taxing individuals on their currency gains is simply impractical.The cost o compliance typically outweighs any revenue to the scus. Giventhese concerns, it is proposed that the capital gain charge or oreigncurrency be completely removed.

Relie or long-term commuting by the judiciary

Employees receive tax relie or company vehicles associated with work

travel, but not or private travel or ordinary commuting to work. Even thoughthis exclusion or commuting is theoretically sound, it creates unair resultsor judges presiding over multiple courts or over a court that is located along distance rom the judges home. Government provides judges withvehicles to cover these costs, and it is proposed that this unusual work-travel arrangement be eligible or tax relie.

Business

Completion o dividends tax

The new dividends tax is set to replace the secondary tax on companies rom1 April 2012. To date, most issues have been resolved with the assistanceo public consultation. In 2011, nal issues will be resolved, most notably:

Inbound oreign dividends The proposed taxation o inbound oreigndividends remains unresolved. Generally, oreign dividends are taxable atvarying levels. Some dividends are exempt and others are taxable at topmarginal rates (40 per cent or 28 per cent). Given the proposed changesto the taxation o domestic dividends, the exemptions and rates need tobe adjusted in line with the new dividends tax.

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Foreign-owned South Arican branches Foreign-owned South Aricanbranches are currently subject to tax at a 33 per cent rate instead o thestandard 28 per cent rate or local companies. The 33 per cent rate servesas a simplied alternative to a branch prots tax or physical branch

repatriations. However, this higher level o tax is only made possible bycertain exceptions made to various non-discriminatory provisions withintax treaties. At this stage, it must be determined whether the changerom a secondary tax on companies or dividends to a new dividendstax renders these exceptions null-and-void or treaty purposes, therebycalling into question the 33 per cent branch rate as a whole. When thenew dividends tax comes into eect, it is proposed that this rate be

reduced i discriminatory.

Revised tax rules or capital distributions and or pre-2001 capital

gain assetsDividend distributions are subject to the secondary tax on companies, whilecapital distributions are subject to the capital gains tax. The capital gainstax impact on capital distributions has had a checkered history. In essence,the most appropriate (and internationally acceptable) result is or capitaldistributions to reduce the distributing share base cost, with gains only takingeect once base cost is exceeded. However, this result has proven elusiveover the years, as the pre-2001 capital gains tax rules prevent taxpayersrom knowing the base cost o pre-2001 assets until disposal. Thereore,

a revised and simplied system or determining the base cost o pre-2001assets will be considered that does not require the base-cost determinationo pre-2001 to be deerred until disposal. I this is achieved, the rules orcapital distributions can be realigned with international practice.

Transer o contingent liabilities

I a business is acquired as a going concern, the purchaser oten assumescontingent liabilities (such as warranty obligations). These acquisitionsmay be taxable or tax-ree. The seller is relieved o these liabilities andthey are removed rom the sellers books. The impact o these contingent

liabilities is an issue that needs to be addressed. In the case o taxableasset acquisitions, a set o explicit rules will be established to ensure thesetransers do not give rise to double deductions or double inclusions. Inthe case o tax-deerred reorganisations, it is proposed that contingentliabilities be completely transerred rom seller to buyer.

Taxation o debt

The tax rules or interest were altered several years ago to close certainavoidance schemes. However, this alteration has given rise to technicaldiculties, especially concerning debt with indenite or indeterminable

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maturities. This problem exists because the interest calculation requiresa set term period that is lacking. It is thereore proposed that a specialcalculation be used in these circumstances to reach an appropriate yieldwithout reliance on a set a term date. It is also proposed that the disposal o

debt instruments beore their maturity generate ordinary revenue becausethe gain or loss refects implied interest dierentials to overall market rates.

Film incentive revision

Film investors are entitled to claim a ull upront deduction or productionand post-production expenditure incurred due to lm ownership costs.Unortunately, this incentive has been widely abused over the years by manytaxpayers who claimed deductions based on articial expenditure. Due toprevious weaknesses in the incentive, taxpayers infated their expenditureby borrowing through articial non-recourse loans or by incurring excessive

costs imposed by connected persons. In view o these diculties, theincentive will be transormed into a tax incentive that encourages prots.

Income tax relie or international shipping

National Treasury announced the intention to provide tax relie or theshipping industry in the 2005 Budget Review to stimulate South Aricanshipping transport. While National Treasury remains committed in thisregard, it is ully understood that tax is only one contributing actor to theshortall in the South Arican shipping register. A working group consistingo all relevant government stakeholders was ormed to reormulategovernments policies and rebuild South Aricas shipping industry. Thiseort will lead to engagement with the industry and a revision o legislation,including tax relie (such as a proposed tonnage tax).

Government grants to private stakeholders

The Income Tax Act exempts certain government grants i they are approvedby the Minister o Finance. This approval depends on a list o actors, butthe main issue is distinguishing between: (i) grants representing an indirectorm o compensation or goods and/or services that should be taxed,

and (ii) other grants designed as a subsidy mainly or the benet o thegrantee. It is proposed that a new set o clear and transparent principles beestablished to determine this distinction.

International

Oshore cell companies

In 2010, National Treasury announced its intent to review oshore cellcompanies due to concerns o large-scale avoidance. Ater discussionswith stakeholders, it is proposed that oshore cells be taxed according to

their substance as multiple-investment entities. This will trigger imputed

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income or each party controlling each oshore cell. Consideration will alsobe given to enhancing the recoupment system when unds are directly orindirectly returned to the insured parties paying the premiums.

Completion o the cross-border withholding tax

In 2010, South Arica enacted a 10 per cent withholding tax on cross-border interest payable by residents to oreign persons, while retaining thecurrent exemption or cross-border portolio debt. The new tax will becomeeective rom January 2013 (the delay caused by the need to renegotiatecertain tax treaties). In the meantime, the withholding enorcementmechanisms will be adjusted to enhance uture South Arican RevenueService (SARS) enorcement and taxpayer compliance.

Tax treaty coordination o similar taxes

Tax treaties apply to income tax and similar taxes. The scope o the termsimilar taxes is an issue, especially when the dierent treaties havediering lists o similar taxes. It is proposed that the income tax be amendedto list all similar taxes (including the impending dividends tax and interestwithholding tax) as explicitly eligible or tax treaty relie.

Company-structured management investment unds

Mutual and private equity unds are showing an increased interest in Arica,including the use o South Arican management to channel these unds.Unortunately, this use o South Arican management triggers signicant

additional South Arican tax, even though the investment unds have aoreign origin and destination. While tax changes in 2010 have soughtto alleviate certain intermediary partnership and conduit entities, the vastmajority o unds use oshore intermediary companies that all outsidethis new relie. It is proposed that these intermediary companies receivetax relie rom the eective management test to remove the negative taxconsequences associated with South Arican management.

South Arican multinational oshore restructurings

Many South Arican multinationals seek to restructure their oshoreoperations. These restructurings oten occur when multinationals acquireoreign companies with inconveniently located subsidiaries and move tomore ecient locations within the South Arican multinational group.In light o the current economic downturn, these restructurings haveaccelerated to reduce costs and increase eciency. Because many o theseoshore restructurings give rise to immediate tax, even i the restructuredoshore entities remain wholly under the control o the South Aricangroup, it is proposed that tax relie be provided in these circumstances.

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Currency transactions indirectly connected to certain oreignhedges

Foreign currency held or business use is largely taxed on an annual mark-to-market basis with certain exemptions and deerrals until actual disposition.

For example, certain loans to oshore oreign subsidiaries all outside themark-to-market regime, as do certain currency hedges against the purchaseo oreign shares. In essence, once certain assets linked to currency gainsand losses are exempt, all linked instruments should also be exempt. Itis proposed that a urther set o linked arrangements be excluded rommark-to-market taxation. These newly exempt arrangements will includeoreign bank loans used to und urther intra-group loans, the latter owhich already all outside mark-to-market taxation.

Value-added tax

VAT and transer duty nexus

A notional VAT input credit may be claimed when a VAT vendor buys axed property rom a non-VAT vendor. To combat abuse, this notional VATinput is currently limited to the transer duty paid by the purchasing VATvendor. It is proposed that the notional VAT input credit be delinked romthe transer duty payable, and that the quantum o the notional VAT inputcredit is set equal to the tax raction (14/114) o the lower o the:

Selling price (consideration) payable or the property

Open-market value o the property

Current municipal value o the property

VAT-inclusive acquisition price, including improvements, by the

non-vendor selling the property.

Synchronising VAT and customs or temporary import relie

The VAT exemption or temporary imports is encountering operationalbarriers in the case o customs duty-ree imported goods. This is due to

coordination issues between the VAT and customs rules. The lack o relieor temporary imports is causing problems or mining and manuacturingoperations that temporarily import and upgrade oreign goods, whichundermines South Aricas ability to export value-added goods. To addressthis issue, technical adjustments will be made to the applicable customsitem number to accommodate duty-ree goods.

Minimum exemption or imported services

VAT is payable on the import o goods and services into South Arica. VATprovides or a R100 minimum threshold exemption or certain imported

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Manuacturer/producer rebates or retail goods

Manuacturers (or producers) may issue coupons that customers redeemwhen purchasing goods rom dealers (or retailers). These coupons (otenreerred to as a rebate) are used to oset the purchase price o the goods.

The question o how to ully account or these three-party relationships inVAT terms is an issue. More specically, the customer should be preventedrom claiming input credits or this ull amount. These input credits shouldonly be available or the non-coupon consideration actually incurred by thecustomer.

Revised starting date or alternative apportionment methods(administration)

I a vendor utilises goods or services or both taxable and other non-taxablepurposes (mixed purposes), only a portion o the VAT may be claimed asinput tax credits. In this regard, SARS has prescribed the use o the turnover-based method as the deault method, and SARS has the discretion toapprove alternative methods with retrospective eect. In theory, however,any retroactive input credits caused by the alternative method shouldbe accompanied by a reduction in income tax osets or the same priorperiods. But this corresponding income tax reduction rarely occurs, withtaxpayers receiving VAT reunds without any corresponding tax increase(i.e. without amending previously submitted tax returns). It is proposed thatretroactive changes o apportionment be limited to periods within current

open years o income tax assessment.Limiting month-end cut-o changes

Vendors account or VAT according to tax periods that generally end on thelast day o a calendar month, and the VAT Act allows a vendor to change themonth-end cut-o date to another xed date. This other xed date mustbe within 10 days beore or ater the month end. However, some vendorsare regularly changing their end dates solely to reduce VAT. These constantchanges were never intended and are a drain on SARS enorcement. It isthereore proposed that end dates should not be changed more than once

per 12-month period.

Securities transer tax

Clariying the broker exemption

Members o a stock exchange (brokers) are exempt rom securities transertax. While the exemption has existed or years, its initial intent is not entirelyclear. Upon review o industry practice, it appears that the exemption is usedby brokers as market makers or shares to enhance liquidity and to acilitatethe role o banking institutions. It is now proposed that the exemption be

revised to clariy that it applies solely to players engaged as market makers.

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Technical corrections

In addition to the amendments described above, the 2011 tax amendmentbills (like all annual amendment bills) will contain various technicalcorrections. The main thrust o these technical corrections is to cover

inconsequential items. These items remedy typing errors, grammar,punctuation, numbering, misplaced cross-reerences, misleading headingsand denitions, dierences between the two language texts o legislation,updating or removing obsolete provisions, the removal o superfuous textand the incorporation o regulations and commonly accepted secondaryinterpretations into ormal law. Technical corrections urther includechanges to eective dates and the proper coordination o transitional taxchanges.

A nal set o technical corrections relates to modications that account

or practical implementation o the tax law. Although tax amendmentsgo through an intensive comment and review process, new issues arise(including obvious omissions and ambiguities) once the law is applied.Issues o this nature typically arise when returns are prepared or the rsttime ater legislation is implemented. Technical corrections o this natureare almost exclusively limited to recent legislative changes.

Tax policy research projects

The ollowing tax policy research projects are under way:

Taxation o nancial derivatives. Taxation o long-term insurers. Housing tax incentive or developers. To increase the supply o aordable

housing (below R300 000), the easibility o an income tax credit ordevelopers will be explored.

Provincial motor vehicle licence ees. Minimum national standardsto include an environmental tax component in provincial licence eestructures will be considered.

VAT treatment o public passenger transport services. The VAT treatment

o public passenger transport, rail, bus and taxi, will be reviewed withthe objective to acilitate higher levels o investments in passengertransport inrastructure.

VAT and educational accommodation. VAT treatment and apportionmentrules concerning educational institutions that provide contract researchand student accommodation will be reviewed.

Estate duty. The eectiveness o estate duty (20 per cent on the netvalue o estates in excess o R3.5 million) is being reviewed, with severaloptions under consideration.

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User charges and other ees. Mechanisms or the setting o user chargesand administrative ees will be reviewed. The setting o such ees shouldbe transparent and subject to public consultation, particularly wherethese are not regulated by an independent agency.

Impact o tax proposals on 2011/12 revenue

- 4 115Budget 2011/12 proposals

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