Since its establishment in October 2013, the Office of the Tax Ombud (OTO) has been expected to enhance South Africa's tax administration system. Although the OTO has proven its value to the industry and taxpayers alike by resolving complaints, securing large refunds and launching much-anticipated investigations, its greatest challenge continues to be proving that it is equipped and has the capacity to go toe-to-toe with the South African Revenue Service.
The Supreme Court of Appeal recently considered whether the South African Revenue Service commissioner had been correct in disallowing the use of certain assessed losses under Section 103(2) of the Income Tax Act. Section 103(2) of the act is an anti-avoidance provision which essentially allows the commissioner to disallow the offsetting of an assessed loss or balance of an assessed loss against a taxpayer's income where certain requirements are met.
The South African Revenue Service recently published Binding Private Ruling 309, which deals with the disposal of assets by public benefit organisations. Specifically, the ruling deals with the application of the definition of 'gross income' in the Income Tax Act and the capital gains tax exemption in the Eighth Schedule to the act.
The South African Revenue Service recently published Binding Private Ruling 310, which deals with the tax treatment of customer loyalty programmes. The applicant was a local company supplying goods and services in the course of trade, which had – in order to enhance its business – proposed to implement a customer loyalty programme through which participating customers could benefit.
The South African courts have held, on a number of occasions, that taxpayers are entitled to deduct damages or compensation paid to third parties. However, this principle does not apply in all cases. A recent High Court decision has made clear that before a taxpayer calculatedly breaches an agreement, it should carefully consider the incidence of tax.
United Manganese of Kalahari (Proprietary) Limited (UMK) recently applied to the High Court for declaratory relief in relation to the correct interpretation and application of Section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act. The South African Revenue Service alleged that UMK had incorrectly deducted transport and distribution costs from gross sales and, in so doing, had estimated these costs instead of using actual costs incurred.
Under Section 93 of the Tax Administration Act, there are five circumstances under which the South African Revenue Service may issue a reduced assessment in order to reduce a person's tax liability. While Section 93 makes it possible to 'skin a cat' (ie, reduce tax liability) in more ways than one, taxpayers should be mindful of the requirements that must be met and the correct process to follow in order to achieve the desired result.
The Supreme Court of Appeal recently had to determine whether an assessment issued for secondary tax on companies (STC) in respect of a dividend cycle ending in February 2007, which had been levied under the Income Tax Act, had prescribed in accordance with the Tax Administration Act. The key issue for consideration was whether the Tax Administration Act had prohibited the South African Revenue Service from issuing the assessment for STC in respect of that dividend cycle.
In deciding whether to invest abroad and which country to invest in, taxpayers will usually consider whether South Africa has a double tax agreement with that country. However, taxpayers should also ensure that they comply with South Africa's exchange control rules when making an offshore investment. One of the biggest pitfalls to avoid in this regard is the creation of a loop structure, which is considered to be a serious contravention of these rules.
An amendment to the Eighth Schedule to the Income Tax Act, as proposed in the draft Taxation Laws Amendment Bill, seeks to clarify that capital losses between connected persons will be ring-fenced where a person redeems its interest in the other person (eg, a company) and the two persons are connected. The amendment directly addresses the discrepancies ensuing from Income Tax Case 1859 and clarifies the legal position in respect of the redemption of shares.
The draft Taxation Laws Amendment Bill 2018 has proposed a number of significant legislative amendments, including with regard to the allowance for doubtful debts set out in Section 11(j) of the Income Tax Act. The proposed amendments envisage separating the tax treatment of two defined categories of taxpayer – namely, those which use International Financial Reporting Standards 9 for financial reporting purposes and those which do not.
The draft Taxation Laws Amendment Bill, which was recently published for public comment, represents a first for South African taxpayers as it introduces legislative provisions regarding cryptocurrencies. The draft bill is indicative of the National Treasury's approach to the tax treatment of cryptocurrencies, with the proposed amendments demonstrating an identifiable impact on cryptocurrency traders at the outset.
The supply of cryptocurrencies can cause administrative difficulties with regard to the value added tax (VAT) system. As such, the former minister of finance recently proposed that the VAT legislation be amended. In the interim, the South African Revenue Service has stated that it will not require persons to register for VAT for the supply of cryptocurrencies until there has been policy clarification in this regard. The exemption of cryptocurrency transactions from VAT is undoubtedly the preferred route.
The Explanatory Memorandum on the Taxation Laws Amendment Bill notes that the 2017 amendments to the Income Tax Act which provided that the anti-avoidance rules on dividend stripping override the corporate reorganisation rules may affect some legitimate transactions. As such, a number of amendments have been proposed to remedy this issue.
Given the current economic climate, debt restructuring and relief have increased and thus received concomitant increased attention from the relevant tax and finance authorities. The latest round of proposed tax amendments in this regard attempt to address a number of concerns discussed in the explanatory memorandum on the draft Taxation Laws Amendment Bill.
A recent judgment dealt with the pertinent and relevant issue of whether the South African Revenue Service (SARS) was legally justified in refusing to pay certain value added tax (VAT) refunds to a taxpayer on the grounds that the taxpayer owed an income tax debt, which SARS alleged was due and payable. The judgment should be seen as positive by taxpayers that have experienced difficulties in getting SARS to pay VAT refunds.
Section 31 of the Income Tax Act concerns transfer pricing, one of the most contentious areas of tax law not only in South Africa, but also around the world. Historically, there has been no judicial precedent in South Africa regarding the application of Section 31 – in particular, the arm's-length principle. However, the High Court recently issued its findings regarding the application of certain provisions included in Section 31.
Dividends are exempt from income tax even if a person receives the dividend by virtue of a cession to that person of the right to receive the dividend. In a notable exception to this principle, if a shareholder cedes the right only to receive dividends (ie, without transferring the other rights attaching to the underlying shares) to a company, the dividend accruing to the company is subject to income tax.
In 2016 the Davis Tax Committee (DTC) formed a corporate income tax (CIT) sub-committee to prepare a CIT report setting out the DTC's position. To ensure that the recommendations made in the report were practical, the DTC took into consideration South Africa's present economic position as well as its outlook. The DTC recognises that in the context of low economic growth, taxes must be raised in a manner that causes as little disruption to economic growth and employment as possible.
In recent years, taxpayers have frequently been unsuccessful in their disputes with the South African Revenue Service, especially where the dispute has involved the interpretation or application of the substantive provisions of tax legislation. However, where disputes have involved compliance with the procedural requirements of tax legislation, taxpayers have generally had greater success.