International Tax -Budget 2023/24 Highlights

Today, the Minister of Finance Enoch Godongwana presented the National Budget for 2023/24. Here are some of the highlights from the #budgetspeech relating to #internationaltax .

Article by - Raeesa Haneef

Base erosion, pro?t shifting and digital services taxation

The OECD/G20 Inclusive Framework has two pillars. Pillar One focuses on the digital economy while Pillar Two focuses on the remaining base erosion and profit-shifting matters. It proposes that all internationally operating businesses with million pay an effective tax rate of at least 15 per cent, subject to certain requirements and exemptions. The Minister has stated that government will publish a draft position on the implementation of Pillar Two for public comment and draft?

Extending the anti-avoidance provision to cover foreign dividends from shares listed in South Africa

Section 10B of the act exempts foreign dividends received or accrued from shares listed on a South African stock exchange from normal tax. This exemption was introduced because these foreign dividends may be subject to dividends tax. It has been noticed that schemes have been devised to exploit this exemption. Accordingly, it is proposed that the round-tripping anti-avoidance provision for foreign dividends be amended to include foreign dividends received or accrued from shares listed on a South African stock exchange if the foreign dividends are directly or indirectly funded by amounts that were deductible in South Africa.

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Interaction between the anti-avoidance rule and exemption applying to foreign dividends

The act contains an anti-avoidance rule in terms of which the participation exemption does not apply to a foreign dividend if any amount of the foreign dividend arises directly or indirectly from an amount that is deductible from the income of any person under the Income Tax Act. further exemption that applies to foreign dividends limits the effective tax rate for foreign dividends accruing to residents to a rate of 20 per cent. This exemption has the effect that amounts that are allowed to be deducted for income tax at a rate of 27 per cent or marginal tax rates are taxed at a rate of only 20 per cent where the anti-avoidance provision applies. It is proposed that the exemption to tax foreign dividends at 20 per cent should not apply where the anti-avoidance rule is applicable.

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Clarifying the foreign business establishment exemption for controlled foreign companies

The act contains anti-avoidance rules in section 9D aimed at taxing South African residents on an amount equal to the net income of a CFC. The CFC rules contain exemptions for certain types of income. For example, amounts that are attributable to a foreign business establishment of a CFC. It has come to the government’s attention that some taxpayers are retaining certain management functions but outsourcing other important functions for which the CFC is also being compensated by its clients. This is against the policy rationale of the definition of a foreign business establishment. It is proposed that the tax legislation be clarified such that, to qualify as a foreign business establishment, all important functions for which a CFC is compensated need to be performed by the CFC or by the other company meeting the requirements listed above.

Taxation of non-resident beneficiaries of trusts

Government is concerned about the difference between the rules covering the normal tax treatment of income attributed to beneficiaries of trusts in section 25B of the act and the rules covering the tax treatment of capital gains in relation to beneficiaries in paragraph 80 of the Eighth Schedule to the act. The flow-through of amounts from South African tax resident trusts to non-resident beneficiaries makes it difficult for SARS to collect income tax from those non-resident beneficiaries as it is more complicated to enforce recovery actions against non-residents. To address this, it is proposed that changes be made to section 25B to align it with the provisions of paragraph 80.

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Refining the participation exemption for the sale of shares in foreign companies

Paragraph 64B of the Eighth Schedule of the act contains a participation exemption relating to the sale of shares in foreign companies and section 10B contains a participation exemption relating to foreign dividends from foreign companies. The main aim of these exemptions is to encourage the repatriation to South Africa of foreign dividends and the proceeds on the sale of shares in foreign companies to non-connected non-residents. Government has identified certain transactions that do not achieve this aim but for which the participation exemption for the sale of shares in foreign companies applies. Accordingly, Government proposes changing the tax legislation to not grant the participation exemption if the sale of shares is to a non-resident company that formed part of the same group of companies as the company disposing of the shares, or the shareholders are substantially the same as the shareholders of any company in the group of companies disposing of the shares.

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Refining the participation exemption for the foreign return of capital from a CFC

The participation exemption relating to the sale of shares in foreign companies is subject to certain qualifying requirements. One of these requirements is that the South African tax resident selling the shares in a foreign company should have held those shares for at least 18 months prior to the sale. In 2012, changes were made to the act to extend the participation exemption to apply in respect of the foreign return of capital from a CFC. However, the participation exemption for the foreign return of capital from a CFC does not have a similar 18-month holding requirement. To close this loophole, it is proposed that a similar holding requirement be introduced for the participation exemption in respect of the foreign return of capital from a CFC.