What awaits corporate taxpayers in the 2023?
The National Treasury published the draft proposals for tax amendments for the 2022 legislative cycle on 29 July 2022. These give taxpayers an indication of the changes to expect at the end of 2022 (click here for the proposals). The proposals are open for comment during August. These proposals form the basis for the amendments towards the end of the year.
The draft Taxation Laws Amendment Bill (‘TLAB’) contains a number of substantive amendments relating to retirement funding, VAT and carbon tax. Many of the corporate tax amendments are clarifications, technical and textual corrections or amendments that relate to dates. There are however a few corporate tax proposals that taxpayers should be aware of and may want to follow as they develop.
Returns of capital
The definition of contributed tax capital was amended in 2021 to curb abuse. The concerns related to transactions where only selected shareholders received distributions from contributed tax capital (‘CTC’) (i.e. returns of capital). These recipients are typically persons who are subject to dividends tax if the transfer was made as a dividend. The return of capital does not attract dividends tax.
The effect of the 2021 amendment was that an amount transferred by a company to a shareholder(s) cannot be a return of capital unless all shareholders of the class participated in the allocation proportionately. Most share buy-back transactions cannot be returns of capital under this rule, since all shareholders do not generally participate in these distributions. (The rules excluded certain buy-backs by listed companies . It remains questionable whether the exception assisted taxpayers). To allow time to further refine the rules, the 2021 amendment only became effective from 1 January 2023.
The draft TLAB proposes to replace the 2021 amendment with a requirement that an amount transferred to a shareholder by a company may not be from CTC unless all shareholders in the class to whom transfers were made within the 91 days before or after the transfer were allocated CTC in proportion to their shareholding. This is clearly a narrower anti-avoidance rule than the previous proposal. Companies still have to plan the timing of dividend distributions and share buy-backs carefully. They may inadvertently find themselves in a position where no portion of the repurchase price may be a return of capital if they fail to do so.
Lay-by transactions
Many South African retailers use use lay-by agreements to sell products to consumers. The retailer must include the full amount due to it in its income upfront upon entering into the agreement. The duration of these agreements are generally not long enough to qualify for debtors’ allowances. As a result, retailers pay tax on amounts not yet received.
The National Treasury proposes a specific timing concession for lay-by agreements. The proposal contemplates that taxpayers may deduct an allowance for any amounts deemed to have accrued in respect of a lay-by agreement but that have not yet received at the end of the year of assessment. The allowance must take into account doubtful debt allowances claimed. In principle, this should align tax with cash flows.
Intra-group CFC funding
Controlled foreign companies (‘CFCs’) in the same group of companies must disregard certain passive flows between them when determining the net income of each CFC. These flows include interest, royalties, rent and insurance premiums.
Some CFCs provide intra-group funding to each other using instrument classified as hybrid equity instrument for South African tax purposes. The hybrid equity instrument rules deem the yield on such an instrument to be income (of no specific character). It is not clear whether the current intra-group exclusions apply to it. The draft TLAB proposes that the recipient CFC should disregard this income, similarly to other passive flows.
