Page 1136 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
described in the relevant regulation. Also, since the introduction of the incentive in 2009, the rate of 45 c/kWh has not been adjusted and is deemed insuf cient to incentivise energy ef ciency projects.
III. Proposal
It is proposed that the amount of the allowance to be claimed by taxpayers in respect of energy ef ciency savings be increased from 45 cents per kilowatt hour to 95 cents per kilowatt hour or kilowatt hour equivalent of energy ef ciency savings.
IV. Effective date
The proposed amendments will be deemed to come into operation on 1 March 2015 and applies in respect of years of assessment commencing on or after that date.
5. INCOME TAX: INTERNATIONAL
5.1 RELAXING CAPITAL GAINS TAX RULES APPLICABLE TO CROSS ISSUE OF SHARES AND INTRODUCING COUNTER MEASURES FOR TAX-FREE CORPORATE MIGRATIONS
[Applicable provisions: Section 9H, paragraphs 11(2)(b) and 64B(1)(b) of the Eighth Schedule]
I. Background
A. Prior to 2013
Prior to 2013, the issue of shares by a company was not considered to be a disposal for capital gains tax purposes. It was envisaged that this would be tax neutral to encourage company formations and would increase foreign investment in and capitalisation of South African resident companies. However, it came to Government’s attention that certain types of investments by non-residents could have resulted in the tax-free exit of resident companies. Ultimately, the transactions of concern initially involved a strategy to gain foreign control of a resident company through the tax-free issue of shares by the resident company to a non-resident in exchange for shares in a non-resident company.
Secondary to this step, the resident company would be stripped of its foreign operations free of tax by relying on the participation exemption (under paragraph 64B of the Eighth Schedule) on the disposal by a resident of its shares in its foreign operations (including shares acquired through the preceding tax-free cross-issue of shares). Added to this, the dividends participation exemption (under section 10B(2)(a)) would exempt any foreign dividends being channeled through the resident company in the intervening period from income tax.
Finally, the tax residence of the resident company would in some instances be shifted offshore through a shift in the place of effective management which, in any case, resulting in a much lower exit charge arising at this stage given the preceding asset realisation and low level of unrealised gains in the assets at the time of ceasing to be a South African tax resident.
B. 2013 Amendments
In an attempt to counter the abovementioned concerns, in 2013 paragraph 11(2)(b) of the Eighth Schedule was amended. As a result, the issue of shares by a resident company is currently not exempt from capital gains tax where shares are issued to any person in exchange, directly or indirectly, for shares in a foreign company. The introduction of this exception was aimed at dealing with the initial step of these transactions that involved the issue of shares in exchange for shares in a foreign company.
II. Reasons for change
As stated previously, the introduction of the exception under paragraph 11(2)(b) of the Eighth Schedule was aimed at preventing the potential tax free corporate migrations that took advantage of the tax free transfer of the control of a resident company and the participation exemptions. However, it has come to the attention of Government that the 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule are too broad and impact on transactions that broaden the South African economy and by implication the tax base through the acquisition of foreign entities in exchange for the issue of shares and undermines the expansion of South African multinationals.
As the current wording of paragraph 11(2)(b) of the Eighth Schedule refers to the direct or indirect acquisition of shares in a foreign company, the application of the provisions of paragraph 11(2)(b) of the Eighth Schedule has unintended consequences on the asset for share transactions covered by section 42. This may result in the company issuing the shares (transferee company) under a section 42 asset-for-share transaction not being able to bene t from the intended capital gains tax relief envisaged under the roll-over provisions.
Finally, it has been identi ed that the current ambit of the participation exemption in respect of the disposal of shares in a non-resident company by residents is open to abuse. In the 2003 Budget Review, the then Minister of Finance announced the intention to allow the tax free repatriation of foreign dividends back to South Africa. This type of dividend exemption (which is known as the participation exemption) often exists alongside the tax free sale of foreign shares as pro ts from the sale of shares merely represent retained dividends. It was in this context and for this intention that the participation exemption in respect of the disposal of shares in a non- resident company was introduced.
Whilst it was intended that the disposal of foreign shares should not be subject to tax in order to allow for the envisaged tax free repatriation of capital, it is of concern that non-resident connected persons in relation to South African foreign controlled companies use this exemption to strip resident companies of their holdings in foreign operations and may oftentimes keep the resident company tax resident in South Africa while embarking on this base erosion strategy.
III. Proposal
In order to reverse the unintended consequences of the 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule, without losing sight of the initial policy intent to counter untaxed corporate migrations out of South Africa, the following changes are proposed:
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