Page 1137 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
Reversal of the 2013 amendment
It is proposed that the 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule be reversed. The issue of shares by a South African resident company as consideration for the acquisition of shares in a foreign company will no longer be subject to capital gains tax. For purposes of reversing the unintended consequences of the 2013 amendment, it is proposed that this amendment should be reversed retrospectively from the date of its introduction, i.e. in respect of shares issued on or after 1 April 2014.
A. Counter measures for tax free corporate migrations out of South Africa
A two-pronged approach will be adopted to counter the identi ed base erosion strategies that use the participation exemption to strip resident companies of unrealised gains in shareholdings in foreign operations. This approach will include:
1. The denial of participation exemption on disposals to connected persons
In the rst instance, as a mechanism to counter tax-free disposals of the foreign operations of resident companies to their non-resident connected persons, it is proposed that disposals of foreign shares by South African residents to connected persons should not bene t from the participation exemption. As a result, it is proposed that an amendment be effected to paragraph 64B of the Eighth Schedule and that any disposal of shares in a foreign company by a resident to a connected person will be subject to capital gains tax.
2. The claw-back of participation exemption bene ts on a change of tax residence
B. Claw-back of capital gains bene ts
It is proposed that upon a change of tax residence as envisaged in section 9H, any capital gains bene ts enjoyed by a South African resident during the three year period before ceasing to be a South African tax resident will be subjected to tax. As such, capital gains disregarded in terms of paragraph 64B of the Eighth Schedule that were determined in respect of disposals by a resident of its shares in foreign companies during the abovementioned three year period will be clawed back. In this regard, the aggregate of such disregarded capital gains will not be allowed to be taken into account in determining the net capital gain or assessed capital loss of the resident, but will be included in the taxable income of the resident at the companies’ inclusion rate.
C. Claw-back of participation exemption on foreign dividends
Similarly, the participation exemption on foreign dividends enjoyed by a South African resident during the three year period before ceasing to be a South African tax resident will be subjected to tax upon exit. As a result, foreign dividends that were exempt in terms of only section 10B(2)(a) during the abovementioned three year period will be subject to tax. Such foreign dividends will be subject to tax, as is the current policy on foreign dividends, at an effective tax rate of 15 per cent. It is proposed that the abovementioned proposed two pronged approach aimed at countering tax free corporate migrations should be applied retrospectively from the date of the release for public comment of the rst batch of the draft Taxation Laws Amendment Bill of 2015, i.e., 5 June 2015.
IV. Effective date
A. Amendments to paragraph 11(2)(b) of the Eighth Schedule
The proposed amendments to paragraph 11(2)(b) will be deemed to have come into operation on 1 April 2014 and apply in respect of shares issued, cancelled or options granted on or after that date.
B. Amendments to section 9H and paragraph 64B(1)(b) of the Eighth Schedule
The proposed amendments to section 9H and paragraph 64B(1)(b) of the Eighth Schedule will be deemed, respectively, to have come into operation on 5 June 2015 and apply in respect of any person that ceases to be a resident or any controlled foreign company that ceases to be a controlled foreign company in relation to a resident on or after that date. Further, the provisions will apply in respect of any person that becomes a headquarter company during years of assessment commencing on or after that date (5 June 2015).
5.2 WITHDRAWAL OF SPECIAL FOREIGN TAX CREDITS FOR SERVICES FEES SOURCED IN SOUTH AFRICA
[Applicable provision: Sections 6quin and 6quat(1C) and (1D)]
I. Background
In 2011, a special foreign tax credit for service fees was introduced. This foreign tax credit applies to foreign withholding taxes imposed in respect of service fees from a South African source (i.e. services rendered in South Africa by a South African resident to a foreign resident). This special tax credit applies on an income-by-income basis. The introduction of this special tax credit was intended to operate as some form of a relief from double or potential double taxation on cross-border services for South African multinational companies that render services to their foreign subsidiaries. The concern was that revenue of cials in some treaty partner countries that have withholding tax on fees in their domestic law ignored tax treaty provisions when funds were paid by their residents to South African resident companies in respect of services rendered to their residents. Although these countries, in terms of their tax treaties with South Africa, do not have the right to tax service fees, they still imposed withholding tax on services (i.e. management, consultancy and technical fees) rendered by South African residents to their residents.
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