Page 1138 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
II. Reasons for change
The special tax credit regime is a departure from international tax rules and tax treaty principles in that it indirectly subsidies countries that do not comply with the tax treaties. South Africa is the only country in the world that provides for this kind of tax concession. Effectively, it encourages treaty partners not to abide by the terms of the tax treaty in respect of the taxation of fees and thus give them taxing rights over income that is not sourced in those countries. Consequently, it defeats the whole purpose of the tax treaty. While the enactment of this relief was well intended, it has resulted in a signi cant compliance burden on the South African Revenue Service. Some taxpayers are also exploiting this relief by claiming it even for other income such as royalties and interest that are not intended to be covered by this special tax credit.
Further, the Davis Tax Committee Interim Report on Action 6: ‘Preventing Treaty Abuse’ in its discussion of section 6quin ‘Base erosion resulting from South Africa giving away its tax base’ states that ‘South Africa has effectively eroded its own tax base as it is obliged to give credit for taxes levied in the paying country.
III. Proposal
In view of the above, it is proposed that the special tax credit for service fees be withdrawn. All tax treaty disputes should be resolved by competent authorities of the respective countries through mutual agreement procedure available in the tax treaties as a mechanism to resolve disputes. As a concession, in order to mitigate double tax faced by South African taxpayers in doing business with the rest of Africa, amendments will be made to the current provisions of section 6quat(1C) and (1D) to allow for a deduction in respect of foreign which are paid or proved to be payable without taking into account the option of the mutual agreement procedure under tax treaties.
IV. Effective date
The proposed amendments will come into operation on 1 January 2016 and applies in respect of years of assessment commencing on or after that date.
5.3 REINSTATEMENT OF THE CONTROLLED FOREIGN COMPANY DIVERSIONARY INCOME RULES
[Applicable provision: Section 9D]
I. Background
A. Diversionary income rules prior to 2011
Prior to 2011, controlled foreign company (‘CFC’) provisions contained three sets of diversionary income rules. The rst set of diversionary rules were known as CFC inbound sales. These rules applied to the sale of goods by the CFC to any connected South African resident. An exemption exists if:
• the CFC purchased those goods from an unconnected person in the same country of residence of the CFC; or
• the CFC is engaged in the creation, extraction, production, assembly, repair or improvement of goods that involves
more than minor assembly or adjustment, packaging, repackaging and labelling; or
• the CFC sells a signi cant quantity of goods of the same or similar nature to unconnected persons at comparable
prices, after taking into account whether the sales are wholesale or retail, volume discounts and other geographical
differences such as location costs of delivery or the same; or
• similar goods are purchased by the CFC mainly within the country in which the CFC is resident from unconnected
persons in relation to that CFC
The second set of diversionary rules was known as CFC outbound sales. These rules applied to the sale of goods by the CFC to a foreign resident or to unconnected South African residents where those goods were initially purchased from connected South African residents. An exemption exists if:
• those goods purchased by the CFC from a connected South African resident amounts to an insigni cant portion of the
total goods ; or
• the CFC is engaged in the creation, extraction, production, assembly, repair or improvement of goods that involves
more than minor assembly or adjustment, packaging, repacking, and labelling; or
• the products are sold by the CFC to unconnected persons for physical delivery to customers’ premises situated in the
country in which the CFC is resident; or
• the same or similar products are sold by the CFC mainly to unconnected persons for physical delivery to customers’
premises in the country in which the CFC is resident
The third set of diversionary rules was known as CFC connected services rules. These rules applied when the CFC performs services to a connected South African resident. An exemption exists if the services are performed outside South Africa and:
• such services relate directly to the creation, extraction, production, assembly, repair or improvement of goods and the
goods are used outside South Africa; or
• such services relate directly to the sale or marketing of goods of South African connected persons and those goods are
sold to persons who are not connected persons in relation to that CFC for physical delivery to a customer’s premises
situated in the country in which the CFC is resident; or
• such services are rendered mainly in the country of residence of the CFC for the bene t of customers that have
premises situated in that country; or
• no deduction is allowed of any amount paid by that connected person to that CFC in respect of the services.
B. Diversionary income rules after 2011
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