Page 1139 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
In 2011, changes were made to the diversionary income rules. The diversionary rules in respect of the CFC outbound sale of goods were completely abolished. The rationale for removing these rules was that the transfer pricing rules could be applied as an alternative. In addition, the 2011 amendments narrowed the diversionary rules in respect of the CFC inbound sale of goods. The exemption in respect of income from the CFC inbound sale of goods only applies if:
• the CFC is located in a high tax jurisdiction; or
• the income from the sale of goods is attributable to the activities of a permanent establishment of the CFC.
However, diversionary rules in respect of CFC connected services rules were retained.
II. Reasons for change
While transfer pricing rules can be applied to prevent the shifting of income offshore through the sale of goods and services, the CFC diversionary rules are more expedient in preventing shifting of pro ts offshore through these transactions. The removal of diversionary rules in respect of the CFC outbound sale of goods CFC resulted in the CFC rules being less effective in immediately addressing pro t shifting by South African resident companies. Transfer pricing auditing processes by their nature often take long to be nalised and therefore relying on transfer pricing solely leaves the South African tax base vulnerable to base erosion practices. In addition, the narrowing of the diversionary rules in respect of the CFC inbound sale of goods limited the scope of effective application of these rules.
III. Proposal
In view of the above, it is proposed that:
• the diversionary rules in respect of the CFC outbound sale of goods that were removed by the 2011 Taxation Laws
Amendment Act be reinstated in their pre 2011 form.
• the old diversionary rules in respect of the CFC inbound sale of goods that were changed by the 2011 Taxation Laws
Amendment Act be reinstated in their pre 2011 form.
IV. Effective Date
The proposed amendments will come into operation on 1 January 2016 and applies in respect of foreign tax years of controlled foreign companies ending during years of assessment commencing on or after that date.
5.4 REVISION OF THE DEFINITION OF IMMOVABLE PROPERTY
[Applicable provisions: Section 35A; and paragraphs 2(2), 64B (1), (2) and (4) of the Eighth Schedule)
I. Background
The term ‘immovable property’ is de ned in paragraph 2 (2) of the Eighth Schedule to include any interest or right of whatever nature of a person to or in immovable property situated in South Africa. An interest in immovable property includes any equity shares held by a person in a company or ownership or the right to ownership of a person in any other entity or a vested interest of a person in any assets of any trust. For tax treaty purposes, the term ‘immovable property’ is de ned with reference to the de nition in the law of the contracting country in which the property is situated (i.e. in terms of the law of the source country). According to paragraph 2 of Article 6 of the Organisation of Economic Cooperation and Development (OECD) Model Tax Treaty the term ‘immovable property’ shall include, inter alia, the rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or xed payments as consideration for working of, or the right to work, mineral deposits, sources and other natural resources.
II. Reasons for change
The current de nition of the term ‘immovable property’ in paragraph 2 (2) of the Eighth Schedule does not include the right to mine or prospecting or right to work mineral deposits and other natural resources. South Africa has over 73 tax treaties in force and it is important that the de nition of immovable in paragraph 2(1) of the Eighth Schedule is as closely aligned with the de nition of immovable property in the OECD Model Tax Treaty as possible in order to order avoid any possible anomalies.
III. Proposal
In order to eliminate anomalies, it is proposed that the de nition of the term ‘immovable property’ in paragraph 2 (2) of the Eighth Schedule should be aligned with the de nition of the term ‘immovable property’ in paragraph 2 of Article 6 of the OECD Model Tax treaty to include the right to variable payments or xed payment as consideration for the working of or right to work mineral deposits, sources and other natural resources.
IV. Effective date
The proposed amendments will come into operation on 1 January 2016 and will apply in respect of years of assessment commencing on or after that date.
5.5 DEFINITION OF INTEREST FOR WITHHOLDING TAX PURPOSES
[Applicable provision: Section 50A]
I. Background
Currently, the Act does not contain the general de nition of the term ‘interest’. Section 50A, dealing with withholding tax on interest also does not contain a de nition of the term ‘interest’. The only de nition of interest contained in the Act is found in section 24J and only for the purposes of that section.
For the purposes of section 24J, interest is de ned as including, inter alia, the gross amount of any interest or related nance charges, discount or premium payable or receivable in terms of or in respect of a nancial arrangement, irrespective of whether or not such amount is calculated with reference to a xed rate of interest or variable rate of
SAIT CompendIum oF TAx LegISLATIon VoLume 2 1131