Page 1140 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
interest, or payable or receivable as a lump sum or unequal installments during the term of the nancial arrangement. For the purposes of the source rules (see section 9(2)(b) and hybrid instruments rules (see sections 8F(1) and 8FA(1), the term ‘interest’ is de ned with reference to the de nition of the term in section 24J.
In terms of common law (see CIR v Genn & Co Ltd 1955 (3) SA 293 (A); ITC 1496 53 SATC 229 and ITC 1588 57 SATC 148), interest is de ned as consideration paid for the use of money.
For tax treaty purposes, the term ‘interest’ is de ned in Article 11 as income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s pro ts and in particular, income from government securities and income from bonds and debentures, including premiums and prizes attaching to such securities, bonds or debentures.
II. Reasons for change
The de nition of the term ‘interest’ is clear for the purposes of section 24J, hybrid instruments rules and source rules. However, the lack of general de nition of the term interest in the Act and in section 50A, withholding tax on interest, creates uncertainty. Part of this uncertainty stems from the fact that it is not clear whether, for withholding tax on interest purposes, the term ‘interest’ means interest as de ned in section 24J or common law meaning the term. This lack of de nition makes it dif cult to determine which amounts are included in the concept of interest for the purposes of the withholding tax on interest.
III. Proposal
In order to remedy the uncertainty described above, it is proposed that the for the purposes of withholding tax on interest, the term ‘interest’ will be de ned in section 50A with reference to paragraphs (a) or (b) of the de nition of ‘interest’ under section 24J(1).
IV. Effective Date
The proposed amendments will come into operation 1 March 2016 and applies in respect of interest that is paid or that becomes due and payable on or after that date.
5.6 REVISION OF THE DEFINITION OF FOREIGN PARTNERSHIP
[Applicable provisions: Section 1 of the Income Tax Act]
I. Background
A number of jurisdictions offer investors the option of using a form of enterprise that combines the bene t, for their members, of limited liability with ow-through treatment for tax purposes. These entities combine, in effect, the characteristics of a partnership and a company. The pro ts of these entities are taxed in the hands of the members and not that of the entity. The tax treatment being, in essence, similar to that of a limited partnership formed and carried on in South Africa.
In 2010, amendments were made in the Income Tax Act to exclude a ‘foreign partnership’ from the de nition of a ‘company’. The main aim of this amendment was to align the tax treatment in South Africa with the tax dispensation applying in the country of its formation or establishment. According to the 2010 amendments, an entity will in terms of the current Income Tax Act de nition of a ‘foreign partnership’ be regarded as being scally transparent in its country of origin if tax on income is levied only on its members, and not levied at entity level. The entity will then qualify as a foreign partnership and be taxed in the same manner as a limited partnership irrespective of whether it quali es, in that jurisdiction, as a separate legal entity.
II. Reasons for Change
It has come to Government’s attention that entities can be scally transparent at national level, but such entity is subject to a tax on income at municipal level in respect of a business enterprise carried on by it. Effectively, the entity is subject to tax at entity level only in respect of its income that is subject to the municipal tax. An entity the total income of which is, at national level, subject to tax in the hands of its members only, may therefore fail to qualify as a ‘foreign partnership’ as it will not meet the requirement of not being liable for or subject to any tax on income in its country of origin. The entity may, as a result, be subject to disparate tax dispensations in South Africa and its country of origin. This may give rise to various anomalies and possibilities for cross-border tax arbitrage.
III. Proposal
It is proposed that amendment be made to the de nition of ‘foreign partnership’ to align the income tax treatment of the entity in South Africa with its income tax treatment, at national level, in its country of origin and exclude any taxes levied at municipal or local authority level or a comparable authority in the country of origin. The harmonised treatment of these entities should provide greater clarity and assist in curbing the use of these entities for purposes of cross-border tax arbitrage.
IV. Effective Date
The proposed amendments will be deemed to have come into operation on 31 December 2015 and applies in respect of years of assessment ending on or after that date.
6. VALUE-ADDED TAX
6.1 ENTERPRISE SUPPLYING COMMERCIAL ACCOMMODATION: MONETARY THRESHOLD ADJUSTMENTS
[Applicable provisions: Section 1(1): De nition of ‘commercial accommodation’ and proviso (ix) to the de nition of ‘enterprise’]
1132 SAIT CompendIum oF TAx LegISLATIon VoLume 2