VAT rate increase may be budget hot potato
ONE tax question deserving attention on budget day is a discussion of an increase in the VAT rate to a potential 15% to close the budget gap. Another much talked about issue will be base erosion and profit shifting (BEPS) and the Davis committee’s take on the Organisation for Economic Cooperation and Development’s (OECD) recent recommendations.
The Davis Committee released a report on BEPS on December 23 2014 with recommendations for SA on implementing the 2014 deliverables of the OECD on BEPS. The 2014 OECD report addresses seven of 15 deliverables, with the remainder anticipated to be finalised this year.
The Davis Committee believes that general law changes to address e-commerce is not critical in light of the extensive existing general South African tax rules, although certain specific rules may be beneficial.
The committee recommends that specific source rules for the supply of e-commerce goods and services be implemented. These rules should be consumption based and lend themselves to apportionment, i.e. not as rigid as the current source rules.
The committee also recommends that foreign residents should be required to submit annual income tax returns if they have source income, irrespective of the existence of a permanent establishment in SA.
The committee recommends that the definition of e-commerce for VAT purposes be extended to include online advertising and that it distinguishes between business-to-business transactions and business-to-consumption. The committee also recommends that consideration be given to use the banks as a withholding mechanism for VAT transactions.
The committee is of the view that hybrid instruments should be addressed conceptually and not through specific legal rules such as those relating to hybrid debt provisions in the Income Tax Act. The committee recommends that the law should not allow for foreign tax credits where global tax was neutralised in terms of the underlying net income through deductions or set-offs.
The committee recommends that the South African headquarter regime be retained to attract companies to use SA as a headquarter jurisdiction. It also recommends that the regime be further enhanced to promote headquarter services, and not only to favour holding company status. It also criticises certain aspects of special economic zones.
The committee recommends the introduction of a main business purpose requirement for the application of tax treaties and a limitation of benefits article. A domestic general anti-avoidance override for tax treaties should be made legally explicit.
The committee supports the renegotiation of older tax treaties with outdated provisions. It also strongly supported the revised Mauritius tax treaty, including the revised clause dealing with dual residence companies and that pre-existing tax-sparing clauses within certain older treaties be revised in line with OECD guidelines.
The committee believes that the current transfer pricing and exchange control provisions effectively caters for schemes where intangibles are developed locally and finalised abroad to make payments to the low-taxed foreign jurisdiction. The committee expressed concern over payments made to a foreign location with little value addition, but without firm recommendations on how these schemes can be rectified.
The committee supports the OECD recommendation that multinationals should have a master global file, a local file and country-bycountry reporting. It recommends a group turnover threshold of R1bn and certain materiality requirements to reduce administration that outweighs the business economics. The committee supports the OECD plan for multilateral agreements to enhance the globalisation of the BEPS proposals.
Since BEPS is extremely topical in the global tax arena and of great importance to a developing (or dualistic) economy such as SA, this month’s budget may go that one step further than the committee has already gone in December 2014. In addition, a long expected 1% hike in the VAT rate which could see a revenue yield of R15bn may not be that surprising.
Another thing to watch will be word on the economy’s outlook. Finance Minister Nhlanhla Nene may want to close out on his mediumterm budget policy statement delivered last October where he pointed out that in the 2014 budget, the South African economy was expected to grow by 2.7% in 2014, whereas the medium-term budget policy statement revised this estimate to 1.4%, reaching 3% in 2017.
Other issues include SA’s headquarter regime, profit shifting and income tax returns for foreign residents
Ferdie Schneider is head of tax at BDO South Africa.