VAT rate in­crease may be bud­get hot potato

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ferdie Sch­nei­der

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.

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