NON-EXECUTIVE, NON-RESIDENT NON-EXECUTIVE DIRECTORS, PAYE AND VAT: SARS GENERAL RULING – INTERPRETATION

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The position for non-executive directors remain complex, despite the recent SARS General Rulings. The general rules confirmed in these Rulings are that non-executive director fees will, with effect 01 June 2017, not be subject to employees’ tax withholding and will be subject to VAT where the non-executive director is liable for VAT, either through voluntary or compulsory VAT registration. The following principles make the position on non-executive directors more complex –

  • The source of directors fees are considered to be where the head office of the business is located. Therefore, where the directorship is South Africa, the source is South Africa.  See for example ITC 77 (1927) 3 SATC 72; ITC106 (1927) 3 SATC 336; ITC235 (1932) 6 SATC 262; and ITC250 (1932) 7 SATC 46.
  • There is a specific Double Tax Agreement clause and which deals with directors’ fees. This clause is generally contained in Article 16 of the OECD model treaty and typical wording reads “Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.” This means that the DTA does not override the source country taxing right and also that the “independent personal services” clause, with certain exemptions, does not find application.
  • The non-executive director will have to register for VAT on a compulsory basis, where the VAT Act requirements are achieved. This effectively means that where the expected fees are above R1m for a fiscal year, the registration is compulsory provided there are some meetings held in SA in compliance with the definition of ‘enterprise’ in section 1 of the VAT Act. The VAT vendor must the invoice for services through the issuance of valid VAT invoices and there is normally a bi-monthly VAT compliance requirement, even where no VAT invoices was issued.
  • There is still employees’ tax withholding on non-resident non-executive directors. The reason is that they do not fall within the exemption in the Fourth Schedule to the Act. This makes also sense logically, as SARS would have difficulty collecting from someone in a foreign jurisdiction and the tax laws are by its very design aimed at protecting our tax base.
  • The non-executive director is allowed to claim expenses against the production of income, which can be done on personal tax assessment. There is necessarily then a refund of PAYE and to the extent which expenses are allowed. We recommend that a basic set of AFS are prepared and to support the tax filing. Also, a South African bank account may be opened and is very useful to receive the tax refund and a prerequisite for receiving a VAT refund.

Many companies with non-executive directors who are non-resident outsource their compliance and planning to provider for an end-to-end solution, including on income tax, VAT, administration and opening of their foreign bank accounts.

NON-EXECS, PAYE AND VAT: SARS PROVIDES CLARITY

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Historically, it was unclear whether amounts paid to a non-executive director were subject to the deduction of employees’ tax and whether the prohibition against certain deductions by salaried employees applied to them. This being as a result of a non-executive directors arguably not earning remuneration as defined in the 4th Schedule to the Income Tax Act. No. 58 of 1962 (“the Act”)

This uncertainty further extended into the application of proviso (iii) to the definition of an “enterprise” as contained in Section 1(1) of the VAT Act, 89 of 1991 (“the VAT Act”), as this proviso excludes from the ambit of VAT the activities of an employee but nevertheless applies to the activities of an independent contractor.

During the 2016 budget speech, it was announced that an investigation into these uncertainties will be launched and clarity provided.  This resulted in the issuance by SARS of two welcomed binding rulings. These are, Binding General Ruling 40 (“BGR40”) which deals with employees’ tax implications for a non-executive director and Binding General Ruling 41 (“BGR41”), which deals with the VAT implications.

In terms of BGR40, SARS ruled that non-executive directors do not earn remuneration and therefore amounts paid to them are not subject to employees’ tax. In addition, BGR40 puts it beyond doubt that the prohibition against deductions as contained in section 23(m) of the Act does not apply to non-executive directors.

In terms of BGR41, SARS ruled that non-executive directors may be required to register for and charge VAT in respect of fees earned provided all requirements are satisfied.

While the rulings only apply from 1 June 2017, it is arguable that the rulings merely give effect to what has always been the position under South African tax law.

SA’s Tax Dilemma: Hiking VAT vs Wealth Taxes

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ALL eyes will be on government’s tax proposals in the upcoming national budget, to be tabled in Parliament on February 22.

The minister of finance already indicated in his mini budget that the fiscal authorities will be looking for additional tax revenue of R28bn in the 2017/18 fiscal year, plus a further R15bn in 2018/19, which will require more than routine tax increases. This is almost double the amount envisaged at the time of the tabling of the 2016 national budget, which indicated planned increases in tax revenue of R15bn in both 2017/18 and 2018/19, after an increase of R18bn in the current fiscal year. As unwelcome as these increases are at a time of general weakness in economic activity, they could have been substantially higher if National Treasury had not been as successful in maintaining the expenditure ceiling as has been the case.

Although increases in tax (in particular direct taxes) are generally regarded as anti-growth, one could argue that at this juncture they will contribute indirectly to higher economic growth by helping to maintain South Africa’s credit ratings and in that way prevent an increase in the cost of capital. The choice of taxes through which to raise the required additional revenue will nevertheless have to be exercised carefully to minimise any anti-growth bias.
The tax increases to be announced will in a sense be ad hoc in nature to address the current pressing problem of stabilising the government debt/GDP ratio. However, they will have to be contemplated within the context of the longer-term, fundamental tax reform envisaged at the time of the appointment of the Davis Tax Committee.

The pronouncements in this connection in the 2016 Budget Review should therefore be noted, viz. “Key considerations include the need to maintain the progressive nature of South Africa’s fiscal system and ensure that tax measures do not unduly prejudice economic growth or poor households.” Furthermore, “In future, the balance between taxes on income (direct taxes) and consumption (indirect taxes) will be an important consideration in ensuring a diversified, equitable and sustainable tax system. “The current mix suggests that there may be greater room to increase indirect taxes, such as VAT. Any proposals along these lines would need to be accompanied by measures to improve the pro-poor character of expenditure programmes so that the fiscal system remains progressive.” The comment about a possible increase in the VAT rate contrasts with the recent statement by Judge Davis that an increase in VAT would be inappropriate at this point in time, but then of course the judge does not make policy. It is therefore not surprising that the tax proposals in the 2016/17 budget relied mainly on increases in indirect taxes to raise additional revenue, but they could not avoid limiting the allowance for fiscal drag to less than what full compensation for inflation would have required (although shunning a further increase in marginal rates of personal income tax after the one percentage point increase in 2015).

So what does this tell us about the possible nature of tax increases in the 2017 national budget? Judging by the principles set out in the 2016 Budget Review as quoted above the emphasis should once again be on indirect taxes, viz. increasing rates for a variety of taxes (e.g. excise taxes and the fuel levy) by more than inflation, but also looking at broadening the indirect tax base by the introduction of new taxes such as the proposed sugar tax. The problem is that the amount of additional revenue (R28bn) required at this point in time is probably too large to raise the lion’s share of it from indirect taxes without increasing the VAT rate. The comments from the National Treasury quoted above indicate that they have accepted the eventual inevitability of a higher VAT rate, but one must acknowledge that there will always be political push-back against this because of the alleged regressive nature of an increase in the VAT rate (ignoring the World Bank’s finding that the way South Africa’s VAT regime is structured results in it actually being progressive).

Oddly enough, the regressiveness of increases in other indirect taxes does not get a mention.
A key question is how the expenditure side can be made even more pro-poor as envisaged in order to make an increase in the VAT rate politically more palatable. For this reason any compensating adjustment will have to be visible and its effect demonstrable. One possibility would be an ad hoc increase in social grants coinciding with an increased VAT rate becoming effective, but then one should guard against diluting the revenue gain from an increased VAT rate too much. For example, a one percentage point increase in the VAT rate will result in approximately R22bn in additional tax revenue in the first year. If all social grants were simultaneously increased by 1% (which would amount to overcompensating for the higher VAT rate) it would cause a revenue loss of approximately R1.5bn, resulting in a net increase in tax revenue of approximately R20.5bn. This would be enough to almost close the tax gap, while the remainder could be raised from routine adjustments to other indirect taxes and tweaking the allowance for the effect of fiscal drag.

Without an increase in the VAT rate, increases in income and wealth-related taxes (capital gains tax is to my mind closer in character to a wealth tax than an income tax), including adjustments to marginal rates of personal income tax, will be unavoidable. (An increase in corporate taxes, although politically popular, would be extremely unwise given the imperative of raising South Africa’s growth rate.) If this route is chosen, income taxes should only be raised in so far as they fit into government’s longer-term strategic view of the future tax system. By now government should already have a sense of how it will respond to the work of the Davis Tax Committee, and any tax changes at this stage should not be contradictory to the anticipated response. Tax reform should be aimed at broadening the tax base in order to enhance the possibilities for lower tax rates, rather than politically expedient tax increases aimed at plucking the goose to get the maximum amount of feathers with the least amount of hissing (with due acknowledgement to Jean-Baptiste Colbert).

In view of South Africa’s highly unequal distribution of income and wealth a markedly progressive tax system is not only inevitable but also justifiable as a matter of principle. However, one should bear in mind that directing government expenditure towards pro-poor items is an even more powerful tool for redistribution. As a rule many South Africans are inclined to uncritically revert to “the rich must pay” (to put it in populist terms) whenever the issue of financing public expenditure is raised. The cumulative extent of all redistributionary measures are rarely considered and although the disincentive effect of any single measure may not be that great, together it may well add up to having a significant influence, e.g. on the international mobility of high-skilled labour. Given the amount of extra tax revenue required, an increase of at least 2 percentage points in marginal tax rates would be a reasonable expectation if the bulk of the required additional revenue was to come from increased personal income tax.

The final answer will depend on how much allowance is made for fiscal drag, if any, and whether the lowest marginal rate (18%) will again escape from being increased as in 2015.

 

Source: m.news24.com

SA RETIREMENT LUMP SUMS: FULLY TAXABLE DESPITE OFFSHORE SERVICES

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SA RETIREMENT LUMP SUMS: FULLY TAXABLE DESPITE OFFSHORE SERVICES

Promulgation of the 2016 Taxation Laws Amendment Bill on 8 January 2017 brings about an impending change to the way in which South African pension, pension preservation fund, provident funds, provident preservation funds and retirement annuity fund (“hereinafter collectively referred to as a “retirement fund”) lump sums are taxed in South Africa for South African tax residents. The brunt of impending the change will be borne by South African tax residents who render employment services outside South Africa while still saving for retirement in a South African retirement fund.

Currently, the Income Tax Act, No. 58 of 1962 (“the Act”) allows an exemption for South African tax residents from tax on lump sum payments from a South African retirement fund to the extent that the services giving rise to the payment were rendered outside South Africa. With effect from 1 March 2017, this will no longer be the case.

According to the explanatory memorandum issued by SARS addressing, amongst others, the reason for changing the status quo is to avoid the disparity which ostensibly arises where South African residents get the benefit of an income tax deduction for contributions towards the retirement fund whilst enjoying an exemption (or partial exemption) on pay-out.

Accordingly, with effect from 1 March 2017, lump sums received by South African tax residents from South African retirement funds will be fully taxable, irrespective of the location where services giving rise to the benefit were rendered. Benefits paid from retirement assets transferred from a foreign fund to a South African retirement fund will however remain exempt from tax as per the status quo.

It is important to note that the change referred to here only effects South African tax residents. Non-residents will still be required to identify the source of the lump sum in accordance with the provisions of section 9 of the Act to assess any South African tax liability.

Tax Increases Next Year?

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With the introduction of Dividends Withholding Tax during the 2013 fiscal year, corporate taxpayers (effectively) saw an increase in the effective tax rate from 34.55% to 38.8% while the Royalty withholding tax was increased from 12% to 15% in the 2015 fiscal year. In the 2016 fiscal year, individual taxpayers bore part of the brunt of meeting fiscal demands when the maximum marginal rate for individuals were increased by one percentage point from 40% to 41%. In addition, 2016 saw an increase in the maximum transfer duty marginal rate from 8% to 11%. The 2017 fiscal year, in turn, has also seen its fair share of tax increases with an increase in amongst others, the effective capital gain tax rate from 13.3% to 16.4% for natural persons and special trusts, 18.6% to 22.4% for corporates and 26.6% to 32.8% for trusts.

Will we see more increases in the 2018 fiscal year? Early signs indicate a resounding, yes:

  • The 2016 Tax Administration Laws Amendment Bill proposes amendments to various tax acts that gives the Minister of Finance the power to change tax rates by announcement in the annual Budget Speech. While the power to be bestowed on the Minister remains subject to Parliamentary intervention, it seems as if Government is reading itself for quick and effective increases in tax rates.
  • The Minister made it clear in his recent medium term budget policy statement that Government needs to raise an additional R28bn in tax revenue to meet fiscal targets over the medium term.

If an increase in tax is inevitable, the next and more prominent question on everybody’s lips is –  who is going to pick up the bill? Corporates, individuals, trusts, the South African public in general?

The Minister has made it clear on several occasions that we will only know for sure next year. While there are many ways to collect more taxes, we are left to speculate:

  • The VAT rate has been the elephant in the room for many years. However, an increase in the VAT rate during the 2018 fiscal year is highly unlikely due to the political sensitivity of a VAT rate increase –  perhaps even more so than in the recent past given the current political landscape.
  • The corporate tax rate, currently at 28%, is relatively low when compared to other jurisdictions. However, potential adverse consequences on investment would probably prevent an increase of this rate next year.
  • Perhaps most likely is yet a further increase in the maximum marginal tax rate for high earning individual taxpayers. We will also not be surprised by an increase in Skills Development Levy to assist with the funding demands for higher education.

Either way, chances are very good that taxpayers will be forking out more next year. We will have to wait for the 2017 Budget to see exactly how much more.

 

 

 

SARS Interpretation Note 92

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SARS has released their Interpretation Note 92 (documentary proof prescribed by the Commissioner).

For access to the entire note, please click here

 

Sugar Tax Could Include Pure Fruit Juices – National Treasury

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South Africa could add pure fruit juices to the list of drinks expected to face a levy under a proposed tax on sugary drinks, the Treasury has said, in a country where more than half of adults are overweight.

In his budget speech in February, Finance Minister Pravin Gordhan proposed the tax on sugary drinks to be implemented in April next year, aimed at fighting growing obesity in the continent’s most lucrative market for Coca-Cola.

Health campaigners have welcomed the tax, citing obesity in South Africa, where 42% of women and 13% of men are categorised as obese.

The proposal initially exempted beverages containing natural or intrinsic sugars found in unsweetened milk and milk products and 100% pure fruit juices from the 20% tax, but officials have recently reconsidered their decision citing similar health risks to drinks with added sugar.

“Many health experts argued that 100% fruit juice should also be subject to the tax, as the natural sugar level it contains has the same or very similar negative health consequences as that of sugar added in soft drinks,” the National Treasury said in an emailed response to Reuters.

Chairman of South African Fruit Juice Association, Johan de Kock, said the big difference between fruit juices and some of the other beverages is that fruit juices contain a lot of nutritional value in vitamins and minerals.

“We believe the health benefits of 100% fruit juice outweighs the fruit sugar that it contains,” De Kock said, adding that his group had not been formally informed about the tax on pure fruit juice.

The Treasury said it will debate the proposed tax, including the inclusion of pure fruit juice, during a meeting in November.

The proposed tax on sugary drinks has been opposed by business lobby groups who argue that the tax will impact the economy by hurting soft drink producers and cutting jobs.

If the proposed law is passed, South Africa will join Mexico, France and Hungary in introducing taxes on sugary drinks to fight obesity. Britain also plans to launch the tax.

Source – www.engineeringnews.co.za

Supreme Court of Appeal – XO AFRICA SAFARIS CC v C:SARS (395/15) [2016] ZASCA 160

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XO AFRICA SAFARIS CC v C:SARS (395/15) [2016] ZASCA 160: Supreme Court of Appeal case dealing with whether the supply of services are to be standard rated or zero rated in terms of section 11(2)(l) of the VAT Act, following services being supplied to a non-resident of South Africa but being supplied directly to other persons who were present in South Africa at the time that the services were rendered.”

For access to the entire case, please click here.

Supreme Court of Appeal: CSARS V Morula Platinum Mines

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A Supreme Court of appeal case was ruled between CSARS and Morula Platinum Mines which determines whether certain mined ore should be included in trading stock or be classified as mining operations in terms of the deductibility of the costs thereof.

For access to the entire case, please click here.