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MAY 2012 – ISSUE 152

CONTENTS

STOP PRESS

Dividends withholding tax detailed schedule prepared by SARS [click here].

Protocols subsequently published need to be taken into account. See article 2066 in this

issue for a discussion on the new UK protocol.

COMPANIES

2058. New SARS return

GENERAL

2064. SARS jeopardy assessments

CUSTOMS AND EXCISE

2059. Registration of foreign companies

INTEREST

2065. Section 24J

DEDUCTIONS

2060. Interest and section 23K

2061. Industrial projects

INTERNATIONAL TAX

2066. South Africa/United Kingdom protocol

2067. Namibian withholding tax

DIVIDENDS TAX

2062. Necessary procedures

VALUE ADDED TAX

2068. Input tax apportionment formula

2069. Electronic invoices

EMPLOYEES’ TAX

2063. Long-term policies

SARS NEWS

2070. Interpretation notes, media releases and

other documents

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COMPANIES

2058. New SARS return

The South African Revenue Service (SARS) recently introduced an additional Supplementary

Declaration which must be completed by companies and close corporations (IT14SD) when

requested by SARS subsequent to the completion of an annual income tax return. According to

SARS, the purpose of the IT14SD is to enhance taxpayers‟ tax compliance through the

verification and reconciliation of various declarations made by taxpayers to SARS.

How do I know that my company has to complete and submit the IT14SD?

Currently, the IT14SD would only need to be completed if a company‟s annual income tax return

(IT14), subsequent to it being submitted to SARS, is selected for verification by SARS. As part

of this process, SARS would issue an initial verification letter addressed to the company (which

would either be posted or displayed through eFiling), together with a blank IT14SD for

completion. From our experience, the IT14SD must be completed within 21 calendar days of the

date of the initial verification letter.

What information must be completed on the IT14SD?

The following information is to be completed:

A reconciliation of total employment costs per the IT14 to the total employment cost on

which Pay-As-You-Earn (”PAYE”) was calculated and disclosed per the corresponding

EMP201 returns.

A reconciliation of accounting profit/loss to calculated profit/loss per the IT14.

A reconciliation of total output value-added tax (VAT) supplies per VAT201 returns to

the disclosed turnover per the IT14.

A reconciliation of total acquisitions in respect of input VAT per VAT201 returns to cost

of sales per the IT14.

A reconciliation of the value of imported goods between customs declarations cost of

sales per the IT14 and VAT201 returns.

A reconciliation of the value of exported goods between customs declarations, sales per

the IT14 and VAT201 returns.

Why may this supplementary declaration pose a risk for my corporation?

Industry experience has revealed that SARS may, depending on the nature of the information

submitted in the IT14SD, subject taxpayers to audit or immediately raise additional assessments

in respect of any seemingly unexplained differences in excess of R100. This may pose a

significant risk / administration burden or result in significant additional and unexpected tax

costs for corporations where various reconciling differences may exist which would have to be

disclosed to SARS.

What can I do to ensure that the information required by the IT14SD is readily available,

should its completion be required by SARS?

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In order to ensure ease of completion of the IT14SD (should it be required by SARS), it is

suggested that monthly reconciliations of at least the following taxes to supporting accounting

records be performed and maintained:

PAYE;

VAT; and

Customs & excise.

KPMG

CUSTOMS AND EXCISE

2059. Registration of foreign companies The South African Revenue Services (SARS) has over the last few years been modernising its

processes in line with the World Customs Organisation's SAFE Framework of Standards. In the

implementation of some of these principles however, certain unforeseen consequences arose

resulting in sometimes dire consequences for certain business environments.

Provisions of the Customs and Excise Act No.91 of 1964 (Customs Act) compel any person,

which specifically includes any natural person and any juristic person, whether or not

incorporated in terms of any laws of South Africa, to register with SARS for the appropriate

customs and/or excise client types.

However in practice, during the last year, foreign companies requiring registration with SARS

for any activities falling within the control of the South African customs and excise legislation

have experienced significant barriers in obtaining the required registration.

Upon consultation with SARS, it was noted that the issue stemmed from a constraint within the

information system utilised by SARS for customs and excise registration. In particular, when a

juristic person (i.e. a company or a close corporation) applied for a customs and excise client

type registration, the system required, as a mandatory field, the entity's CIPC (formerly CIPRO)

registration number. Further, the data field was only configured to accept the CIPC registration

number and therefore any foreign company not registered with the CIPC would not have a

registration number that allowed for the SARS' system to accept the registration.

Despite numerous discussions with SARS on this matter, in which the constraint was

acknowledged, SARS were unable to suggest a solution and in fact opined that in terms of this,

foreign companies were obliged to register a company in South Africa in order to comply with

its customs and excise registration obligations. This view seems to disregard the other

consequences of registration of a foreign company in South Africa.

In the meantime, SARS has developed rules which provide specifically for the registration of

foreign companies, for customs and excise clients, allowing for the foreign company to have a

"registered agent" acting on their behalf in South Africa. Initially the implementation of this

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principle is limited to goods imported into South Africa through the Kopfontein border post,

however, following discussions with senior SARS officials, the roll-out of these provisions on a

national basis is planned to occur during 2012.

SARS have been made aware of the constraints and limitations encountered by foreign

companies and have undertaken to consider the impact of these constraints on business and

foreign investment, and to accelerate the provisions allowing for the registration of foreign

companies and their "registered agents" in order to allow for easier and less onerous compliance

with the customs and excise requirement.

Ernst & Young

Customs and Excise Act No.91 of 1964

DEDUCTIONS

2060. Interest and section 23K

Following the drastic 18-month suspension of the intra-group relief available in section 45 of the

Income Tax Act 58 of 1962 (“the Act”) announced on 2 June 2011 which caused much concern

in the business community, with many pointing out that this not only sent a negative message to

the foreign investors but was widely disruptive to legitimate transactions, National Treasury and

the South African Revenue Service (“SARS”) have implemented measures to deal with these

concerns.

In particular, on 3 August 2011 National Treasury and SARS issued a joint press release in

which they announced that the suspension of section 45 would be lifted. They also proposed that

a new section be introduced to control the interest deductions associated with debt used to fund

the acquisition of assets in terms of section 44 (amalgamation transaction), 45 (intra-group

transaction) or 47 (liquidation distributions) of the Act.

Against this background, the new section 23K was inserted into the Act by the Taxations Laws

Amendment Act 24 of 2011 (“TLAA”) and, although the TLAA was only promulgated on 10

January 2012, section 23K is now retrospectively operative with respect to any amount of

interest incurred in terms of any debt instrument issued or used for the purposes of procuring,

facilitating or funding the acquisition of an asset in terms of section 45 of the Act (as from 3 June

2011) or in terms of section 47 of the Act (as from 3 August 2011) such transactions have been

entered into on or after the respective dates (Interestingly and contrary to the initial proposals,

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section 23K does not apply to section 44 amalgamation transactions. However, section 44(4) has

been amended by the TLAA to provide that an amalgamation transaction may not qualify for roll

over relief where the resultant company assumes a debt which was incurred by the amalgamated

company for the purpose of procuring, enabling, facilitating or funding the acquisition of assets

by the resultant company.)

Broadly speaking and subject to the specific provisions of section 23K, “reorganisation

transactions” (i.e. section 45 and 47 transactions) can now be categorised in two categories,

namely so-called “green transactions” and “amber transactions.”

Green transactions are those reorganisations that do not involve interest-bearing debt, in

other words transactions that are cash funded or financed by another company within the

same group of company as the acquiring company. Green transactions will automatically

qualify for roll-over relief and no pre-approval of the transaction is required.

Amber transactions are in essence reorganisations that utilise interest-bearing debt. In

terms of section 23K(2), no deduction is allowed in respect of any amount of interest

incurred by an “acquiring company” in terms of such debt instruments. In accordance

with the provisions of section 23K(3), however, the Commissioner may, on application

by such acquiring company, issue a directive that subsection (2) will not be applicable

(i.e. that the interest may be deducted).

Amber transactions will furthermore fall within two broad categories. Firstly, if the interest-

bearing debt associated with these transactions is funded within the group of companies and

results in no revenue loss (or the possibility of loss), automatic pre-approval is envisioned.

Secondly, a discretionary approval process will apply only if the interest-bearing debt within the

arrangement may result in a revenue loss.

A taxpayer wishing to enter into an amber transaction should therefore apply for approval from

SARS prior to entering into the section 45 or 47 transaction. Applications can be brought by

completing and submitting prescribed documentation and information either directly to the

SARS head office in Pretoria or via a special email account created for this purpose. SARS will

then consider the information supplied against prescribed criteria from the Minister by regulation

and, provided that SARS is satisfied that the issuing of a directive will not lead to a “significant

reduction of the aggregate taxable income of all parties who incur, receive or accrue interest” in

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respect of and for all periods during which any amounts are outstanding in terms of the relevant

debt instrument, SARS may issue the directive.

SARS acknowledges that a longer-term set of solutions to deal with excessive debt and the

characterisation of debt is planned for 2012 and beyond and that they will continue to investigate

what they refer to as “pre-existing aggressive transactions that deliberately avoided paying their

fair share of the tax burden”.

We have previously written on the practical and commercial difficulties which arose from the

sudden suspension of section 45. The introduction of section 23K was aimed at providing

certainty in respect of reorganisation transactions, but the fact that section 23K was introduced

with retrospective effect initially intensified the uncertainty, in particular with regards to

corporates that were in the process of evaluating the most appropriate manner in which to

rationalise their businesses. In our recent experience, however, we have found SARS to be

efficient and helpful in processing section 23K applications and going forward section 23K is

therefore a welcome alternative to the previously proposed moratorium on intra-group

transactions as contemplated in section 45 of the Act.

To ensure that any remaining uncertainties are timeously clarified, we note the following

comments made in the Draft Guide on the Disclosure of Reorganisation Transactions released by

SARS on 3 August 2011:

“It is in the taxpayer‟s best interest to apply for approval well before entering into

transactions subject to section 23K to allow the Commissioner sufficient time to

consider the application. This will ensure certainty on the tax treatment of the

transaction”

Corporates currently underway with reorganisation transactions should, therefore, be aware of

the risk that their proposed transaction could now qualify as an “amber transaction” in terms of

which prior approval for interest deductions must be obtained by SARS in terms of section 23K.

Should this be the case, an application to SARS should be made as soon as possible. Obtaining

and compiling the information and documentation prescribed for completing and submitting the

application may be a time consuming and costly exercise and it is recommended that legal advice

be sought in this regard.

Also, where a transaction was entered into immediately before or simultaneously with the

introduction of section 23K, the parties to the transaction may be at risk that interest already

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incurred would not be deductible. Even if an application is successfully brought to SARS,

section 23K provides for special rules as to when section 23K directives become effective i.e.

either from the date on which the debt instrument was issued or the date on which the application

for the directive was brought. In essence, the effective date will depend on (i) when the debt

instrument was first issued, (ii) when the application for the directive was brought, and (iii) the

time lapse between the date of issuing the debt instrument and the application date, which should

best be kept below 60 days.

It is important to note, however, that a directive granted by the Commissioner in terms of section

23K is a directive as to the non-application of the anti-avoidance provisions contained in section

23K. It is not a directive as to the actual deductibility of the interest expenditure in terms of

section 24J of the Act and therefore, any interest expenditure claimed in respect thereof will still

have to satisfy the requirements of section 24J of the Act.

Specific rules apply in respect of the timing and application of any directive and in order for any

directive issued by the Commissioner in terms of section 23K to be effective from the date of the

granting of the loan funding, the application for the directive must be made before

31 December 2011 where the loan was granted before 25 October 2011 or within 60 days of the

date of the granting of the loan where the loan was granted after 25 October 2011. Failure to

comply with these deadlines will result in the directive being effective from the date of

application for the directive thereby reducing the potential interest deduction.

Another practical issue that arises in the context of the above is with regard to the timing of the

deductibility of the interest expenditure in terms of section 23K. Section 23K refers to the date

upon which the loan is granted in determining when an application for the directive must be

submitted. Where a loan is granted upon the acquisition shares, section 23K will only find

application upon the declaration of the liquidation distribution which may be sometime after the

granting of the loan. Accordingly, in such circumstances, there is a risk that the directive may

only be effective from the date of the application thus limiting the extent of the interest deduction

permitted in terms of 24J

Furthermore, an Advanced Tax Ruling (ATR) is not available in such circumstances as the

Commissioner is not permitted to issue an ATR in respect of applications requiring clarity on

“the deductibility, in terms of section 11(a) or section 24J of the Act of any interest incurred by a

company on debt used to finance the acquisition of shares in another company for the purpose of

acquiring the underlying assets of the business”.

It is therefore recommended that taxpayers proceed with caution and plan carefully in

circumstances in which section 23K may be applied.

Edward Nathan Sonnenbergs

IT Act: s 23K, s 24J, s 44, s 45, s 47

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2061. Industrial policy projects

Following the Minister of Finance's medium term budget speech, there is some welcome news

for the manufacturing sector. The very attractive section 12I allowance of the Act (ITA) is to be

further enhanced to provide 'super allowances' for capital expenditure to be incurred on

qualifying greenfield (i.e., new) projects located within an industrial development zone (IDZ).

Please note that this is likely to be promulgated in November 2011, without any changes to the

present content.

Currently, there are only four operational IDZ's i.e., Coega, East London and Richards Bay. OR

Tambo has been specifically zoned for jewellery manufacturing.

For a greenfield project located within an IDZ and approved on or after 1 January 2012, the

following enhanced deductions will be applicable:

a 100% deduction of the cost of any new and unused manufacturing asset used in an

industrial policy project with preferred status. An Industrial Policy Project that met

additional qualifying criteria in terms of section 12I(8) of the Act by scoring at least 8 out

of 10, and at least 2 out of 4 in terms of direct employment creation and skills

development criteria.

a 75% deduction of the cost of any new and unused manufacturing asset used in any

industrial policy project with qualifying status.An Industrial Policy Project that met the

basic qualifying criteria in terms of sect 12I( 8) of the Act by scoring at least 5 out of 10,

and at least 2 out of 4 in terms of direct employment creation and skills development

criteria.

The section 12I allowances are in addition to the capital allowances (i.e. s11(e), s12C and s13

allowances) that may be claimed on qualifying expenditure. Therefore, the taxpayer could obtain

up to 200% tax deductions in respect of qualifying capital expenditure.

Ernst & Young

IT Act: s 11(e), s 12C, s 12I, s 13

DIVIDENDS TAX

2062. Necessary procedures

Secondary Tax on Companies has been replaced with a Dividends Tax with effect from

1 April 2012.

What is Dividends Tax?

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The tax liability shifts: Secondary Tax on Companies is, as the name suggests, a second tax,

after income tax, levied on a company. In contrast, Dividends Tax is levied on the shareholder,

or to be tax technically correct, the person entitled to the benefit of the dividend (which is not

necessarily in all instances the shareholder, for example, a trust beneficiary). To keep it simple,

we limit this discussion to instances where the shareholder is entitled to the dividend.

A withholding tax: Although the tax liability is on the shareholder, the tax must in most

instances be withheld from the dividend before it is paid to the shareholder. The person

withholding the tax pays it over to SARS.

The credit system is replaced with an exemption system: The shift of the tax liability from the

company to the shareholder allows for a move away from the current STC credit system to a

more sophisticated exemption system. By reason of the exemptions, the Dividends Tax is

essentially only triggered where dividends are paid to individuals, trusts and non-residents. To

determine whether a dividend (or any part thereof) is exempt from Dividends Tax (or entitled to

a lower tax rate), the identity and exempt status of the shareholder is important.

Procedural requirements: Because the Dividends Tax is withheld upon payment to the

shareholder, procedures have been put in place to enable the withholder of the tax to be advised

of the exempt status of the shareholder.

As a company declaring a dividend, when are you required to withhold Dividends Tax? No withholding obligation: A company declaring a dividend need not withhold Dividends Tax,

and need not adhere to any procedural requirements, where:

the recipient shareholder holds at least 70% of the equity shares (typically ordinary

shares) of the declaring company (or otherwise forms part of the same South African

group of companies); or

the dividend is paid to a so-called “regulated intermediary”. The list of regulated

intermediaries in the legislation includes the Central Security Depository Participants

(e.g. Computershare), brokers, nominee companies, transfer secretaries and collective

investment schemes in securities. Although there are exceptions, the regulated

intermediaries generally exist in the context of listed shares.

Withholding obligation: In all other instances procedural requirements must be followed by the

shareholder to advise the company whether a withholding is required.

What are the procedural requirements?

As the company declaring the dividend, you must:

have received declarations from the shareholder that the dividend:

is exempt; or

is subject to a reduced rate by reason of the application of a double taxation

agreement (DTA) that applies between South Africa and the country of tax

residency of the shareholder;

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have received written undertakings from the shareholders informing you in writing

should the shareholder cease to be the beneficial owner in respect of the dividends;

determine and communicate a date to the shareholders by when the above declarations

and written undertakings must be submitted to you (or else the cut-off date for

submissions will be the earlier of the date of payment or the date that the dividend

becomes payable);

retain the declarations relating to a reduced rate, as you are required to submit these to

SARS (at a time and manner to be prescribed);

pay the tax withheld to SARS by the last day of the month following the month during

which the dividend was paid or became payable (whichever is the earlier);

be aware that shareholders who have not submitted written declarations can do so within

3 years after the dividend is paid, in which case you will be obliged to refund them from

any amount of dividends tax withheld within 1 year from date of submission of the

declaration to you;

notify shareholders of any STC credits attached to the dividend. STC credits are phased

out over 3 years. To each dividend declared after 1 April 2012 there will attach STC

credits equal to the amount of the dividend until the STC credits have been used in full.

Where the dividend is paid to a non-exempt shareholder, you need not withhold

Dividends Tax by reason of the STC credit. Where the dividend is paid to an exempt

shareholder, there is no Dividends Tax to be withheld and the STC credit is passed on to

the shareholder who can use it in its future distributions.

Important aspects to remember are:

SARS may prescribe the forms for the declarations and the written undertakings,although

SARS has prescribed the required wording and minimuminformation to be provided If

declarations have not been submitted, you must withhold Dividends Tax, even where

you are aware of the exempt status of a shareholder.

We summarise the above in a decision tree:

No

Yes

Yes No

Shareholder =

Group of companies; or

Regulated intermediary

Have you received a declaration and a written undertaking of: (i) Exemption (ii) That a reduced tax rate applies?

Need withhold despite no declaration

Need not withhold /withhold less Withhold

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As is apparent from the above, Dividends Tax is certainly a positive move towards a more

internationally recognised system of taxation. However, in instances where there is no regulated

intermediary involved, the Dividends Tax gives rise to an administrative burden for the

distributing company. The consequences of non-compliance can lead to interest on late

payments, penalties and even personal liability for persons involved in the management and

overall affairs of the distributing company.

KPMG

Editorial Note: This article does not deal with dividends in specie which are subject to

dividends tax payable and borne by the distributing company.

IT Act: part VII

EMPLOYEES’ TAX

2063. Long-term policies

Employers often provide employees with group life and disability benefits as part of their

employment benefits (“employee related insurance policies”). Usually, employment agreements

provide for the payment, by the employer (or insurers), upon the happening of a future event

(death or disability) of pre-defined lump sum benefits. Employers may take out group life and

disability policies to fund such future payments.

In many instances, the employer is the policyholder and beneficiary of the policy, i.e. the insurer

pays the proceeds to the employer and the employer in turn pays the proceeds to the employee or

the employee‟s beneficiaries. Alternatively, the employer is the policyholder but the

beneficiaries are the employees. Under these policies the insurer pays the proceeds from the

policy directly to the employees or their beneficiaries.

The legislation has fundamentally changed the taxation rules for both employers and employees

relating to long-term insurance benefits provided to employees.

Premiums paid to employee-related insurance policies

Fringe benefits tax

The Act introduced an amendment in terms of which the premiums paid by an employer on

employee-related insurance policies (typically, group life and disability policies), from which the

employee derives a benefit, is a taxable fringe benefit. The value of the fringe benefit is equal to

the premium paid by the employer. The legislation provides for special valuation rules where the

employer pays premiums on a group basis without reference to a specific employee.

Should the disability policy provide for income continuation benefits, a tax deduction in respect

of the premiums paid by the employer is granted to the employee. These changes are tax-neutral

for employees as employers may deduct the deemed premium in calculating the amount of

employees‟ tax due. Employers will have to process these changes via their payrolls.

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Corporate tax deduction

Previously, employers could claim a corporate tax deduction in respect of premiums paid relating

to long-term insurance policies either under the general tax deduction provisions (section 11(a)

of the Act) or under the specific tax deduction provisions (section 11(w) of the Act). There were

changes to prevent an employer from claiming these premiums as a corporate tax deduction

under the general tax deduction provisions.

An employer will only qualify for a corporate tax deduction if the premiums payable are

included in the taxable income of the employee or director, from the later of the date in which

the employer became the policy holder or effective 1 March 2012.

As the legislation now regards the premiums under these policies as taxable fringe benefits in the

employee‟s hands, employers who have not taxed (by way of employees‟ tax) their employees

on the now taxable fringe benefit will have to make the necessary changes to their payrolls

effective from 1 March 2012. This will have a negative cash-flow implication for these

employees. We recommend that employers communicate these changes to their employees.

Taxation of proceeds from these insurance policies

Employer

The employer will be taxed on the proceeds received from these insurance policies only to the

extent that the proceeds are not on-paid to the employee or the employee‟s beneficiaries.

Employee

Provided the fringe benefit tax has been applied on the premiums, the proceeds received will not

be taxable. There are exceptions to this general rule, e.g. income protection policies.

We highlight that employers must ensure that they implement the corresponding deduction of the

premium in the payroll, to allow the employee the cash flow benefit over the period of the

policy.

The Act disregards these proceeds for capital gains tax purposes.

Conclusion and next steps

Employers need to take notice of these changes and re-evaluate whether their group life and

disability benefits still meet their needs and the needs of their employees from an after tax

position. It has been our experience, that most employers have historically not subjected the

group life and disability premiums to tax in their employee‟s hands. These employers will now

be required to tax their employees on this fringe benefit and employees should be made aware of

these changes.

Employees also need to be made aware of the deductions that they are permitted to claim for

disability and income replacement policies.

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We recommend employers “walk through” their whole process for all employee insurance, risk

and disability policies from contracts to payouts ensuring they meet the tax law requirements at

each step.

Ernst & Young

IT Act: s 11(a), s 11(w) and paragraph 12C of the Seventh Schedule

Editorial Note: Further proposed amendments have already been published.

GENERAL

2064. SARS jeopardy assessments

The Tax Administration Bill (TAB) will soon be signed into law as the Tax Administration Act

(TAA).

Although the TAA introduces the concept of “self-assessment” (refer to s1 for the definition) the

TAA by-and-large retains the well known concepts related to the assessment process.

Assessment (defined in s1), original assessments (s91), additional assessments (s92), reduced

assessments (s93) and estimated assessments (s95) are all old-timers, but they‟ve been given a

slight face-lift in the TAA (for example, refer to paragraph 2.2.8 of the Explanatory

Memorandum to the TAB).

The “jeopardy assessment” is the new kid on the block (s94).

According to the Explanatory Memorandum (refer paragraph 2.2.8.4), a jeopardy assessment

may be issued in advance of the date on which the tax return would normally be due, in order to

secure the early collection of tax that would otherwise be in jeopardy or where there is some

danger of tax being lost by delay. It will be made where the Commissioner is satisfied that such

an assessment is necessary to secure the collection of tax that would otherwise be at risk, e.g. a

taxpayer attempts to place assets beyond the reach of SARS‟ collection powers once an

investigation starts.

The raising of a jeopardy assessment at a stage before any tax return is due is clearly a drastic

measure. That‟s the reason for the involvement of the Commissioner Used in conjunction with

the “pay now, argue later” approach, a jeopardy assessment potentially enables SARS to

quantify, assess and collect in respect of an alleged tax debt before the taxpayer has even

rendered any return related to the income/gain that SARS has subjected to tax via such

assessment.

The recent United Kingdom (UK) case of Revenue and Customs Commissioners v Ali [2012]

STC 42 / [2011] EWHC 880 (Ch) does not deal directly with jeopardy assessments. But it does

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give some insight how UK courts regard the interplay between the assessment process and the

risk that a taxpayer might dissipate assets.

Mr Ali was a director and employee of a company that during 2001 received nearly £3 million

from the UK Department of Education and Skills for its purported participation as a learning

provider in a vocational scheme operated by the Department. The company in turn paid £2,5

million to Ali. Her Majesty‟s Revenue and Customs (HMRC) alleged that the company had

willfully failed to deduct the correct amount of PAYE in respect of said payments, during 2002.

In 2011, HMRC anticipated making a direction which meant that Ali would become liable for

income tax of well over £1 million. HMRC did not wish, however, to serve the direction and the

associated assessment because it feared that Ali would hide his assets or remove same from its

jurisdiction. HMRC was also concerned that it might not have a cause of action sufficient to

support a freezing order unless it had first issued the assessment. In the end HMRC served the

direction and assessment on Ali as well as the freezing order on the same day (17 February), so

very little time elapsed between the two events.

The issue before the Chancery Division was the fact that the serving of the assessment and the

freezing order happened virtually simultaneously. [Ali intended to contest the merits of the

assessment in a separate process.]

In court the following argument was raised on Ali‟s behalf: the assessed amount was only due in

30 days from the day on which the notice of assessment was given (i.e. the debt under the

assessment did not become due until 30 days after 17 February). In Ali‟s view HMRC therefore

had no existing cause of action at the stage the freezing order was made.

Warren J put it thus: “... there does exist a present right, that is to say the payment of tax, albeit

payable in future, but there is an accrued right and a threatened breach...” The Judge

consequently considered many well known UK cases addressing the “no cause of action” point.

He also referred to Australian case law dealing with Mareva injunctions.

Warren J held as follows (at [51]):

“In my judgment, the court clearly has jurisdiction in the strict sense to grant these injunctions

against Mr Ali. More importantly, it is not, in my judgment constrained from doing so by the

authorities. I consider that HMRC have sufficient immediate and present interest to support this

relief. The particular important point is that HMRC are properly to be seen as a creditor. Their

debt is not contingent, albeit it is payable, as I have said a couple of times already, at a time, and

a short time at that, in the future. The special feature of this debt makes it right that where it is

just and equitable to grant the relief the court should be able to do so. It does not seem to me that

the factors which have led the courts to refuse Mareva injunctions where there is no cause of

action or anything like a cause of action apply in the present case.”

He continued (at [53]):

“I see no reason not to find support in that when applied to the statutory functions of HMRC to

collect tax and if they can see a taxpayer who is going to dissipate his assets to avoid compliance

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with an assessment on which they cannot, because of the 30-day time limit, yet sue him to

judgment, I see no reason why that is not a factor properly to be taken into account.”

Warren J then mentioned the following factors to be taken into account when considering the

making of a freezing order:

The chances of success of the taxpayer‟s tax appeal.

The risk of dissipation which, in turn, strongly hinges on the taxpayer‟s honesty,

alternatively dishonesty (“If he has been dishonest, that may colour the view of the court

about the risk of dissipation. But just as dishonesty is not an essential element to the

exercise of the jurisdiction, so dishonesty is not by itself enough. The dishonesty relied on

must be sufficient to justify, together with the other evidence, the inference of a risk of

dissipation and this requires an examination of the facts of course.”).

The delay in seeking relief i.e. the party fearing dissipation should act expeditiously (“A

failure to seek relief promptly might be seen as indicating a lack of concern, suggesting

that there is really no risk of dissipation at all.”).

The manner in which the court applied the above-mentioned principles suggests that the

following would be some of the factors that a senior SARS official would have to consider

before raising a jeopardy assessment:

The merits of the tax case to be contested later on

Pointers regarding the taxpayer‟s honesty or dishonesty in past dealings with SARS

Transparency, or the lack thereof (e.g. evasive and/or contradictory answers)

The taxpayer‟s historic general compliance record

The quantum of the assessment and how this stacks up against the taxpayer‟s resources

Whether the taxpayer‟s actions might possibly have involved criminality (e.g. fraud)

Non-disclosure or concealment of assets e.g. bank accounts

The ease with which the taxpayer could dispose of assets and externalise the proceeds

(e.g. multiple passports, access to off-shore bank accounts, relatives overseas, etc).

This is by no means an exhaustive list. Each case will depend on its particular facts.

The raising of a jeopardy assessment is an invasive step which could be highly prejudicial to a

taxpayer.

Section 94 (2) does provide for a review application to the High Court on grounds that (1) the

amount is excessive; and (2) the circumstances justifying such assessment are non-existent. The

reality is that any review application is a reactive (and costly) remedy.

The publication of detailed guidelines governing this important aspect of the TAA might be a

better safe-guard, thereby pro-actively ensuring that a jeopardy assessment would only be raised

in appropriate circumstances in the first place.

Cliffe Dekker Hofmeyr

16

Tax Administration Bill

INTEREST

2065. Section 24J

SARS decided not to proceed with the introduction of the proposed new Section 8G, dealing

with perpetual debt in the latest round of legislative amendments. A core issue here was

problems with the property loan stock industry.

However, they have nevertheless made three alterations to the definitions in Section 24J of the

Income Tax Act. Firstly they have amended the definition of "term" which is an important

definition in regard to the application of the yield to maturity method. The definition is now

broken into two portions, one in respect of a demand instrument being a period of 365 days, but

the second part is the important one. In respect of an instrument that is not a demand instrument,

it means the period commencing on the date of issue or transfer of that instrument and ending on

the date of redemption of that instrument. There is now a new definition of "date of redemption".

This definition is also broken up into two parts. Sub-paragraph (a) deals with where an

instrument has a specified term, and that date is not subject to change, then that date is the date

of redemption. However, in subparagraph (b) where the terms of the instrument do not specify a

date on which all liability to pay all amounts in terms of that instrument will be discharged, or if

that date is subject to change as a result of any right, fixed or contingent of the holder of that

instrument, then the date on which on a balance of probabilities all liability to pay all amounts in

terms of that instrument is likely to be discharged is the date that will apply for the purposes of

"term".

The explanatory memorandum is not particularly helpful on explaining these points. However, in

respect of these debt instruments with uncertain maturity dates, the explanatory memorandum

does stipulate that "in addition, rights to renew or extend will be taken into account to extend

(sic) these rights will more likely not be exercised based on the balance of probabilities. It should

be noted that all of these dates may change over time as facts and circumstances deviate from

initial premises (thereby requiring annual adjustments)".

Where one is dealing with financial instruments that do not have a defined term, one will now

need to consider the application of the definition of "date of redemption" very carefully, because

that balance of probabilities date may well now become a date under which you can apply the

yield to maturity formula to produce a smoothed series of accruals over the life of the instrument.

Cliffe Dekker Hofmeyr

IT Act: s 24J

INTERNATIONAL TAX

17

2066. South Africa/ United Kingdom protocol

The amending protocol (Protocol) to the South Africa/United Kingdom income tax treaty of

4 July 2002, signed on 8 November 2010, entered into force on 13 October 2011. It generally

applies from that date.

Readers should note that South Africa has replaced its current secondary tax on companies

(STC) system with a new dividends tax system from 1 April 2012. STC, calculated at a rate of

10% on the net amount of a dividend declared by a South African resident company other than a

headquarter company, is not a dividends tax and hence cannot be reduced under the dividends

article of a double tax treaty. The new dividends tax (calculated at a rate of 15%) may however

access the dividends article of an applicable double tax treaty.

Under the new Protocol, the dividends tax is limited to –

5% of the gross amount of the dividends, if the beneficial owner is a company which

holds at least 10% of the capital of the company paying the dividends,

15% of the gross amount of the dividends in the case of qualifying dividends paid by a

property investment company which is a resident of a Contracting State, or

10% in all other instances.

For UK purposes, property investment companies are real estate investment trusts

(REIT structures). South Africa currently does not have specific REIT legislation (we expect this

to be introduced towards 2013 / 2014) and hence for South African purposes, the Protocol simply

refers to a company that may be agreed between the competent authorities as corresponding to a

REIT. The two most common types of REIT-like property vehicles in South Africa are property

loan stock (PLS) companies and collective investment schemes in property (CISP‟s). Returns to

PLS shareholders generally take the form of interest (the shareholder holds a linked unit

consisting of a 99% debenture and 1% equity), whilst CISP‟s are structured and treated as trusts.

Income, mostly in the form of rental or taxable dividends from property companies thus retains

its nature and passes through to the CISP unit holder.

Apart from the exchange of information and a newly inserted assistance in the collection of taxes

article, the Protocol contains a most favoured nation clause. Unlike the South Africa/

Netherlands Income and Capital Tax Treaty which provides for an automatic application of a

lower rate if South Africa concludes a double tax treaty with a third state, the Protocol states that

in such an event, South Africa must inform the UK government of such action through the

diplomatic channel, and enter into a negotiation process to achieve a similar result.

Ernst & Young

IT Act: s108

2067. Namibian withholding tax

The Namibian Income Tax Amendment legislation of 2011 introduced a withholding tax of 25%

on the gross fees payable to a non-resident on or after 31 December 2011, for „management and

18

consultancy services'. Note that this term is defined to cover services of all kinds and not merely

those of a management and consultancy nature.

So for example:

a specialist mechanic travelling to Namibia for two days to repair a machine would be

caught notwithstanding that he has no other Namibian income and would not normally be

subject to tax there.

an accountant providing analytical advice in relation to the financial statements of a

Namibian company, operating from his office in another country, would be caught

notwithstanding that the income earned by him is not from a Namibian 'source'.

In the case of South African service providers however, provided they do not have a 'permanent

establishment' in Namibia, it is our view (and we understand that Namibian Revenue agrees) that

they are not exposed to the tax by virtue of the double taxation agreement (DTA) between

Namibia and South Africa. Namibian clients should therefore not withhold the tax from such

fees.

The above summary is very brief and simplified. There are difficulties of interpretation in regard

to the commencement date, the meaning of 'management and consultancy services' and the

trigger date for a particular fee to be taxed (we have suggested above that the trigger is liability

to pay but this might not be true in every case).

We strongly recommend that any corporate or individual client rendering services in Namibia

should take specialist advice to properly understand the risks and, in particular, to establish

whether they are protected under the DTA.

Ernst & Young

VALUE ADDED TAX

2068. Input tax apportionment formula

On 13 May 1998, the Commissioner for the South African Revenue Service issued a general

written directive to all members of the Banking Association, in respect of the standard agreed

input tax apportionment method to be used by these members. The Commissioner extended the

ruling to all vendors in the financial service industry. In addition the Commissioner stated in this

directive, that a financial institution may approach the Commissioner to agree an alternative

method where the agreed standard method is materially inappropriate to their business activities.

In this regard many vendors belonging to the financial service industry approached the

Commissioner to agree on an alternative method to the standard agreed method. In many

instances the alternative method agreed by the Commissioner was based on the standard agreed

method with variations.

19

At present, there are various vendors belonging to the financial service industry who rely on this

standard agreed method or on an agreed variation. The Commissioner has, however, recently

announced that he will not be reconfirming this directive issued to the Banking Association, i.e.

it will be withdrawn. The Commissioner has not announced the new method of input tax

apportionment to be used by financial institutions, but has given an indication that the method

will be linked to the activities/costs incurred by the financial institution relating to each revenue

stream.

In order for a financial institution to comply with this new proposed method of input tax

apportionment, it will need to perform a detailed review of the activities/cost relating to each

revenue stream. This may also involve a reconfiguration of the vendor‟s current financial

accounting system. This change will be applicable to all vendors who are currently relying on the

method of apportionment stated in the 13 May 1998 directive as well as other vendors who are

relying on a variation to this method.

This change in direction may also impact on other vendors who will have to analyse their

activities to substantiate direct attribution. SARS disallows input credit where an expense can be

linked in part to any „tainted income‟. For example, a vendor may potentially only be entitled to

claim a portion of VAT incurred on rental or stationary where interest, foreign exchange gains

and dividends received exceed 5% of the vendor‟s total income. This approach has already been

followed at Municipalities where full input tax credit is disallowed in taxable departments on

passive income allocated to those departments, even though all the activities giving rise to

expenses are directly linked to the making of taxable supplies.

Cliffe Dekker Hofmeyr

VAT Act: s 17 (A vendor will have to apply for a ruling)

2069. Electronic invoices

In the past, a variety of factors, including, the business environment, infrastructure, access to

computers and the internet may have stifled e-commerce within South Africa. However, with the

influx of telecommunications investment, specifically internet and cellular phone service

providers, e-commerce, and specifically telecommunication services have become popular. This

is evidenced by the fact that the South African electronic market in respect of digital voucher

sales is expanding. South Africans can consequently buy vouchers for accommodation, spa

treatments, books and airtime or telephone credit via the internet.

Even though the current VAT legislation does not specifically provide for these types of

transactions, existing provisions may be applied to sufficiently address the complexities of these

types of services. However, this is generally done on the basis that the services relating to the

voucher are consumed in South Africa. Unfortunately, there are no clear guidelines on the exact

VAT treatment of services relating to digital products consumed or utilised outside South Africa.

This is different from the supply of digital products (such as e-books and digital music), where

the generally accepted principle is to regard this as a service for VAT purposes. These types of

transactions may constitute an imported service for VAT purposes and be pulled into the VAT

20

net in this way. An “imported service" is defined as the supply of a service by a non-resident

supplier, to a resident recipient, to the extent that such services are utilised or consumed in South

Africa otherwise than for the purpose of making a taxable supply. The voucher offering a service

which is only consumable outside South Africa would thus not constitute an “imported service”.

Given the fact that the vendor is based in South Africa and would typically not be rendering the

service outside South Africa, i.e. it would merely be selling the right to the service; it would be

difficult to zero-rate the supply of the voucher.

Although there are provisions that allow for the zero-rating of the supply of services physically

rendered outside South Africa, commentary in respect of this legislation, however, suggests that

the services must be rendered by the vendor (via its employees) outside South Africa, and does

not provide for where the services are provided by another entity situated outside South Africa.

These issues are further exacerbated by the fact that although VAT is generally a consumption

tax, consumption (or the use and enjoyment) of the supply does not form the basis of

determining whether the supply would be subject to VAT. The basis of determining whether a

supply is subject to VAT is whether it is being supplied by a person supplying goods and or

services, inside or partly inside South Africa, on a continuous and regular basis, for a

consideration. Further, there are no specific use and enjoyment rules applicable in terms of South

African VAT. Simply, this means that merely because a service is not consumed or utilised in

South Africa does not mean that it is not „pulled‟ into the South African VAT net.

Vendors supplying vouchers which entitle the bearer to services which will be provided outside

South Africa should thus be cautious of automatically zero-rating these supplies or adopting the

thinking that it falls outside the South African VAT net.

Ernst & Young

VAT Act s1, s7(1)(c), s10(18), s10(19), s11

SARS AND NEWS

2070. Interpretation notes, media releases and other documents

Readers are reminded that the latest developments at SARS can be accessed on their website

http://www.sars.gov.za

Editor: Mr P Nel

21

Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI

Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees.

The Integritax Newsletter is published as a service to members and associates of The South

African Institute of Chartered Accountants (SAICA) and includes items selected from the

newsletters of firms in public practice and commerce and industry, as well as other contributors.

The information contained herein is for general guidance only and should not be used as a basis

for action without further research or specialist advice. The views of the authors are not

necessarily the views of SAICA.

All rights reserved. No part of this Newsletter covered by copyright may be reproduced or copied

in any form or by any means (including graphic, electronic or mechanical, photocopying,

recording, recorded, taping or retrieval information systems) without written permission of the

copyright holders.

INTEGRITAX CPD

No. Words CPD Mins Questions

2058 459 0 0

2059 461 0 0

2060 1358 30 12

2061 299 0 0

2062 919 15 6

2063 720 0 0

2064 1340 30 12

2065 436 0 0

2066 440 0 0

2067 287 0 0

2068 435 0 0

22

2069 542 0 0