The South African courts have held, on a number of occasions, that taxpayers are entitled to deduct damages or compensation paid to third parties. However, this principle does not apply in all cases. A recent High Court decision has made clear that before a taxpayer calculatedly breaches an agreement, it should carefully consider the incidence of tax.
The draft Taxation Laws Amendment Bill 2018 has proposed a number of significant legislative amendments, including with regard to the allowance for doubtful debts set out in Section 11(j) of the Income Tax Act. The proposed amendments envisage separating the tax treatment of two defined categories of taxpayer – namely, those which use International Financial Reporting Standards 9 for financial reporting purposes and those which do not.
Given the current economic climate, debt restructuring and relief have increased and thus received concomitant increased attention from the relevant tax and finance authorities. The latest round of proposed tax amendments in this regard attempt to address a number of concerns discussed in the explanatory memorandum on the draft Taxation Laws Amendment Bill.
Section 31 of the Income Tax Act concerns transfer pricing, one of the most contentious areas of tax law not only in South Africa, but also around the world. Historically, there has been no judicial precedent in South Africa regarding the application of Section 31 – in particular, the arm's-length principle. However, the High Court recently issued its findings regarding the application of certain provisions included in Section 31.
In line with the removal of the remnants of the administrative assessment system in 2015, the South African Revenue Services commissioner's discretion in respect of the doubtful debt allowance was to be deleted from the Income Tax Act. The intention behind this deletion was that, in future, the allowance would be claimed according to certain criteria set out in a public notice. However, according to the recent budget, it is now proposed that the criteria for determining the allowance be included in the act.
One of the key changes to the tax administration regime following the Tax Administration Act's promulgation in 2012 was the conversion from the so-called 'additional tax' regime to the understatement penalty regime. While this shift towards greater certainty has been welcomed, a key challenge remains as the new regime's criteria are open to differing interpretations. In this regard, the South African Revenue Service recently published its Guide to Understatement Penalties.
The debt reduction provisions provided for in the Income Tax Act have been the subject of significant debate since their introduction. As a result, the National Treasury included various proposed changes to the provisions in the first draft of the Taxation Laws Amendment Bill 2017. Following consultation on the bill, the National Treasury recently published a revised bill, which contains further significant amendments.
Under the Tax Administration Act, a Tax Court judgment regarding an appeal under the dispute resolution provisions contained in the act must be published for general information purposes. The South African Revenue Service recently published a raft of Tax Court judgments that have thus far been handed down in 2017, which provide for interesting reading and cover a broad range of procedural and administrative issues.
In order to assist companies in financial distress, it has been proposed that definitive rules dealing with the tax treatment of conversions of debt into equity be introduced. The Draft Taxation Laws Amendment Bill 2017 therefore proposes that the rules dealing with a debt that has been cancelled, waived or discharged should not apply to a debt that is owed by a debtor to a creditor that forms part of the same group of companies.
In February 2017 the South African Revenue Service published two binding general rulings which provided much-needed clarity on various interpretational issues, but failed to cover certain practical issues. Subsequent publications, media releases and revisions have offered further practical guidance on the manner in which companies and non-executive directors should have dealt with the taxation of their earnings before June 1 2017.
Due to the nature of their business, many multinationals send their employees to work in other countries. Such employees are often subject to taxation in their host country, yet remain tax residents in their home country. The Johannesburg Tax Court recently considered issues that arose as a result of the tax arrangements entered into between the host country employer and its expatriate employees, who were seconded from their home countries to work in South Africa.
The long-awaited final public notice regarding the record-keeping requirements pertaining to transfer pricing transactions was recently published. While the public notice clarifies the additional record-keeping requirements for transfer pricing transactions, these requirements may increase compliance costs for certain taxpayers. Further, taxpayers risk the South African Revenue Service auditing them and finding that they have failed to keep the required records.
Membership-based organisations and the willingness of members to pay membership fees are becoming increasingly less attractive as a result of restrictive funding requirements in the Income Tax Act. There may be merit in extending the partial taxation regime currently governing public benefit organisations to membership-based organisations. In this way, membership-based organisations could maintain their tax-exempt status.