Professionals: Investment » Press Room

Webber Wentzel's tax experts give their views on two compelling questions ahead of the Minister of Finance's Budget speech tomorrow

What should the Minister be doing to encourage foreign direct investment in South Africa?

Nola Brown, Associate Director, Tax at Webber Wentzel says:

"Considerable progress has been made with regard to the stated intention to make South Africa an attractive spring board into, mostly, Africa with the introduction of the 'headquarter company' regime. In essence, both SA and foreign investors can use this new structure to ensure a less burdensome tax regime in relation to cross-border activities.

“However, in order to enhance South Africa's attractiveness as a holding company jurisdiction, we also need to see improvements in respect of South African capital gains tax on the sale of foreign subsidiaries by such headquarter companies.  It would also be very useful if SARS could release the details regarding the form and manner in which the international headquarter company income tax election must be made.

“In addition, some clarity regarding the proposed introduction of a withholding tax on interest is necessary.  Will it in fact be introduced on 1 January 2013?  Specifically in light of the fact that it was previously mentioned that the tax authorities would be renegotiating certain double taxation agreements which allowed for a 0% withholding tax on interest, and it is not clear whether this process will be completed by the beginning of next year, when the tax is due to be implemented."

What should the Minister be doing to address the expected shortfall in revenue?

Des Kruger, Director, Tax at Webber Wentzel says:

"While South Africa was perhaps somewhat protected from the negative effects of the world financial meltdown, it is clear that the SA economy has not been progressing as expected.  As a result, there is an anticipated shortfall in revenue. The issue is how is this going to be addressed?

“Nothing needs to be done in regard to raising income tax on individuals as 'fiscal drag' operates to increase the tax take even if rates remain the same. Fiscal drag is the term given to the effect of the progressive individual tax rates on increases in remuneration. In essence, an additional R1 of income may push a taxpayer into a higher tax bracket, resulting in that R1 being taxed at a higher marginal tax rate.

“Given that the worldwide trend is to reduce corporate tax in an effort to kick-start the economy, it is highly unlikely that any changes will be made to the rate of corporate tax.

“A number of European countries have increased their VAT rates to try and balance their budgets. While the SA VAT rate is relatively low in comparison to many other jurisdictions, because VAT is perceived to disproportionately impact the poor, it would be political suicide to increase the rate without at least introducing further relief in respect of so-called basic goods.  This in a sense then requires a higher general rate to derive the requisite revenue. SA, in line, with international trends, provides relief for a few basic foodstuffs, such as milk, brown bread, maize meal and vegetables, but there would no doubt be pressure to provide extended relief.

“An obvious source of revenue is through capital gains tax. At present SARS does not apply tax to the full amount of the capital gain. It only applies tax to 25% in the case of individuals and to 50% in the case of corporates and trusts. Increasing these so-called inclusion rates would provide significant additional income and would, in my opinion, be the most politically palatable approach to increasing revenue and overcoming the shortfall."

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