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South Africa’s Budget Speech 2022: A deep dive

The Finance Minister was able to avoid tax rate increases, and even make a positive contribution to reducing the deficit, as a result of better than expected tax revenues. These were largely contributed by the mining sector due to the increase in commodity prices, strong consumer demand after the COVID-19 lockdowns contributing to VAT and corporate taxes, and better personal tax collections due to improved earnings.

The Finance Minister referred to reducing the corporate tax rate in future, and the disbenefits of further rate increases generally.

He also cautioned that unless GDP and tax revenue increased, there was no capacity for increased permanent state expenditure.

He warned about risks to the fiscal outlook both in the global and the domestic environment, including increased borrowing costs, state wage bill, and the poor state of certain SOEs.

In the circumstances, taxpayers may be relieved about a neutral or even slightly positive budget from a tax perspective.

Below, we very briefly mention selected tax proposals and policy announcements.

SPECIFIC TAX PROPOSALS

Corporate

• The corporate income tax rate is proposed to reduce by 1% to 27% for tax years ending on or after 31 March 2023, which is linked to other initiatives to broaden the tax base, including the limitation of loss set off which was put on ice last year. Mention is made of the negatives of a comparatively high corporate tax rate in South Africa as well as aligning interest deduction limitation rules with international guidance.

• A restriction on the amount of set-off assessed losses to 80% of taxable income is proposed to be implemented for tax years ending on or after 31 March 2023. Some changes are necessary regarding the impact on mining companies.
• There will be a reduction and phasing out of certain existing tax incentives, but the R&D allowance is to be extended.

• The effective date for the proposed amendments to the collateral arrangement and contributed tax capital definitions has been postponed to 1 January 2023.
• Government proposes broadening the instances in which the “nil base cost” rule will apply through further refinements of the intra-group transaction rules in the corporate reorganisation provisions.
• Clarification of the recoupment triggered under the debt forgiveness rules where an asset is disposed of during a year of assessment and the debt used to fund the acquisition of that asset is forgiven in a subsequent year of assessment.

Individuals, Employment and retirement

• There is no tax rate increase.
• Personal income tax brackets will be adjusted in line with the expected inflation rate of 4.5% for the financial year.
• There is a proposed expansion of the employment tax initiative through a 50% increase in the maximum monthly value, to ZAR1 500.
• Government intends to initiate negotiations this year to revise tax treaties to ensure SA retains taxing rights on payments from local retirement funds.
• The reforms referenced in the discussion paper "Encouraging South African Households to Save More for Retirement" are being considered with reference to public comments and anticipated public workshops, with a view to implementing legislative amendments.
• The domestic tax exemption on foreign retirement benefits will be reviewed.
• There is a proposal to amend and expand section 7B to cater for performance‐based variable payments.
• When an individual ceases to be a resident, they in effect have two years of assessment during a 12-month period. Government has pointed out that this may mean that such individual may double-up on certain exemptions and exclusions. It is accordingly proposed that amendments be adopted to apportion the interest exemption and capital gains annual exclusion in such instances.
• There is a proposal to amend the Employment Tax Incentive Act, 2013 such that understatement penalties may be imposed on reimbursements that are improperly claimed.
• The Income Tax Act, 1962 currently permits members of retirement funds to transfer their retirement interest from one retirement fund to another, subject to conditions including the number of contracts that may be transferred. Government proposes expanding the dispensation to allow fund members to transfer one or more contracts in a particular retirement annuity fund.
• Government proposes amending the pension and provident fund definitions to ensure that historical vested rights remain protected even if they are transferred to a public-sector fund.
• To cater for the 2021 retirement reforms that required mandatory annuities for provident funds (including certain public sector pension funds), Government proposes that, with effect from 1 March 2022, paragraph (eA) of the definition of “gross income” be amended to clarify that gross income under the provision includes all public‐sector funds.
• As a result of the 2021 retirement reforms (mentioned above), government is of the view that it is no longer necessary to differentiate between a pension and provident fund for retirement purposes, as these funds now operate in the same way. In this regard, it is proposed that paragraph 4(3) of the Second Schedule to the Income Tax Act be deleted. This provision (in its current form) in effect taxes as a withdrawal benefit any lump sum received by a provident fund member who is younger than 55 and who retires from that fund for reasons other than ill-health.

• It is proposed that the relief under paragraph 6(1)(a) of the Second Schedule to the Income Tax Act be expanded such that transfers to a provident or provident preservation fund prior to 1 March 2021 are also tax‐neutral, irrespective of the type of retirement fund from which the retirement interests were transferred.
• It is proposed that all provisional taxpayers with assets above ZAR50-million be required to declare specified assets and liabilities at market values in their 2023 tax returns.

EXCHANGE CONTROL

Corporate and institutional

Proposed changes include the following:

• Offshore portfolio allowances for all institutional investors to be harmonised at 45%, inclusive of the 10% African allowance.
• Foreign direct investment allowance to be increased to ZAR5-billion.
• Permitted transfers to Domestic Treasury Management Companies for capital transactions to be increased to ZAR5-billion (listed entities) and ZAR3-billion (unlisted entities).
• After consideration, it has been decided that all debt securities referencing foreign assets listed on South African stock exchanges will remain classified as foreign.

 

Individuals

• The export of dual‐listed domestic securities to a recognised foreign share exchange is permitted and limited to the single discretionary allowance and/or foreign capital allowance, provided the SARB’s FinSurv department is notified.
• Resident individuals may use their single discretionary allowance to participate in online foreign‐exchange trading activities but may not use credit or debit cards to do so.
• Resident individuals may receive and retain gifts from non-residents offshore.
• Residents may lend or dispose of authorised foreign assets held offshore to other South African residents, subject to local tax disclosure and compliance.
• Residents may transfer, for foreign investment purposes, authorised capital in excess of ZAR10-million per year through offshore trusts, subject to the current tax application and reporting requirements.

Indirect tax and VAT

• The VAT standard rate is unchanged at 15% and no proposals to change zero-rated and exempt supplies.
• In 2019, changes were made to section 72 of the VAT (which deals with SARS’ discretion to make arrangements or decisions regarding the application of the Act where the manner in which a vendor or class of vendors conducts their business leads to difficulties, anomalies or incongruities). It has been recommended that further changes be made to section 72 based on data collected from SARS’ review of prior section 72 decisions over the last two years.
• It has been proposed that, in line with the OECD BEPS Action 1 Report, the regulations relating to electronic services under the VAT Act be amended to broaden the scope of electronic services supplies that are currently subject to VAT in South Africa. These regulations were last reviewed and updated in 2019 when the VAT net was significantly widened in this regard.
• It is recommended that non-residents who make once-off electronic services supplies in South Africa be exempt from the obligation to register for VAT (an exemption that already applies to residents).

CROSS BORDER

International

• Review of the domestic legal framework to effect joint audits
  • It is proposed that the South African domestic legal framework, particularly the Tax Administration Act, 2011, be amended to make provision for the full use of joint audits with other tax administrations in order to improve the effective exchange of information under international tax agreements.
• Clarifications in respect of the controlled foreign company (“CFC”) rules
  • The following amendments, which National Treasury views as clarifications, are proposed to the CFC rules:
    • In calculating the net income of a CFC, the CFC must be deemed to be a resident in respect of the receipt of royalties from a South African source;
    • Certain intra-CFC dividends deemed to be income in terms of the hybrid equity instrument rules are excluded from net income, along with interest, royalties, rental, insurance premium or income of a similar nature where the two CFCs are part of the same group of companies.
  • Updating the CFC rules to align with terms relating to the Insurance Act
    • Certain exclusions to the CFC rules exist where participation rights are held in the policyholder funds of an insurer. It is proposed that the CFC rules be amended to align their wording with that of the Insurance Act, which came into effect on 1 July 2018.
  • Clarification on exclusions of participatory interests in foreign collective investment schemes from the definition of foreign dividend
    • The redemption of participatory interests in foreign collective investment schemes is specifically excluded from the definition of a foreign dividend in section 1 of the Act. The proposed amendment seeks to clarify that similar forms of disposal are also excluded from the definition.

Mining

• Interaction between the application of the assessed loss restriction rules and capital expenditure regime

• In terms of section 36(7E) of the Income Tax Act, taxable income in respect of which capital expenditure may be redeemed must be determined after the set-off of any balance of assessed loss. The proposed amendment would therefore clarify that the set-off of the assessed loss and the corresponding limitation must be determined before the deduction of capital expenditure. Of course, the limitation of assessed losses in itself is quite unwelcome, but the amendment appears to be for purposes of clarification and is therefore neutral.

• Interaction between the application of the interest limitation rules and capital expenditure regime for mining operations

• This is a positive development as the interest limitation provisions will not apply to interest that forms part of capital expenditure.

• Government grant

• The limitation on the claiming of allowances on assets received in respect of which no expenditure was incurred seems fair.

Insurance

• The implementation of IFRS17 insurance contracts (effective for reporting periods starting on or after 1 January 2023), which replace IFRS4 insurance contracts, may have a material impact on the valuation method for insurance contract liabilities and insurers’ cash‐flow and profit profiles. Government thus proposes that legislative changes be made to income tax provisions dealing with the taxation of insurers.

Tax administration

The following tax amendments relating to tax administration are proposed for the upcoming legislative cycle:

• Refunds of dividends tax by SARS to regulated intermediaries
  • It is proposed that the Income Tax Act be amended to allow a regulated intermediary to recover refundable dividends tax from SARS in instances where the refundable amount exceeds the dividends tax withheld by the regulated intermediary at least one year after the amount became refundable.
• Review of the provisional tax system
  • Government proposes a review of the provisional tax system given changing circumstances and international developments, with the intention of publishing a discussion paper on this subject.
• Once‐off electronic services supplies by non‐resident suppliers to a recipient in South Africa
  • It is proposed that a specific exception to the rule that a non‐resident supplier register as a vendor when electronic supplies exceed ZAR1-million a year (an exception that already applies to resident suppliers) be
• Review of the domestic legal framework to effect joint audits
  • Government proposes that the South African domestic legal framework, particularly the Tax Administration Act, 2011 be amended to make provision for the full use of joint audits with other tax administrations in order to improve the effective exchange of information under international tax
• Imposition of understatement penalty for employment tax incentives improperly claimed
  • Government proposes that the Employment Tax Incentive Act, 2013 be amended to impose understatement penalties on reimbursements that are improperly claimed.
• Removal of statutory recognised controlling body
  • A statutory recognised controlling body has indicated that it is no longer appropriate for it to be listed as a recognised controlling body in terms of the Tax Administration Act. It is proposed that this body be removed from the list.
• Tax compliance status for taxpayers under business rescue
  • SARS cannot reflect a taxpayer as being tax compliant if it has outstanding tax debts unless the taxpayer has entered into an instalment payment agreement or compromise agreement with SARS or, where the tax debt is disputed, a suspension of payment has been granted. This may not be possible in the earliest stages of a business rescue, which may negatively affect the prospects of the rescue being successful. It proposed that empowering SARS to assist in these cases, under certain conditions, be investigated.

Customs and excise

• SARS has invested ZAR430-million in refreshing and modernising its ICT infrastructure. The multi‐year customs modernisation programme is underway, with an initial focus on improving Beitbridge border operations through data-driven risk profiling and number plate recognition. SARS will expand the modernisation programme to other ports of entry over the medium term. Notwithstanding these measures, corruption at the border posts remains endemic where SARS officials issue fraudulently created documents on exports.
• Upstream petroleum tax regime: A review of the tax regime for the upstream petroleum industry was published at the end of 2021. It proposed replacing the variable royalty rate with a flat‐rate royalty of 5 per cent. Public comments have been received, including some expressing concerns about this approach. A workshop will be held to engage on the various issues so that a proposal can be included in the 2022 Taxation Laws Amendment Bill. Fuel in South Africa is already taxed at 40% placing pressure on costs and on the consumer. The end of South Africa’s crude oil refining capacity is imminent. This will only leave Sasol’s coal and gas refinery. Continuing to tax locally produced fuel with a 5% royalty whilst it competes with imported fuel that is not subject to the royalty is not equitable.
• To support consumers and the economic recovery, no increases will be made to the general fuel levy on petrol and diesel, providing tax relief of ZAR3.5-billion. There will also be no increase in the RAF levy.
• The plastic bag levy will increase from 25c/bag to 28c/bag, in line with inflation.
• Government proposes to increase the vehicle emissions tax rate on passenger cars from ZAR120 to ZAR132/gCO2/km and on double cabs from ZAR160 to ZAR176/gCO2/km.
• The incandescent light bulb levy will be increased from ZAR10 to ZAR15 per light bulb.
• The targeted excise tax burdens for wine, beer and spirits are 11 per cent, 23 per cent and 36 per cent of the weighted average retail price, respectively. Excise duties have increased more than inflation in recent years, resulting in a higher tax incidence. Government proposes to increase excise duties on alcohol by between 4.5 and 6.5 per cent.
• The targeted excise tax burden as a percentage of the retail selling price of the most popular brand within each tobacco product category is currently 40 per cent. The consumption of cigars has moved towards more expensive brands, requiring a higher‐than‐inflation increase to maintain the targeted tax burden. Government proposes to increase the excise duty rate by between 5.5 and 6.5 per cent.
• Review papers on the alcohol and tobacco excise duties policy framework will be released shortly for comment.
• The current excise duty regime applies a flat excise rate for traditional African beer powder of 34.7c/kg. There are similar products in the market. In the interest of equity, these products will be included in the tax net with an excise equivalent to the powder rate from 1 October 2022.
• Government proposes to apply a flat excise duty rate of at least ZAR2.90/ml to both nicotine and non‐nicotine solutions. The proposal will be included in the 2022 Taxation Laws Amendment Bill for further consultation before being introduced from 1 January 2023.
• The health promotion levy for beverages with more than 4g of sugar content per 100ml will be increased from 2.21c/g to 2.31c/g. Consultations will also be initiated to consider lowering the 4g threshold and extending the levy to fruit juices.
• There are currently no provisions in the Customs and Excise Act, 1964 enabling the SARS Commissioner to issue advance rulings. It is proposed that an enabling framework for advance rulings be provided in the act. Before introducing these provisions SARS should ensure that it has capacity to deal with such advance ruling applications.
• Government proposes that the act be amended to allow the Commissioner to make rules for the entry time of any category of goods, which may include break‐bulk cargo imported by sea, air or rail.
• Because of existing uncertainty, it is proposed that amendments be made to the Customs and Excise Act to clarify the legislative requirements for invoices in respect of import and export goods. The Act already provides for invoices and invoice requirements. Not all goods are traded under invoices and invoices are not always issued by the time goods cross the border. It would be insightful to understand SARS’ uncertainty around invoices.
• Draft amendments to the diesel refund notes and rules to the Customs and Excise Act were published for public comment in 2020 and 2021. Industry‐specific workshops were conducted in the second half of 2021 to refine and finalise the proposed reforms. Government proposes that legislation effecting these amendments be put forward.

Fintech

• In accordance with the position paper published by the IFWG during June 2021, the relevant regulatory authorities are developing interventions based on the recommendations set out therein, including:
  • Designating crypto asset service providers as accountable institutions for the purposes of Financial Intelligence Centre Act, 2001 ("FICA"). The proposed amendments will be finalised during 2022;
  • Declaring crypto assets as financial products under the Financial Advisory and Intermediary Services Act, 2002 ("FAISA"). In terms of this declaration, crypto exchanges and platforms and any person providing advice or intermediary services will be required to comply with FAISA. The proposed amendments will be finalised during 2022; and
  • Enhancing the monitoring and reporting of crypto asset transactions to comply with the exchange control regulations, 1961. The process to include crypto assets in the regulations is currently underway.
  • The IFWG intends to publish a follow-up paper inter alia addressing the risks posed by stablecoins and measures to regulate electricity-intensive crypto mining.
  • In accordance with the IFWG paper on open finance (i.e. ability of customer to transfer all data linked to financial activity), financial authorities continue to consider the potential impact of open finance inter alia including the manner in which it may spur innovation and/ or impact cybersecurity and rules that protect financial stability.
  • The SARB continues to explore policy and regulatory impacts of digitisation. Following the review of a wholesale digital central bank currency or digital cash, the second phase of this project explores digital financial assets based on distributed ledger technology and the use of digital money to settle payments. The project findings are expected to be released in April 2022.

Collateral arrangements

• In 2021 far-reaching amendments were proposed to the definition of a “collateral arrangement” which amendments were postponed to 1 January 2023. A review of the impact of the proposed amendments will be made during the current legislative cycle.

Taxation of collective investment schemes 

• In 2018 legislative proposals were made to address the tax treatment of trading profits made by collective investment schemes which were subsequently withdrawn. A discussion document will now be published for comment prior to amendments being proposed to the tax legislation. This discussion document will deal with the tax treatment of amounts received by or accrued to portfolios of collective investment schemes.

 

Carbon tax

• The first phase of the carbon tax will be extended by three years for the period 1 January 2023 to 31 December 2025.
• The transitional support measures afforded to companies in the first phase, such as significant tax-free allowances, will continue over this period.
• The threshold for the maximum trade exposure allowance will be increased from 30 per cent to 50 per cent from 1 January 2023.
• A higher carbon tax rate of ZAR640 per tonne of carbon dioxide equivalent will apply to greenhouse gas emissions exceeding the carbon budget which will be allocated to a company when the Climate Change Bill is passed into law.
• The carbon price will be increased every year by at least USD1 to reach USD20 per tonne of carbon dioxide equivalent by 2026. For the second phase, government intends to increase the carbon price more rapidly every year, to at least USD30 by 2030, accelerating to higher levels by 2035, 2040 and up to USD120 beyond 2050.
• The basic tax‐free allowances will also be gradually reduced to strengthen the price signals under the carbon tax from 1 January 2026 to 31 December 2030.
• To encourage investments in carbon offset projects, government intends to increase the carbon offset allowance by 5 per cent from 1 January 2026.
• These and other proposals will form part of a review for the second phase, to inform future budget announcements.

For more information, contact ENSafrica's tax department.