Detailed below (and in respect of the impact of expatriates working in and outwith South Africa in the appended document) are PricewaterhouseCoopers’ written submissions on the Revenue Laws Amendment Bill 2002.

Although we wish to thank the South African Revenue Service ("SARS") and National Treasury for the opportunity to submit these representations on certain aspects of the Bill, we do wish to raise our concern that the Bill is extremely long (some 190 pages) and there has been only very limited time for us to examine the Bill and provide meaningful comment. The first draft was made public only on Monday 13 October, with comment sought by 22 October, a mere 9 days thereafter and only one day prior to the laying before the Portfolio Committee on Finance ("the Committee") of the Bill scheduled for 23 October.

In addition to the, what we consider to be, wholly unrealistic and unreasonable time permitted for interested parties to comment on the draft, it is clear from the length of representations we now make that time constraints obviously impacted on the drafting of the legislation itself. By way of example we would point out that one of the proposed changes has the potential to render wholly ineffective the capital gains tax regime introduced with effect from 1 October 2001, and we can only presume that this is a direct result of trying to rush through too many changes too quickly. The time frame for the proposed Bill this year is far more onerous than that seen before.

Seeking the approval of Parliament for such complex legislation within the time frames that have been set leads to a situation where the risk is high that there will need to be numerous amendments to the provisions in future Bills presented to the Committee. This phenomenon is amply reflected by the number of such amendments that are now placed before the Committee in respect of the previous legislation that was similarly enacted under severe time constraints. We would reiterate our comments made in respect of last year’s Bill (itself a document running to some 233 pages) that it appears that we are continuously playing catch-up and a period of calm and consolidation is required.

It is suggested that the time frame for the legislative process is so constrained and unrealistic, and the proposed changes so wide and far reaching, this year, that it essentially undermines the Parliamentary process. Under these circumstances we shall request the Committee to consider seriously whether it can adequately perform its role of policing the legislation prior to its submission to Parliament for promulgation.

Additionally, the number of amendments, both in last year’s Bill and the current Bill, do not contribute at all to creating tax certainty within the South African business environment. We strongly believe that SARS should now promote such tax certainty by providing the SA business and tax community with tax legislation that does not change annually. We do not believe that the current set of proposed changes can be seen merely as of a textual nature as there are a number of amendments which will have a marked impact in the tax planning and offshore structures of SA multi-nationals. The most significant of the proposed changes include new sections with substantive amendments dealing with the taxation of controlled foreign entities, the taxation of foreign dividends and the corporate rollover provisions.

The principle was established last year that to the extent technical corrections made apply to tax reliefs they will have retrospective effect, and to the extent they apply to taxing provisions they will have prospective effect. Unfortunately this principle does not appear to have been adhered to this year with multiple effective dates being put forward. We maintain that such principle should necessarily be enshrined within the legislative process and be strictly applied, particularly where such tight deadlines are set such that interested parties are not afforded a reasonable opportunity to comment and try to effect any necessary changes.

We would also point out that it is considerably less than desirable to have numerous rules applying in respect of any one period and the current plethora of dates in existence for the application of different sets of provisions, requiring reference to multiple sets of legislation when dealing with one period does not lend itself to a tax system which is accessible and understandable to the majority of tax payers.

One of the fundamental objectives which was enunciated by Professor Michael Katz when opening the working group put together to formulate the foreign dividends legislation as a transitional measure to the introduction of a world-wide basis of taxation was to ensure that we create a tax system with numerous periods accompanied with different sets of tax rules. The proposed effective dates for the legislation appears to disregard this fundamental objective and principle. The use of the tax technical corrections concept referred to above would address this.

You will appreciate that whilst every effort has been made to provide the most comprehensive and constructive comments on the Draft Bill it is obvious to us that further issues will continue to be identified.

In making our comments on the proposed amendments, we have, for ease of reference, followed the same headings and numberings as the clauses in the draft bill.

In addition, we have included comments on a number of other anomalies we have encountered in the legislation as a whole, arising from our experience and application of the rules in practice.

Yours faithfully

David Lermer James Aitchison
Director: International Tax Senior Manager: Corporate Tax

1 Amendment of section 3 of Act 32 of 1948

As regards the sworn affidavit or solemn declaration to be made by the public officer that the transaction complies with the provisions of one of the sections noted, we are of the view that the exemption from the marketable securities tax should also apply when, notwithstanding no election has been made in respect of the relevant rollover relief provided for in Part III of Act 58 of 1962, the other conditions of the relevant relief are met.

Under these circumstances, where no election is met, the sworn affidavit would at present not be possible and requires to be amended to permit such affidavits to be made in respect of occurrences where the election is not made.

Our detailed comments in this respect are included in respect of the proposed amendments to Part III of Act 58 of 1962. (see clause 35).

We note that the effective date for certain of the amendments to Section 3 is outstanding. As noted in our introductory section at paragraph 8, we believe that this should also be effective from 1 October 2001.

2 Amendment of section 1 of Act 40 of 1949

In respect of transfers of property now covered by this section, where transfer duty is payable we submit that an exemption from MST is required so that two taxes are not payable in respect of the same transfer.

In addition, it must be appreciated that taxpayers with existing corporate structures for holding residential property at the time of the introduction of capital gains tax on 1 October 2001 would have made their decision on whether to collapse the structure in order to avoid the cascading effect of corporate tiers and access the main residence exemption on the basis that this needed to be weighed up against the potential future transfer duty saving on the disposal of the shares in the property holding company. Indeed, this benefit was referred to at the time by SARS as a reason why CGT main residence exemption would not be available to properties not held directly by the individual. Given this proposed change in legislation, we are of the view that the window of opportunity for unwinding existing corporate structures should be extended from 30 September 2002 to 31 March 2003.

Finally, we are concerned that different rates of tax will apply in respect of transfers which are identical other than by reference to the nature of the transferor. Clearly this could be considered discriminatory.

3 Amendment of section 3 of Act 40 of 1949

We are concerned that a joint and several liability has been placed on the counter party to a transaction in respect of the other parties tax liability. This could give rise to adverse commercial complications as the vendor will now require additional comfort from the purchaser that the transfer duty liability will be met. It is hard to see what justification exists for passing on one parties tax liability to another, perhaps unconnected, party.

This approach is in direct contrast to the principle that each tax payer has responsibility for their own tax affairs.

Accordingly we are of the view that the proposed insertions 1(A) and (1B), detailed in clause 3(1)(b) of the bill should be removed.

4 Amendment of section 9 of Act 40 of 1949

We submit that this exemption should also apply in respect of company formations transactions contemplated in section 42 of Act 58 of 1962.

In addition, our comment made in respect of clause 1, as to the availability of the relief even where no election is made in accordance with the relevant section of Part III of Act 58 of 1962, also applies here.

6 Amendment of section 1 of Act 58 of 1962

(a) (a) Reference is made to the spot rate for each day. Which spot rate for each day is intended? Within each day there are several spot rates. Is the intention to use the average spot rate for the day, the midday spot rate or the spot rate on that day at some other time? (and if so in which time zone?)

It is our understanding that in practice the accepted annual average spot rate will be that provided by a banking institution. Accordingly we suggest that such practice be reflected in the legislation.

Our comments above in respect of (a) also apply here.

We are of the view that requiring the spot rate to be applied in respect of each day on which a transaction took place is far too onerous a task, the majority accounting systems will not be sophisticated enough to enable this to be achieved. Many businesses do however prepare financial reports on a monthly basis and accordingly we suggest that a monthly average spot rate, applied against transactions within that month is sufficient for the purposes of the definition.

Finally, reference is made to the "relevant day", a term which we are not aware has been defined anywhere. We submit that this should be replaced with "the date of disposal as determined in accordance with paragraph 13 of the Eighth Schedule".

(b) We note that the Collective Investment Schemes Control Act 2002 has yet to be numbered.

(c) We note that the definition of "controlled foreign company" is incomplete in that the date has yet to be inserted. We presume this will be the date of promulgation of this draft Bill.

(f) Our understanding was that the intention of amending the definition of "dividend" was, in relation to a company being wound up of liquidated, to exclude only those profits of a capital nature relating to periods up to and including 1 October 2001, i.e. profits of a capital nature after that date will be included within "dividend". It is not clear whether this is actually achieved through the proposed wording, which refers to profits of a capital nature attributable to "capital gains", which accrued prior to 1 October 2001.

The term "capital gain" was only introduced and defined in the Eighth Schedule with effect from 1 October 2001 and so it would not be possible for a "capital gain" to accrue prior to that date. What would have been possible prior to that date was for a capital asset to have been disposed of giving rise to a profit of a capital nature.

However, another scenario exists in that a capital profit could be realised after 1 October 2001, with the period to which that accounting capital profit (being the profit which will actually be available for distribution to the shareholders) relates being partly before that date and partly after. The means by which that part of the profit as relates to the period prior to 1 October 2001 are excluded from the definition are not clear from the amended definition.

We agree that the exclusion of accounting profits attributable to periods prior to 1 October 2001 appears to give the most equitable and consistent result in that capital profits relating to periods to 1 October 2001 (being the date of introduction of capital gains tax) are not subject to normal tax (whether as a result of having arisen on a disposal prior to the introduction of taxation on capital gains or where arising as a result of disposals post 1 October 2001 as a result of the availability of the 1 October 2001 value as base cost).

Capital profits relating to periods from 1 October 2001 to date of disposal are, notionally, subject to normal tax on the capital gain although it should be noted that the taxable capital gain may bear little or no resemblance to the accounting capital profit (it is this accounting capital profit which would be available for distribution, not the taxable capital gain) and would then also be subject to STC on distribution.

We would highlight that there is a distinction between profits for accounts purposes (being those available for distribution) and that it is entirely possible for accounting profits to arise (and to be distributed) on the disposal of an asset which gives rise to a capital loss. Under the current wording in the legislation such profits would not be included within "dividend" irrespective of when the disposal took place. Is this the intention?

Please also see our comments in respect of Clause 36.

(k) We had previously made submissions on the definition of "listed company" and we are glad to see that these submissions were accepted. We would now propose one further amendment for your consideration.

"Listed company" is currently defined as "a company the shares of which are listed …".

We propose that the term "share" be replaced by "securities". "Securities" is the term defined and used in the Stock Exchanges Control Act and since "listed company" is defined with reference to the Stock Exchanges Control Act we believe "securities" is the more appropriate term to use.

On the basis that section 1 now includes a cross reference to the section 9E(8) definition of "designated country", should not section 1 also include a similar 3cross reference to "qualifying statutory rate" as defined in section 9E(1)?

(2) No effective dates are given for certain of the changes proposed in clause 6(1). We have listed these below with our suggestions as to what the effective date should be in each instance.

(f) "dividend" 1 January 2003 (in line with
Explanatory Memorandum)
(g) "financial instrument" 1 October 2001
(k) "listed company" 23 February 2000
(l) "pension fund" 27 July 2001
(o) "retirement fund employment" 1 March 2002
(q). "trading stock" 1 January 2003

7 Amendment of section 3 of Act 58 of 1962

It is noted that the proposed changes give a taxpayer the right of objection and appeal in respect of additional provisions, and this is obviously welcomed.

However, no justification exists for subjecting the exercise of only certain discretions to objection and appeal as this can only create confusion – why are certain discretions referred to in section 3 subject to objection and appeal, but others are not.

At the very least we would suggest that the taxpayer should also have a right of appeal and objection against decisions of the Commissioner in respect of Sections 42 to 47 (the corporate rollover reliefs) inclusive, whether or not such decision has been taken in accordance with the Regulations provided for in Section 41(5).

In addition, the right of objection and appeal under decisions of the Commissioner under section 23H(2), which allows the exercise of discretion in terms of limiting certain deductions, should also be included here.

9 Amendment of section 6 quat of Act 58 of 1962

(c) We understand that this amendment means that a credit would be granted in respect of all federal, state, provincial and city taxes payable on income and welcome the expansion and clarification. Is this actually the case?
(j) We welcome the reduction of three definitions to the single definition of "group of companies".

(l) and (m) The conversion of foreign taxes actually paid at the average exchange rate may create an unfair effect and be to the disadvantage of the taxpayer.
Foreign taxes are in fact paid and accounted for at the specific spot rate on the date of payment.
Should the average exchange rate be worse than this spot rate at which the foreign tax has been paid, the taxpayer would only obtain a tax credit for the average amount and not the amount physically paid.
Should the average exchange rate be better than this spot rate, the taxpayer will in turn obtain an unfair advantage.

12 Amendment of section 9 of Act 58 of 1962

(a) We are unclear as to which proviso is to be deleted. Is this the proviso to Section 9(1)(e)(ii) or 9(1)(g)(ii)?

(b) The insertion should actually be after subsection (1A). Also, in order to retain the history note in respect of the previous Section 9(2), should not the proposed insertion be numbered (2A)?

13 Insertion of section 9A of Act 58 of 1962

In order to retain the history note in respect of the previous Section 9A, should not the proposed insertion be numbered (9AA)?

This move to delay taxing income until such time as it can be remitted and so put the taxpayer in cash funds to enable them to meet such tax liability is welcomed.

14 Substitution of section 9D of Act 58 of 1962
9D(1)(b) - (d): ‘Carrying on those operations/activities’
It is not clear whether the requirement that the controlled foreign company ("CFC") must be ‘carrying on the operations/activities’ will be satisfied by the use of an agent or subcontractor of such CFC to actually undertake the mentioned operations/activities. Please clarify.

9D(1)(e): ‘Transportation within a single country’
This appears to be a very impractical provision. The main purpose of transportation companies is to transport goods between harbours/airports of different countries. For instance, not many shipping companies are involved in merely shipping goods between Durban and Cape Town.
We are of the opinion that all vessels and aircraft operated by a CFC outside of SA should create a business establishment for such CFC.

9D(1): Definition of CFC

Does the fact that the ‘jointly or individually’ requirement has been removed from the definition mean that there must be an element of collusion between SA resident shareholders in order to create a CFC?
If this is not the intention, we are of the opinion that the definition should be amended to clarify this and to ensure that a CFC can only be created where SA residents acting in collusion jointly hold more than 50% of the shares in the foreign company.
If collusion between SA residents is not a requirement for the creation of a CFC, it is virtually impossible for a SA shareholder to determine in all cases whether other SA residents hold shares in the same foreign company. For example, if a SA resident holds 15% in a foreign company and a Jersey company holds 40% of the shares in that foreign company, and unconnected SA residents hold the shares of the Jersey company, the foreign company will be a CFC. It is, however, impossible for the SA resident shareholder to obtain information from the Jersey company regarding its shareholders and thus determine whether the foreign company may in fact be a CFC.
It is recommended that the definition be amended to refer to ‘SA residents, acting in collusion’ as it is only in circumstances of collusion that ‘control’ can be constituted. For this purpose connected parties would be treated as acting in collusion unless those parties can prove otherwise.
In addition, in the case of a listed company, the Draft Bill proposes that a person who holds less than five per cent of the participation rights in a listed company shall be deemed not to be a resident. The Draft Bill further proposes that the same "less than five percent" exclusion applies to any other foreign company which is a "controlled group company" in relation to the listed company. This means that the "less than five per cent" exclusion only applies in instances where the listed company holds at least 75 per cent participations rights in any other foreign company.

Whilst we appreciate the efforts to standardise on concepts and tests in the Act by the introduction of terms such as "group of companies", "controlled group company" and "controlling group company" we submit that the use of the term "controlled group company" is inappropriate in this instance. With reference to previous Explanatory Memorandums, it is apparent that the reason why the "less than five percent" exclusion was introduced was because it is so difficult to determine and monitor the shareholding of a listed company. Once this principle is accepted, it is clear that the "less than five percent" exclusion should apply to all listed companies and all other companies in which such listed company has an interest.

We cannot see any justification for limiting the exclusion to companies in which the listed company holds at least 75 per cent of the participation rights. Neither can we think of any other negative consequences if the exclusion is extended to all other companies in which such listed company has an interest.

We therefore propose that the wording "which is a controlled foreign company in relation to that foreign company" in the proviso to the definition of "controlled foreign company" be replaced with "any other company in which such foreign company has an interest".

9D(1): Definition of "foreign financial instrument holding company"
The financial instruments excluded under (a) and (b) of the definition should be expanded so that cash in bank is also excluded from consideration. It does not make sense to penalize a company which may have realised non-financial instrument assets and at year end holds the cash with the intention of buying other non-financial instrument assets in the following year.
In addition it is wholly normal for a company to retain a balance of cash reserves to meet ongoing working capital requirements and it would be particularly draconian to include such balances within financial instruments for the purposes of this test.

We appreciate the clarification of the treatment of a situation where a foreign company becomes either a CFC or ceases to be a CFC.
However, how should the situation be treated where the foreign company remains a CFC as defined for the entire tax year, but the participation rights:
held by a SA resident are increased of decreased. For example, a SA resident holds 60% of the shares initially and acquires an additional 10% from a non-SA resident during the course of the year (lets say after 6 months). If the total net income of the CFC for the year is 1000, how will the amount to be imputed to the SA resident be calculated? The calculation (70% x 1000 x 6/12) + (60% x 1000 x 6/12) will not result in a fair result if the CFC’s business is seasonal with e.g. large profits realised during the first half of the year;
are sold by one SA resident (A) to another SA resident (B) during the course of the year (e.g. A sells its 60% shareholding to B after 6 months). Thus, if the total net income of the CFC for the year is 1000 and 800 has been earned during the first six months and 200 during the second six months, does this mean that there will be imputed to A’s SA taxable income (1 000 x 60% x 6/12 = 300) or (800 x 60% = 480)? It is thus obvious that the results in the two situations will be dramatically different.

9D(2)(b)(i) and 9D(2)(b)(ii)

These sections refer to a calculation of the proportional amount of the net income of a CFC where that CFC has been held for a portion of a year by referring to the calculation made where that CFC was held for an entire year. This reference should perhaps not refer to "an amount determined in accordance with paragraph (a)(ii)(aa)" as it cannot be in accordance with the same method used to calculate the net income of a CFC held for an entire year but should rather refer to a calculation equal to paragraph (a)(ii)(aa) pro rata the number of days held during the year in question relative to the number of days in that year.


Section 9D(2A) currently provides that the taxable income of a CFC shall be determined as if it is a resident. The Draft Bill proposes to restrict the treatment of a CFC as a resident to only certain sections of the Income Tax Act ("Act"). As regards the application of section 31, these provisions are complex and we should be grateful for confirmation that the amendments will not apply to transactions which, had they occurred on an arms length basis, would have fallen within an existing exemption.
This interpretation is supported by the current wording in that in terms of section 31, the transfer pricing adjustment can only be made in the determination of the taxable income of either the acquirer or supplier. On the basis that an exemption would have applied, no taxable income arises. Alternatively in terms in section 31(2) the adjustment is to "the consideration in respect of the transaction" and therefore in the case of an interest free loan for example interest would be deemed to be payable for the purposes of section 31. On this basis the exemption in 9D(9)(fA) would apply if the deemed interest is payable between members of a group of companies.

In addition, we submit that the treatment of a CFC as a resident should be extended to the exemptions from tax on foreign dividends as in section 9E(7). By way of example: Section 9E(7)(c) currently exempts any foreign dividend declared by a listed company to a small (less than 10 per cent) shareholder who is a resident. Because a CFC is currently regarded as a resident, the exemption also applies when the listed company declares the dividend to a CFC.

The restrictions in the Draft Bill whereby the treatment of a CFC as a resident is limited to certain sections of the Act only, should therefore be extended to also include 9E(7) and the reliefs provided for in Part III of the Act. We believe that it was always the intention that CFC’s should enjoy the same exemptions that residents enjoy.

The proposed amendments to section 9D and the Explanatory Memorandum confirm that transfer pricing also applies to CFC’s. At the same time sections 9D(2A)(c) and (9)(fA) provide that interest, royalties, rentals, etc between CFC’s should be ignored for tax purposes provided certain requirements are met.


There is concern that this amendment will give SARS wide ranging powers to impose transfer pricing adjustments, even in circumstances where the local Revenue authorities in the CFC’s jurisdiction are comfortable that the pricing represents arms length rates.

9D(2A)(j): Capital gains
We foresee that keeping sufficient information to adjust the base cost as suggested in this amendment will place a huge administrative burden on taxpayers.

9D(6): Currency for financial reporting
Please refer to our comments above.

This section excludes the provisions of section 9D where the income of the CFC is taxed in its hands in South Africa. This prevents the same income being taxed twice in South Africa (ie in the hands of the CFC itself and also in the hands of the South African shareholder of the CFC).
The proviso to this section however excludes this exemption where the income of the CFC has been subject to an exemption from or reduced rate of tax in South Africa in terms of an agreement for the avoidance of double taxation.
The problem with this proviso is that if the income is subject to a reduced rate of tax in South Africa in the hands of the CFC, and then the full amount of the income is again subject to tax in the hands of the resident shareholder (ignoring the CFC’s expenses) then the income has been subject to tax twice and no 6quat credit is available as it is not foreign tax. This is patently unfair and the proviso should either be scrapped or amended to only allow total South African tax on the income up to a maximum of 30%.

Section 9D(9)(f)
The removal of section 9D(9)(f) is of concern. Whilst it is appreciated that the exemption provided by this section is often covered by the existing exemption in 9D(9)(h), the so called participation exemption, the existence of the section 9D(9)(f) exemption was very helpful to South African multi-nationals in the administration and South African tax compliance of transactions within their controlled foreign groups.
This is because there was only one condition to be satisfied for section 9D(9)(f) to apply, namely that the dividend declaring and recipient companies were controlled foreign entities in relation to the same South African resident. Indeed we would suggest that the exemption be extended to cover CFCs in relation to the same South African resident participator, or connected party to that participator, in order to avoid the loss of the exemption where foreign companies are held by different South African resident companies within the same group of companies. The application of section 9D(9)(h) requires quite onerous conditions for the exemption to apply, which in our view are not necessary in a group scenario. Accordingly we should be grateful if the section 9D(9)(f) exemption remain in force, extended as suggested above.

15 Substitution of section 9E of Act 58 of 1962

9E(3) & (4)
We again believe that the record keeping required by the amendments regarding the profits from which a foreign dividend is declared will place a huge administrative burden on the taxpayer and that a last in first out principle would be more manageable.

Section 9E(3)(a)(ii)
In previous submissions, we have demonstrated that our tax system is far more advanced, complicated and onerous in terms of tax liability and obligations than many of South Africa’s developed trading partners and certainly most emerging countries. Against this background the taxpayer should be permitted to choose the profits that are being repatriated to South Africa by way of dividend. It is difficult to understand why we are creating disincentives for the repatriation of dividends to South Africa when it is recognized that we need a system that encourages the repatriation of foreign reserves to South Africa. We believe that enabling taxpayers to choose the reserves they repatriate will increase repatriations to South Africa without creating tax leakage to South Africa.

Section 9E(7)(e)(ii)
This section exempts foreign dividends to the extent that the profits from which they are declared have been subject to tax in South Africa.
The section however has a proviso similar to the proviso to section 9D(9)(e), in terms of which if the income has been exempt from tax in South Africa or subject to tax at a reduced rate in South Africa in terms of an agreement for the avoidance of double taxation, the dividend will not be exempt.
To the extent that the profits of the CFC were subject to tax in South Africa at a reduced rate this seems unfair. The proviso should not be an all or nothing exclusion from the exemption but should rather tax the dividend only to the extent that the total tax suffered on the dividend and the underlying profits is 30%.

9E(8)(b): Exclusion of specific forms of income
What specific forms of income are envisaged by this provision? We are of the opinion that granting this discretion to the Minister precipitates the high level of tax uncertainty already in existence in the country.
17 Amendment of section 9G of Act 58 of 1962

In the case of the proposed paragraph (3)(i), we presume the intended date for the ruling exchange date is 1 October 2001. However, we feel the current wording in the draft bill is ambiguous and could be taken to mean the date of acquisition of the foreign equity instrument.

In addition, on the basis our assumption regarding the 1 October 2001 date is correct, where a foreign equity instrument is disposed of the taxpayer now has to use the 1 October 2001 exchange rate to determine the Rand base cost. It would be preferable if the taxpayer had the election to use the exchange rate at the date of purchase as the Rand and many other African currencies are quite volatile and forcing taxpayers to use the 1 October 2001 currency rate could lead to very inequitable results particularly where the item was purchased in a weak currency (e.g. Zimbabwe dollars), a significant time prior to 1 October 2001 and the purchase currency has devalued against the Rand between the date of purchase and 1 October 2001.

25 Amendment of section 24F of Act 58 of 1962

With regard to the proposed definition of "marketing expenditure", is the wording in (b) of that definition "(excluding expenditure incurred in sponsoring or promoting any sporting or any other event in a country other than an export country)" required given that the opening words to (b) state "in an export country"?

27 Amendment of section 24I of Act 58 of 1962

Please note that a huge difference can exist between the spot and average rate. As the spot rate and not average rate is used for accounting purposes, the use of average rate of purposes of section 24I will lead to substantial timing differences and thus an administrative burden and complicated deferred tax calculation.

Section 24I(1) – definition of "foreign currency" and "local currency"
The change from "legal tender" to the "reporting currency" raises the question how this change will be implemented. For example a Mauritius company reports in dollars but the legal tender is rupees. Assume this company has a dollar denominated loan. Under the "old" s24I, the dollar loan would have been an exchange item as defined as the legal tender is rupees. With the proposed change, the dollar loan will no longer be an exchange item in foreign currency. Will the change been seen as a realisation for s24I purposes? It is suggested that this issue would similarly be dealt with by ensuring the change is effective from 1 October 2001 in line with the concept of tax technical corrections which the amendment to this section clearly falls into.
We understand that, in terms of section 24I(10)(b), unrealised exchange differences in respect of transactions entered into by two foreign companies forming part of the same group (in relation to the same controlling group company) will be ignored for SA tax purposes.
Could you please clarify the interaction between section 9D(9)(fA) and 24I(10)(b) with regards to unrealised exchange gains?
We recommend that taxpayers that acquired assets prior to the amendment of section 24I(11) must be given the opportunity to elect whether they would want section 24I(11) to apply as a result of the fact that, although the purchase price of such assets was denominated in a foreign currency, in all likelihood ZAR proceeds would be earned on the sale of such assets.

28 Substitution of section 25D of Act 58 of 1962

In numbering the section, (1) should be included for the first section.

At the end of the revised wording in the new clause (b) the word "or" should be removed.

31 Amendment of section 30 of Act 58 of 1962

(a) The reference to the paragraph to be amended should be to paragraph (3), not paragraph (5).

Substitution of Part III of Chapter II of Act 58 of 1962


Our initial comments below are those of a more generic nature, or which apply in respect of a number of the revised sections. Where the latter is the case we have identified the relevant sections to which our comments apply by way of footnote. This general section is followed by our comments pertaining to each individual section.

Generic comments

It is noted that the reliefs in sections 42 and 43 have been amended to permit only the rollover of inherent capital gains (i.e. not inherent capital losses). Whilst accepting that this may make drafting the legislation somewhat more straightforward this gives rise to a number of undesirable effects.

When, say, a business is transferred into a company it appears illogical to say certain of those business assets will have one treatment and other assets another.

If we take the example of a company (A) transferring all of its assets to a new company (B) under a company formation transaction and company A then being retained as a dormant company for, say, name protection purposes, any inherent capital losses will be triggered and realised in A and any inherent gains rolled over into company B. As in this case company A would have no further activities, such losses will be forever wasted.

In addition, without the shelter of Part III the triggering of such capital losses would in any event be subject to paragraph 39 of the Eighth Schedule and would be disregarded. We can see no basis on which such a blanket elimination of losses can be justified.

Further, exclusion of assets with inherent losses from these reliefs in Part III also results in the denial of relief from various other taxes such as transfer duty or stamp duty. We cannot see any reason why, for example, shares with an inherent loss should be denied stamp duty relief on their transfer which is afforded to shares with an inherent gain. Equally, why should transfer duty be payable on property sold which has an inherent capital loss attached to it, where if it had an inherent capital gain, which the owner chose to rollover, no duty would be payable.

There appears to be no provision dealing with what the base cost of assets transferred under the old rationalisation reliefs is. See also our comments in respect of the Eighth Schedule.

It appears that, where a transaction otherwise qualifies for one of the reliefs provided for in Part III but that relief is not elected for, the transaction does not qualify for the MST, UST, and stamp duty exemptions.

We submit that where a person decides not to avail themselves of the reliefs in Part III, they should nonetheless be entitled to such other reliefs which would have been available had an election been made.

As it stands, a person who decides not to make an election, but to allow gains or other taxable income to be triggered now is penalised for deciding to pay tax on such income by not benefiting from the other exemptions.

Provision for this will require to be made in those other taxing Acts.

In addition, it is not clear whether a person must elect for the entire provisions of a particular relief to apply or whether the election may be in respect of only part of the relief available (e.g claim month relief for capital gains purposes but not the relief in respect of allowance assets). Clarification is required.

In terms of each of the sections in this substituted Part, only section 47 provides any detail as to the intended effective date of the revised wording, and that is incomplete. We assume that the substituted Part III will be effective from 1 October 2001 and would suggest that this be clarified at the start of the Part. However, we submit that it is also necessary that amnesty be granted in respect of any transactions entered into prior to promulgation of this Bill which complied the previous conditions for relief.

In terms of the elections to be made we await details of the requirements and form that such election must adhere to. We presume that the elections to be made need not identify each individual asset in respect of which the election will be made as this would clearly be an onerous administrative task both for the taxpayer to create and SARS to review.

We note that sections 43 and 46 appear to still be mandatory and presume this is merely an oversight as all other sections are now elective.

We propose that the reliefs be extended to permit securities other than shares to be received in the acquiring company. Indeed, the requirement to receive shares in the company receiving the asset may be considered to be too restrictive in a South African context, where commonly a group comprises a holding company (perhaps listed) and operating subsidiaries and assets would normally be acquired by an appropriate operating subsidiary in exchange for shares in the holding company. The reliefs should facilitate transactions carried out in this manner.

We would further propose that, in line with other countries, a de minimis rule be introduced to permit a small component of cash (e.g. 5 – 10% of the total value of the consideration) to be transferred without triggering the partial disposal clauses in each relieving section. This would allow the disposing party to realise sufficient cash to meet any transaction costs without incurring any tax leakage at that time.

We remain of the view that to preclude the transfer of financial instruments at all is at odds to aims of the group relief provisions. The general principle to tax gains on financial instruments is out of place here. They should be taxed on disposal outside of the group. The purpose of the group-relief is to recognise the economic unity of commercial groups of companies.

Whilst reliefs are provided for the tax treatment of capital assets and allowance assets, no provision appears to have been made for the transfer of any tax attributes of a transferor to also pass over to the transferee (e.g. STC credits or foreign tax credits) We submit that, in accordance with the proposed approach whereby the transferee is deemed to be "one and the same" as the transferor such tax attributes should also cross over to the transferee.

Has any consideration been given to the application of the reliefs, and in particular the restrictions and ring-fencing resulting from the 18 month periods stipulated, to the four funds of insurers contemplated in section 29A?

Comments applying to a number of the revised sections

Provision is made that, in the case of a capital asset, the value at which the disposing party is deemed to have disposed of the asset is its base cost. For pre-valuation date assets this poses a problem in that the rules for determining base cost (paragraphs 26, 27 and 28 of the Eighth Schedule) are by reference to the proceeds thereby creating a circular argument that proceeds = base cost = proceeds et. seq.

In order to address this issue, we submit that the wording be amended to simply state that capital assets are disposed of for such value as gives rise to neither a capital gain nor a capital loss (thereby removing the need to quantify any absolute value).

However the suggested wording does not solve all problems. For the purposes of certain sections the base cost will have to be determined up front in order to ascertain whether those section apply. For example, the definition of company formation transaction contained in Section 42 states at s42(a) "in terms of which ….. market value of which exceeds …. (i) ….. the base cost". If the base cost cannot be determined for pre valuation date assets because of the circular argument identified above nor can the application of the section. We submit that this is yet another reason why the rollover reliefs should not be limited to assets with inherent gains.

The current approach adopted in the legislation in respect of sections 42 and 43 means that certain capital gains may be taxed twice.

We remain diametrically opposed to the double taxation that arises on capital assets from imposing the (lower) original base cost on an acquirer who has paid full market basis for an asset.

The other reliefs provided for in this Part do not give rise to such double taxation so it is hard to see why it is justified in these two circumstances.

In addition, in so far as the rollover relief provides for tax relief (other than on capital gains) no such double taxation applies, so again it is hard to see what justification there can be for taxation of the same inherent capital gain more than once.

This is in direct contrast to the tax systems developed in more advanced territories such as the UK where the disposer either gets the rollover relief or he does not but the acquirer in any event has a base cost equal to the consideration paid (in this case the market value of the shares issued).

The whole basis of the relief should be that it is a rollover for the disposer, not an opportunity to potentially tax the same inherent gain twice.

It appears that a problem may arise where a company acquires assets from a non-resident. The non-resident may have no base cost in those assets for South African tax purposes as the rules determining base cost are contained in the Eighth Schedule, by virtue of paragraph 2 therein, may not apply to non-residents. Accordingly a South African company would be taking on a base cost of nil. We submit that where assets are acquired from a non-resident under the transactions provided for in Part III, the acquiring company should obtain market basis in those assets for tax purposes.

Although provision has been made in the definitions of foreign financial instrument holding company and domestic financial instrument holding company to exclude financial instrument assets where the matching liability is within the same group of companies, this effective relief has not been incorporated within the relevant relieving sections of Part III. In particular, this is the case where the transfer of financial instruments, where these exceed 5% of the total asserts transferred (even where these assets are those where the corresponding liability is within the same group of companies and excluded in the definitions of financial instrument holding companies) are excluded. We trust that this is merely an oversight which will be corrected.

In a number of instances any capital gain on the subsequent disposal of an asset by the acquiring party within 18 months of acquisition is subject to ring-fencing. Whilst we appreciate that this is necessary to avoid tax avoidance, we do not see any justification as to why this should apply to the entire capital gain attributable to such assets. We are strongly of the view that the only capital gain which should be subject to such ring-fencing are those rolled over under the reliefs provided for in Part III.

Using the example provided on page 18 of the Explanatory Memorandum, Y acquires an asset from X when its value is R180,000 and which has a base cost of R20,000 (the gain rolled over is therefore R160,000). On disposal within 18 months Y sells this asset for R190,000, realising a capital gain of R170,000. R10,000 of this gain relates to the period when the asset was owned by Y and in no way relates to the rolled over gain so we maintain that there is no reason why this element of the gain should be ring-fenced. Had no election been made in respect of the transfer X would have been taxed on a capital gain of R160,000 and Y on a capital gain of R10,000 with no restriction as to the use of Y’s losses against that capital gain.

Likewise, any profits or losses attributable to the disposal within 18 months of acquisition of trading stock acquired under a transaction provided for in Part III is also ring-fenced and treated as forming part of a separate trade. Where any increase in the amount received or accrued can be proven to have arisen in the time such stock was held by the acquiring company we do not see why the increase in value should be ring fenced as proposed.

Finally, our comments in respect of trading stock above also apply in respect of allowance assets.

In a number of cases it is stated that a transaction will not qualify where all the receipts and accruals of the recipient company are exempt from tax in terms of section 10.

We are unclear as to the scope of such statements. Are they intended to catch only those companies all of whose receipts and accruals are exempt from tax in terms of s10 (e.g. public benefit organisation approved by the Commissioner under s10(cN)) or is it intended to be broader so that, for instance, disposals to a holding company, whose income up to the date of transfer may have consisted solely of dividends exempt under s10(k) will not benefit from the relief.

This would preclude the rationalisation of the trading activities of a group into its holding company from the relief measures, clearly unintended?

If it is the intention that the relief not apply in the case of transfers to exempt bodies then each specific instance in section 10 which exempts all the receipts and accruals of a particular body should be listed.

Section 41

Subsection (1)

"allowance asset"

We submit that this definition requires to be amended by the insertion at the end of "other than a deduction or allowance in calculating any capital gain or loss on its disposal", as otherwise every capital asset will fall within the meaning of "allowance asset".

"capital asset"

Why are assets such as trade debtors to be considered as a capital asset?

"domestic financial instrument holding company"

A number of issues arise from this definition.

It is unclear at what stage the 50 per cent test to determine whether a company is a domestic financial instrument holding company should be performed.

The wording should read "together with all of the assets of any controlled company"

In addition, we would suggest that the wording "any controlled group company" be replaced with "all controlled group companies". The wording currently contained in the draft bill could imply that multiple tests are required with each controlled group company individually.

The financial instruments excluded under (a) and (b) of the definition should be expanded so that cash in bank is also excluded from consideration. It does not make sense to penalize a company which may have realised non-financial instrument assets and at year end holds the cash with the intention of buying other non-financial instrument assets in the following year.

In addition it is wholly normal for any company to retain a balance of cash reserves to meet ongoing working capital requirements and it would be draconian to include such balances within financial instruments for the purposes of this test.

"equity share"

Whilst the inclusion now of close corporations is welcomed, this still requires to be expanded to include interests in other companies which do not have equity share capital, such as bodies corporate or other associations which are still a "company" as defined in section 1.

In addition, provision requires to be made for companies which do not have an equity share capital (e.g. South African branches of foreign companies).

"qualifying interest"

We remain of the view that the 25 per cent threshold could severely restrict the usefulness of the relief for unlisted shares. In addition to discouraging larger business formations and concentrations, this relief is not available to partnerships of more than 3 equal partners on incorporation of their business.

We also remain unclear as to the rationale for the distinction between listed (or to be listed) and other companies. If the distinction is maintained, we suggest a 10 per cent threshold for unlisted shares may be more appropriate.

It is interesting to note that following the promulgation of these provisions last year the UK introduced capital gains exemption for substantial shareholdings over 10%.

Subsection (4)

This section is obviously drawn from Regulations No. R1168 dated 13 September 2002.

Subsection (4)(d) refers to regulation 3 without detailing which Regulations it actually means. We suggest that for completeness the basis of Regulation 3 of Regulations No. R1168 be incorporated as subsection (5). Minor amendments will require to be made in respect of the wording of that regulation. The existing subsections (5) and (6) will then require to be renumbered. On the basis that Regulations No. R1168 are now to be enacted within the Act, those regulations will require to be repealed.

Subsection (5)

This section should be updated to include reference to amalgamation transactions also.

The regulations referred to here are still awaited though it is noted from the explanatory memorandum that these are optional at the instance of the Minister and it is not intended that any such regulations when issued will have retroactive effect.

In the meantime, we should be grateful to hear what SARS approach will be to a taxpayer electing to obtain prior approval when there is no requirement on SARS to provide this until such time as the Minister prescribes regulations.

Subsection (6)

We await details of the form in which details of transactions under this Part must be submitted to the Commissioner.

Section 42

Subsection (1)

In terms of the wording in (a) following on from (a)(ii), the reference should be to "an equity share or part thereof" as where multiple assets are transferred for shares it may be that certain of the assets transferred are of such a value that a whole share is not attributable to their value.

Subsection (2)

A number of issues arise from this subsection, which are covered by our comments in the "General" section above.

Subsection (3)

Should not this subsection, in line with subsections (2) and (4) also be subject to subsection (8). We presume that this has not been included as an allowance asset will always be a capital asset and so subsection (8) is brought in by Subsection (2) anyway.

Subsection (4)

As it is possible for an asset to be disposed of which is both a capital asset and an allowance asset, the words "or" at the end of subparagraphs (i) and (ii) should read "and".

The wording after (iii) gives rise to an issue in that it can potentially double count amounts in respect of an asset which is both a capital asset and an allowance asset. In order to remove this potential ambiguity, we suggest that the wording be amended to "the respective total amounts referred to in subparagraphs (i) to (iii) as the …."

Subsection (5)

In paragraph (b), which lists the excluded circumstances where the disposal will not be treated as a disposal of trading stock, we submit that further company formations transactions contemplated in section 42, share for share transactions contemplated in section 43 and amalgamations transactions contemplated in section 44 should also be included.

In addition, we are concerned that the 50 per cent of market value test, attributable to allowance assets or trading stock or both is ambiguous as to at what time it should be performed. It is unclear to us whether this should be (i) at the point within the 18 month period at which the equity share is disposed of, or (ii) the time at which the assets were transferred within the company formation transaction.

If the intention is (i) then we have the following reservations which are illustrated by way of example; assume the disposal of the equity shares after 15 months;

in the case of a 25% shareholder (meeting the qualifying interest criteria) who subsequently disposes of his holding it may not be in their power to obtain a valuation as at the date of sale; and

in addition, we are unsure as to what assets the test should be by reference to. Is it intended to be by reference to all the assets originally transferred? By the time of disposal of the equity shares certain of these assets may have been sold by the company, particularly in the case of trading stock, or have been subjected to alteration (e.g. work in progress when originally transferred). Or is it such assets as were transferred and are still held by the company. Again it may not be possible for the shareholder to determine this.

If the reference to "that disposal" is intended to refer to the disposal of assets to the company in terms of the company formation transaction then the wording should be " the disposal contemplated in subparagraphs (i) or (ii) of paragraph (a) of the definition of ‘company formation transaction’".

Subsection (6)

The reference to subsection (1) should be a reference to Section 42(1).

For consistency we would suggest that identical wording is adopted in the proviso as is used in Subsection (5)(b) (as amended per our submission above) when listing the circumstances under which the section will not apply.

Subsection (7)

We submit that the list of circumstances under which the subsection does not apply be extended in accordance with our submission in respect of subsection (5).

Subsection (9)

We submit that a further exclusion from the financial instruments which may not be transferred under a company formation transaction is required in respect of equity shares in a controlled group company in relation to a transferor company where the controlled group company is not a domestic or foreign financial instrument holding company.

This exclusion is provided for in section 45 (intra-group transactions) and appears to us to simply have been omitted from this section.

Section 42(9) contains the exemptions from election. It still seems as if companies with certain financial instruments will be precluded from using the relief. For example, if a company has an intercompany loan account (not included in the income of that company), which exceeds 5% of the total market value of the assets, such company may not elect the relief. The inclusion of the definition of "domestic financial instrument company" seems to imply companies should not be precluded from using the relief if they have, for example, intercompany debt, but section 42(9) does not give this relief.

Subsection (10)

Whilst we note the detail given in the Explanatory Memorandum for the prevention of multi-tier rollovers we are not convinced that the rationale holds. We do not see that the proximity of the original transferor to the assets transferred is of any relevance. The original transferor holds new assets (the shares) and his rolled over gain will be triggered by the disposal of that new asset.

Additionally, in the case of group restructurings in order to avoid messy cross holdings it may be necessary to effect multi-tier rollovers and the prevention of this could adversely impact upon commercial transactions. Accordingly we submit that the section be deleted.

If such proposed deletion is not adopted, then we suggest that the limitation in the 18 month period should apply only where the majority of the assets that were part of the original transaction are disposed of within that period. The isolated disposal of individual assets that are not material when looking at the whole transaction as a whole should not be excluded from this relief.

Section 43

Subsection (1)

We consider the requirement in 43(1)(c)(i) for the acquiring company’s holding in the target company to be attained through "any offer made on the same terms" to be too restrictive and should be relaxed to "any offer made on, what is considered by the Commissioner to be, similar terms".

Whilst we acknowledge that this brings a degree of subjectivity and administrative burden to the scope, commercial reality is that whilst some shares may be acquired on an initial offer, subsequent acquisitions may be made at, for example, a slightly different price and allowing the Commissioner to determine what constitutes "similar" should alleviate any concerns SARS may have. The section appears to already acknowledge the potential for the staggered acceptance of offers by allowing for a ninety day period.

It would appear unjust to deny the rollover relief to certain disposers merely because of a minor difference in the offer, which they accepted.

Such amended wording should also be adopted in respect of Section 43(1)(c)(ii).

Our comments in respect of "qualifying interest" as defined in Section 41 apply here.

It appears that Section 43 remains mandatory and not subject to an election. Is this intended or merely an oversight. If this is the intended result what is the rationale?

Subsection (2)

Our comments in respect of Section 42(2) apply here also.

Subsection (4)

The current references to "interest ….. in paragraph (b)(ii) of the definition of share for share transaction" should be to the definition of qualifying interest in Section 42(1). This also applies to the proviso to subsection (4).

In addition we submit that the proviso should also include company formation transactions as contemplated in Section 42, further share for share transactions as contemplated in Section 43 and amalgamation transactions as contemplated in Section 44.

Subsection (5)

Reference to subparagraphs (i) and (ii) of paragraph (b) should be to (i) and (ii) of paragraph (c).

As regards the proviso contained in this subsection, our comments in respect of subsection (4) apply.

Subsection (6)

As regards the circumstances listed when the subsection will not apply, this should also include company formation transactions as contemplated in Section 42, further share for share transactions as contemplated in Section 43 and amalgamation transactions as contemplated in Section 44.

Subsection (7)

The references should be to a "domestic financial instrument holding company" and a "foreign financial instrument holding company".

In addition, in determining whether a company is such a financial instrument holding company it should be stated that this test is to be applied at the date of transfer.

Subsection (8)

Our comments in respect of Subsection (10) of section 42 apply here. Accordingly, we submit that this subsection should also be deleted.

Section 44

Subsection (2)

Certain of our comments in the general section above apply here.

Subsection (4)

We see no possible justification for restricting the availability of losses against growth in value of assets arising after such assets have been transferred to the resultant company. Only the rolled over gain should be subject to such restriction.

In addition, subsection 4(a)(i) should be subject to subparagraph (a)(ii).

Subsection (5)

The circular issue identified in respect of subsection (2) is also in evidence here.

Subsection (7)

The proviso should also include company formation transactions contemplated in section 42, share for share transactions contemplated in section 43 and further amalgamation transaction contemplated in section 44.

Subsection (8)

We submit that a further exclusion from the financial instruments which may not be transferred under a company formation transaction is required in respect of equity shares in a controlled group company in relation to a transferor company where the controlled group company is not a domestic or foreign financial instrument holding company.

This exclusion is provided for in section 45 (intra-group transactions) and appears to us to simply have been omitted from this section.

In addition, our comments in respect of s42(9) on group companies with intra-company loan balances in excess of 5% of assets transferred applies here also.

Subsection (9)

The reference to subsections (3) and (4) should be to subsections (2) and (3).

How is it intended that this subsection apply to companies which cannot liquidate or deregister as envisaged in Section 41 (e.g. branches of foreign companies).

We would propose that a provision, along the lines of those contained in the previous sections 44(9) and 45(3) is required in respect of the subsequent liquidation of the amalgamated company.

Section 45

Subsection (2)

Certain of our comments in the general section above apply here.

Subsection (4)

We remain of the view that a finite time limit must be applied in s45(4) rather than the "at any time thereafter" currently imposed. As it stands the infinite application of the claw back provision places requirements on both the taxpayer and SARS in terms of administration and record keeping which we consider to be far too onerous.

The "at any time thereafter" is inconsistent with the other clawback provisions in sections 42 to 46, which are limited to 18 months.

If an 18 month period is not acceptable for the clawback, then we would suggest that a maximum of a 5 year period (from the date of the return) apply, in line with the amendments proposed to sections 73B and 75 (record keeping requirements) of the Act by clauses 43 and 44 of the Bill.

We further submit that the clawback should only apply when the transferee company leaves that group of companies while holding an asset transferred to it in terms of an "intra-group transaction" in respect of which an election under s45(1)(c) was made. We cannot see any rationale for taxing the inherent gain on an asset which stays within the same group of companies when the transferor company leaves that group.

We note that the relief has now been expanded to permit the transfer of shares in controlled group companies, other than financial instrument holding companies (domestic or foreign). This move is particularly welcomed, however, for clarity, in respect of the proviso as regards domestic or financial holding companies, it should be stated that in determining whether a company is a domestic or financial instrument holding company that test should be applied at the date of transfer.

Subsection (5)

The circumstances under which subsection 5 does not apply should also include company formation transactions contemplated in section 42, share for share transactions contemplated in section 43 and unbundling transactions contemplated in section 46.

Item (a)(i) should be stated to be subject to item (a)(ii).

Subsection (6)

Our comments in respect of this section are included with the "General" section above.

The previous relief granted by the old section 44(9), the predecessor the current section 45, in terms of the classification of such payments appears to have been removed. This should be reinstated.

Section 46

Subsection (1)

We do not understand why the requirement in section 46(1)(a)(iv) for the unbundled company to become listed should exist.

Subsection (2)

Certain of our comments in the general section above apply here.

The previous relief granted by the old section 45(3), the predecessor to the current section 46, in terms of the classification of such payments appears to have been removed. This should be reinstated.

Section 47

Subsection (2)

Certain of our comments in the general section above apply here.

Subsection (4)

Paragraph (a)(i) should be subject to (a)(ii). As with the other sections we do not see that any capital gain, to the extent it is attributable to the period of ownership of the holding company, should be ring fenced in this way.

Subsection (5)

When is it envisaged that a holding company would dispose of an asset to the liquidating company in a liquidation?

Subsection (6)

See comment in "General" section above.

Subsection (7)

We presume that the second subsection numbered subsection (2) but included after Subsection (6) is intended to be subsection (7). We refer to our comment in the "General" section on Part III as to the effective date of the substituted Part.

35 Amendment of section 56 of Act 58 of 1962

We do not understand why this relief has been removed, surely what is required is an updating of the cross reference to section 45?

36 Amendment of section 64B of Act 58 of 1962

The proposed change to section 64B(5)(c) detailed in paragraph (c)(ii) is ambiguous. Is it intended that

the entire capital profit attributable to an asset disposed of post 1 October 2001 will be subject to the secondary tax on companies ("STC"), or

only that portion of the capital profit on such an asset which is attributable to the period from October 2001 to the date of disposal?

We are of the view that the correct position should be that put forward in (ii) above.

This would appear to give the most equitable and consistent result in that STC is not payable in respect of capital profits relating to periods to 1 October 2001 (being the date of introduction of capital gains tax) as such profits are also not subject to normal tax either.

Capital profits relating to periods from 1 October 2001 to date of disposal are, notionally, subject to normal tax on the capital gain although it should be noted that the taxable capital gain may bear little or no resemblance to the accounting capital profit (it is this accounting capital profit which would be available for distribution, not the taxable capital gain) and would then also be subject to STC on distribution.

We would also point out that it is possible to trigger a distributable accounting profit on an asset without there being any capital gain and the inclusion of such profits for STC purposes does not appear to be catered for in the current draft.

If the intention is that the interpretation in (i) above is the correct position, then reference to 1 October 2001 should be removed as it is unnecessary, it would not be possible for any capital gain to have accrued prior to 1 October 2001 as the term "capital gain" was only introduced by the Eighth Schedule with effect from that date.

As regards the six month time limit for taking the necessary steps, it should be included that this is from the date of declaration of the dividend. See also our comments in respect of Section 41(4).

Paragraph (2) states that the amendments will take effect from date of promulgation and apply in respect of any dividend distributed on or after that date. This contradicts the detail in the explanatory memorandum which envisages the changes will only have effect for dividends declared on or after 1 January 2003.

In respect of the proposed changes to section 64B(5)(f)(iiA), the exemption from STC should be available in respect of profits earned while the distributing company was a member of that group of companies (i.e. the exemption will still be available under circumstances where, for example, the shares in the distributing company have been transferred within that group of companies).

37 Amendment to section 64C of Act 58 of 1962

Definition of share incentive scheme

It is not quite clear why a scheme will only be classified as a share incentive scheme if there is a 10% or less shareholding. In terms of the JSE Listings requirements, for example, a share trust may hold up to a maximum of 20% of the shares in a company, it is not quite clear why the definition contains a 10% rule.

42 Amendment to section 72A of Act 58 of 1962

(b) (b) the word "rights" has been omitted from after "total participation.."

44 Amendment of section 73B of Act 58 of 1962

Is this section actually required at all. Do not the provisions of section 73A also cover capital gains as they form part of the return.

45 Amendment of section 75 of Act 58 of 1962

The reference to "words following paragraph (f)" should be to "words following paragraph (j)".

46 Amendment of section 77 of Act 58 of 1962

Whilst we presume the purpose of clause 46(1)(b) is to ensure all rules may be located in one section the fact that one now has to trace through numerous other sections to get there does nothing for the simplification of the legislation.

47 Amendment of section 78 of Act 58 of 1962

The references to subsection (1B) and (1C) do not appear to relate to section 78. Accordingly, we are unable to comment further.

48 Insertion of section 79B of Act 58 of 1962

Apparently the intention is for the new section to be inserted after section 79A, however no section 79A exists.

70 Amendment of paragraph 24 of Eighth Schedule to Act 58 of 1962

Whilst we have no comment in respect of the changes proposed, we submit that the opening wording in subsections (2) and (3) should be aligned to read the same.

74 Amendment of paragraph 29 of Eighth Schedule to Act 58 of 1962

Clause 1 proposes changes to items (a) and (b) of subparagraph 4 and the insertion of item (c), however subparagraph (4) has no existing items (a) and (b).

82 Amendment of paragraph 82 of Eighth Schedule to Act 58 of 1962

Please see the comments regarding average exchange rate vs spot rate in the comments on section24I.
Paragraph 43(4) should become para 43(3) with the deletion of the existing para 43(3).

89 Substitution of paragraph 63 of Eighth Schedule to Act 58 of 1962

We are surprised at the proposed new wording in this section as it has to potential to render tax on capital gains almost wholly ineffective. The changed words imply that where a person has any receipt of accruals which are exempt in terms of section 10, that person must disregard any capital gain or loss on the disposal of an asset.

This would mean that where, for example, a person has received a dividend of any size, which is exempt under section 10(1)(k) then that person can disregard any capital gain. Clearly this is unintended.

In addition, if the new wording was seen as preferable, why has it not been adopted in Part III of the Act, where the old style wording is still prevalent.

105 Insertion of section 50A in Act 91 of 1964

Section 50A deals with joint international and land border post administration.
This amendment provides for the establishment of joint land border posts and the mutual administration thereof by the Commissioner and the Customs authority of the adjoining state. Such co-operation will follow upon an agreement between the Republic and the adjoining state. This amendment is necessitated by the terms of the SADC Protocol and by practical considerations.
This move should be supported, especially where trade is conducted within the Southern African Customs union (SACU) or in fact the South African Development Community (SADC). Industries concerns are that where South Africa’ s Customs personnel are more effectively trained, the lack of expertise by other authorities on South Africa’s borders may open the flood gates for smuggled/grey products. Rules for country of origin may also be affected. Depending on the protocols within SACU and SADC it is suggested that a high level of training is undertaken prior to the establishment of single border posts and that certain countries goods are not prejudiced. The differences in the calculation of Customs Value, interpretation of tariff classification and risk profiling of clients are not consistent in each member country and could result in long delays at border posts.

This particular piece of legislation therefore bears deeper scrutiny and understanding and a far more detailed practice note.

121 Amendment of section 6 of Act 31 of 1989

Whilst we have no comments in respect of the proposed changes, we submit the words "contemplated in section 46" should be inserted after "unbundling transaction" when it first appears in the subparagraph.


Eighth Schedule

Paragraph 1

"value shifting arrangement"

reference is made to "following a change.." Is this intended to be an infinite time period in which this test should be applied?

In addition the proviso "(other than…)" should be expanded so that changes in rights or entitlements arising from other transactions in which the parties to the first transaction are not involved are not included.

Paragraph 12(4)

This paragraph, subject to paragraph 24, seeks to ensure that the base cost of an asset held by a person when becoming resident is taken as market value on the date that residency commences.

However, what is missing is the timing of the deemed disposal and reacquisition.

The deemed events should be stated as taking place the day before the residency commences as if it were to occur on the date of residency any gain or loss on that deemed disposal would be subject to South African tax.

Paragraph 20

There appears to be an inconsistency between subsection (1)(g)(iii) and (2)(a)

Matters not currently covered by the Eighth Schedule

There appear to be no provisions covering the base cost of an asset where that asset was acquired under a rationalisation within the terms of the "old" legislation. We submit that provision should be made to allow the holding company to use the original cost and not be restricted to market value as at 1 October 2001.

We would like to suggest that an additional relief be provided for in the Eighth Schedule to permit a capital loss to be realised upon election by the holder of that asset, without the need for an actual disposal to crystallise. We are aware that such provisions exist in other territories (e.g. negligible value claims in the UK) to facilitate relief to be given where there are other reasons why the assets may not be disposed of. By way of example, such a relief could apply where shares in a company have diminished significantly in value such that there is no market for a disposal to be possible.

The Uncertificated Securities Act 31 of 1998

Section 6(1)(ix) requires to be updated in respect of the new Part III to Act 58 of 1962 to include reliefs in respect of each of the following transactions;

company formations transactions contemplated in section 42;
share for share transactions contemplated in section 43;
intra-group transactions contemplated in section 45;
transfers in pursuance of a distribution in specie in the course of an unbundling transaction contemplated in section 46; and
transfers in pursuance of a distribution in specie in the course of a liquidation transaction contemplated in section 47 of the Act.

Representations to National Treasury and the South African Revenue Services
October 22, 2002

1. Capital Gains Tax - Eighth Schedule

Deemed disposal on cessation of tax residence

It is disappointing that that despite representations made on the matter when CGT was introduced and subsequently, there has been no amendment to the provisions relating the deemed disposal arising on cessation of tax residence.

The significant adverse impact of these provisions must not be underestimated if South Africa is to redress the skills shortage and attract skilled employees on a longer term basis to South Africa.

Since the introduction of tax on capital gains on 1 October 2001, PwC has advised many international companies of the impact of this legislation on its expatriate employees. Without exception, these companies voiced their concerns that this would have a significant negative impact on the existing expatriate employees, especially those that became tax resident from 1 March 2001 or 1 March 2002, and on the ability of the South African operations of multinational organisations to attract expatriates other than very short term assignees.

The imposition of a deemed disposal of world-wide assets on cessation of tax residence was seen as the most negative aspect of the tax on capital gains, with a particularly harsh impact on expatriate employees. In our view, it is a significant disincentive for the expatriate and the employer alike to retain skills in South Africa, and will result in less expatriate personnel being transferred to South Africa, and as a result, less resource being applied in South Africa, with a consequent reduction in capacity to employ local employees. It is not true to say that less expatriates will lead to more jobs for South Africans, as the multinationals will simply move that particular function to another part of their operation outside of South Africa, and will result in less opportunities for the employment of and skills transfer to locals.

Of the countries that have a world-wide basis of tax, many have a concessional treatment for expatriate workers, and very few have a deemed disposal of assets on ceasing to be resident. The deemed disposal rules in South Africa are in many ways the most harsh in the world. Other countries that have such a charge, e.g. Australia and Canada have recognised the impact on expatriate employees and have sought to moderate the impact of the legislation on this group of tax resident individuals, and have included deferral provisions for non-expatriate employees that cease tax residence temporarily.

Any increase in a person’s tax burden (over that person’s home country tax liability, and on the assignment benefits) often falls on the company. Employers may seek to limit their exposure to South African tax. Employees not tax protected may also seek to reduce their exposure. The end result is that international assignments to South Africa will be shorter in duration, and will be planned so that the person does not become tax resident, or will not happen at all.

Multinationals are already considering how to deal with the impact of these regulations and in some cases, this has already meant the early termination of assignments to avoid the assignee becoming tax resident, and subject to the deemed disposal on cessation of tax residence.

Tax policy should not drive human capital decisions, and it is important that a country which needs skills should not add to its shortages by increasing tax barriers to inward migration. Judging from the significant tax issues arising from PwC clients, the new legislation is having a detrimental impact on the numbers and duration of expatriate assignments as well as giving companies significant tax problems for those expatriates that found themselves tax resident from 1 March 2001. Neither employer nor employee were prepared for the impact.

The following represent actual circumstances encountered recently. A senior executive of a foreign listed company is transferred to South Africa temporarily, but long enough to become resident. This person holds shares and vested (but unexercised) and un-vested share options in the foreign employing company. When such person leaves South Africa, there will be a deemed gain/loss equivalent to the movement in market value of those shares and options between the date he became resident and the date he ceased to be resident. The resulting calculation is extremely harsh, as not only is the real gain potentially subject to tax, the gain arising through the devaluation of the rand between the date of commencement of tax residence and cessation is also subject to tax.

In another case, whilst the gain in foreign currency was negligible, the gain in rand terms was significant, with the result that a gain of approximately R1 million arose on cessation of tax residence, solely due to devaluation of the rand. The expatriate’s wife had inherited significant assets whilst they were present in South Africa (mostly foreign cash and foreign listed shares) and also had significant deemed gains. Neither he nor his wife will get any tax base cost uplift in the country to which they returned, and no tax credit for the SA taxation suffered on subsequent disposal, resulting in double taxation. In such circumstances, it is submitted that there is no justification for South Africa seeking to tax such gains, as the person will never realise an economic benefit in rands as he will return to his home country, and will not realise any gains that will be introduced or used for economic purposes in South Africa. The position has been exacerbated by the proposed changes to the way in which foreign exchange gains on certain assets are taxed (see additional comments below).

It should be noted that the word is spreading internationally, and already, it is becoming more difficult to find medium to longer term foreign assignees. Whilst South Africa has its attractions as an expatriate destination, it also has certain perception problems, especially regarding personal safety. The previous source base tax regime acted to, in part, counter the other negatives. The capital gains tax exit charge, however, now acts as an additional issue for would be assignees and their employers.

It is therefore considered vitally important that South Africa changes the tax legislation for expatriate employees with retrospective effect, and exempts from tax any disposal (deemed or otherwise) of any assets acquired before that person became resident in South Africa for the first time. It is suggested that this concession should apply to all persons not ordinarily resident in South Africa.

In addition to taxing resident foreign expatriate employees, South African ordinarily resident employees that are assigned to work overseas may also suffer significant fiscal disadvantages as a result of the deemed disposal provisions.

By way of a practical example, we are currently dealing with a case where an ordinarily resident employee is being assigned to a Swiss company in the group for a period of 3 years. He is tax resident in Switzerland and will remain tax resident in South Africa as he will return to South Africa after the 36month assignment, and is ordinarily resident. He has a flat available to him in Switzerland, but will let his property in South Africa during his period of absence. His family will travel and stay with him in Switzerland throughout the assignment.

In terms of the Switzerland/South Africa double taxation agreement, he will be resident in both countries but resident in Switzerland only by operation of the tie-breaker clause.

In terms of the provisions of the eighth schedule, as he has ceased to be resident by operation of a double taxation agreement he will be deemed to have sold and re-acquired his assets (other than those taxable in the hands of non-residents) the day before he ceased tax residence. This person has no intention of selling the assets that he holds (indeed in certain cases the assets cannot currently be sold but have significant value), yet in terms of the eighth schedule he must include a significant gain in his tax return. As result, he will need to sell certain of his assets in order to pay the tax (there may also be a Swiss capital gains when the assets are actually sold). He will, however, be returning to South Africa, and will never actually have lost SA tax residence. Notwithstanding the deemed disposal on cessation of residence by virtue of a DTA, it is not clear that when he ceases to be non-resident in terms of DTA that he will obtain a market value uplift as paragraph 12(4) only refers to persons becoming resident, and he is already resident as defined.

It is likely that in many cases, expatriate employees will potentially lose tax residence by virtue of the operation of a DTA, and in most cases, will return to South Africa after their assignment overseas. You will understand that the deemed disposal provisions in such circumstances can provide a significant adverse result, namely, tax on a deemed disposal, having to sell assets to fund the tax with possible foreign country CGT liability, and uncertainty regarding SA asset cost uplift on return.

It is strongly recommended that the tax legislation is amended to provide relief in such circumstances, as is the case in Australia and Canada, which apply a deemed disposal to the assets of person that ceases to be tax resident, but have provisions that allow for deferral of the gain, should such persons resume tax residence within a specified period, and still retain such assets.

Double deemed disposal

A person that ceases to be resident in terms of a double taxation agreement will be deemed to have disposed of and reacquired his world-wide assets at market value giving rise to a taxable capital gain (see above). It appears that in addition to this, should that person subsequently cease to be resident in terms of domestic law (e.g. ceases to be resident in terms of the physical presence test), that person will be deemed to have made another disposal and reacquisition at market value. It is not clear that DTAs will protect against SA levying tax on the deemed disposal.

Alternatively, an actual disposal could give rise to a taxable gain in South Africa (as not all DTAs provide full protection in respect of disposal by persons that would constitute a DTA resident (e.g. Canadian DTA)).

It should also be noted that a person that ceases to be resident in terms of a DTA, but remains a SA tax resident in terms of domestic law, gets an uplift in base cost to the market value at the date of cessation of tax residence, but does not get an uplift to market value of their assets when such person ceases to be DTA resident in that other country, and becomes DTA resident once more in South Africa as they are already resident for the purposes of domestic law. This is contrasted with the position where a person become resident for the first time where an uplift to market value is given for the base cost of assets.

Accordingly, it is our view that the legislation should be clarified such that a person who is a resident but DTA resident in another state is treated as a non-resident for the purposes of the application of the provisions of the Eighth Schedule until such time as that person shall be regarded as DTA resident once again, at which point they will be regarded as a new resident.

Share options

The introduction of tax on capital gains and especially the deemed disposal provisions relating to persons ceasing to be tax resident has resulted in a potentially anomalous and adverse tax treatment where a resident holds unexercised share options at the time that he ceases to be a resident.

Options whether vested or not, constitute assets, and therefore prima facie, subject to gain/loss on disposal or deemed disposal. The first issue is how an option can be valued, especially where it has not vested, and is subject to certain future performance conditions.

Also, option gains arising from options granted for SA services or vesting as a result of performance conditions satisfied as a result of services in South Africa, will be taxable in SA in the hands of non-residents, without DTA shelter unless the conditions of model treaty article 15(2) were satisfied.

Accordingly, where such options will be taxable as income, capital gains should not apply. In the normal case, paragraph 35(3)(a) of the eighth schedule would apply and exclude the amount that must be taken into gross income from proceeds.

However, this section will not apply in the case of the proceeds from the deemed gain as this amount does not satisfy the conditions of

"must be or was included in the gross income of that person or that must be and was taken into account when determining the taxable income of that person before the inclusion of any taxable capital gain"

Also, depending upon the value of the shares at the date of deemed disposal and when exercised or when the options may be exercised, the options may have negligible value or may never be exercised.

Accordingly, there would appear to be an element of potential double taxation.

Internationally, where a deemed disposal exists on ceasing tax residence, share options are excluded. This is the case in Canada, where options granted in respect of Canadian services will be subsequently taxed as income on exercise in Canada, and options not granted for services in Canada and exercised when a non-resident will be exempt from Canadian tax, i.e. Canada’s domestic laws for the taxation of the gain on share options is very similar to ours.

Accordingly, in order to avoid the extremely complex, onerous and costly valuation issues and avoid double taxation, the proceeds arising on the deemed disposal (arising from the cessation of tax residence in South Africa) of employment related share options should be exempt assets for the purposes of the deemed disposal provisions.

In terms of paragraph 20, the base cost of a share acquired by the exercise of a share option which has resulted in the determination of any gain to be included in that person’s income in terms of section 8A, is the market value of that share that was used for the purposes of the calculation. Where the gain is nil, the amount of the consideration taken into account will be used as base cost.

Where a person acquires a share in terms of the exercise of an option and the gain is exempt in terms of section 10(1)(o), the amount of the gain is included in the person’s gross income, but not income (gross income less exempt income). Confirmation is therefore required that where a person acquires a share by way of the exercise of an option that base cost will be equal to the market value as opposed to the amount actually paid for the share plus option costs. It should be noted that shares acquired from cash earnings, even though exempt in terms of section 10(1)(o), would have a base cost equal to the market value paid. It is submitted that the two transactions are commercially identical, and should have the same tax result.

Deemed source/section 6 quat and foreign exchange provisions

Much was said about how the source system had become outdated and the need to modernize the tax system by moving to a residence basis of taxation. It was therefore surprising that the amendments to the Eighth Schedule introduces a source concept into the capital gains tax legislation.

Tax residents are subject to tax on world-wide capital gains irrespective of the source of the gain. The concept of source is therefore not necessary to determine taxing rights. The main impact of the introduction of the source basis will be double taxation in the hands of South African residents, as even though the assets are foreign and may never have been acquired by way of funds from South Africa, substantially all foreign assets (other than immovable property) are deemed to be South African source.

The result of this is that any foreign tax suffered on the sale of such assets will not be creditable against the South African due thereon (new amendments to section 6 quat). However, the asset is located in a country with which South Africa has a double taxation agreement, generally speaking that country may not levy tax in any event (and therefore this amendment has no fiscal value). Where the asset is in a tax haven, generally speaking, there will be no foreign tax, and therefore this amendment has no value. Where, however, the asset is located in country with which South Africa does not have a DTA, and tax non-residents on capital gains of assets located in the country (this is the case in many African countries) with which SA does not have a DTA), both South Africa and the other country will levy taxes resulting in double taxation. With respect, there seems little point in this proposed amendment.

The other place where the deeming provision are used is in the amendments to the sections that determine how gains and losses in foreign currencies are calculated. It may be recalled that one of the strengths of the first draft of the capital gains legislation was the fact that foreign currency gains were not taxed. This was subsequently amended by introducing the concept of a foreign equity instrument (essentially foreign listed shares and similar assets), on which the full rand gain is taxed (including the gain arising from the devaluation of the rand). However, all other foreign assets were taxed only on the real gain converted to rand. Whilst the foreign equity instrument has been retained, it appears that all other foreign assets of a resident (excluding immovable property and assets of a fixed base or permanent establishment) are now to be taxed on the full rand gain.

This apparent continued to tax Rand devaluations is inappropriate and contrary to the response by SARS to the representations made on this matter at the time of introducing foreign equity instrument provisions. It is clearly a further example where the tax legislation appears to ignore other specific economic factors applicable to South Africa. Its impact on individuals temporarily resident here is simply not in the country’s best interests. Many commentators made mention of the fact that the initial intentions for the introduction of capital gains tax can be changed, and that the initial legislation was made politically friendly in order to see it introduced. Is this the first evidence of SARS’ attempts to now change the premise on which capital gains was introduced? Can SARS assure the taxpayer that the inclusion rates (the motivation for which was the absence of indexation) will not as many fear, be the next to be amended?

Foreign currency regulations and translation rates

The simplification of the provisions relating to foreign currency, and the exemption of the gains on one foreign current bank account goes some way to removing the significant compliance burden that would otherwise have resulted.

The impact of the change in basis of valuation to average rate for any particular circumstance needs to be studied in more detail than time permits, and you are referred to initial representations regarding the time provided for comment.

2. Definitions - resident

The explanatory memorandum mentions that the amendments were as a result of issues raised as to whether persons in transit through the republic should be treated as being physically present for any day during which that person is in transit between two places outside the Republic.

This is correct, however, the question raised by PwC was in the context of the continuous days absence criteria both for the purposes of the deemed cessation of residence, and section 10(1)(o). Whilst the proposed amendment to the definition of a day appears to cover the requirement in (a)(ii)(B), the 330day continuous absence test, it does not in our view, extend to the definition of day in section 10(1)(o), which was the section which prompted the question. A copy of PwC’s email to Mr Vlok Symington at SARS, Pretoria is attached below:

"Section 10(1)(o) - urgent

Dear Mr Symington

I should be very grateful for your comments on the following:

I have several clients (that are residents of South Africa) that spend considerable periods of time working overseas. Those working in Africa often fly (say from Congo) to (say Angola) via Jo'burg international. They do not pass through passport control at Jo'burg international and are transit passengers.

In many cases, to get from one place to another at the desired time, there is often no choice but to fly via Johannesburg international (for transit only).

The question has arisen as to whether:

i. passing through Jo'burg would count as a day of presence in the Republic; and
ii. passing through Jo'burg would interrupt a period of continuous absence (for the purposes of the more than 60 continuous days test) from the Republic.

Your urgent comments would be gratefully received."

It is our view that day should either be defined separately in section 1 (rather than as a proviso to the residents’ definition) such that the exclusion of transit passengers will apply to section 10(1)(o), or include a similar proviso in section 10(1)(o) relating to in transit passengers.

4. Section 10 (1)(o)

The amendments to section 10(1)(o) help clarify the application of this section. However, the amendments do not address the key issue that arises from this section.

Section 10(1)(o) was introduced to exempt from tax remuneration earned for services rendered overseas during a qualifying period. The current drafting only partially achieves this, as it only exempts receipts and accruals in a year of assessment during which a period of qualifying absence begins or ends.

Part of the remuneration package of many employees includes remuneration that whilst earned in a particular period, is not paid or able to be received until some point later on, examples, include bonuses and share and other incentive schemes.

In many cases, such remuneration will not be received or accrued for tax purposes until a subsequent year of assessment and more than likely, not in a year of assessment in which ends a relevant qualifying period. Such amounts will therefore not be exempt in terms of section 10(1)(o), whereas had the remuneration been received as cash at the time it was earned, section 10(1)(o) would have exempted such amount from tax.

It is understood that one of the reasons why future payments (received after the end of the tax year during which the conditions are met) have not been brought within the exemption is that there would need to be complex tracing rules and it would provide opportunity for taxpayers to avoid tax.

It should be noted that expatriate remuneration is internationally very tightly controlled and regulated, especially the participation of expatriates in share, incentive and bonus schemes. Such schemes are in writing and an expatriate’s rights in terms of such schemes documented. Certainly with regards to share schemes, the shares are awarded by the scheme administrator that is often independent to the company. In our view, it is a relatively easy process to trace share scheme awards and match the exercise of the same, and should not lead to any tax avoidance by the taxpayer. Where a period of share scheme grant straddles a period of exemption and non-exemption, an apportionment based on days can be applied.

Bonuses are also usually paid in terms of a bonus scheme arrangement, and are usually paid within 12 months of the end of the financial year of an employer. Our view is that control over the bonuses can be achieved by only exempting bonuses if they accrue to the employee within 12 months of the end of the accounting period of the employer during which services were rendered. Board minutes or other confirmatory documentation from the company would need to be supplied to support the exemption.

There remains the issue of obtaining a refund of overpaid SITE. The current mechanism of granting relief in terms of section 10(1)(o) may result in an employee incurring non-refundable SITE. This may occur where an employer deducts employee taxes from remuneration and issues an IRP5 in respect of a particular year, and the employee then subsequently claims an exemption from tax in terms of section 10(1)(o). In this case, the SITE paid would not be refundable. It is suggested that the circumstances in which SITE may be refunded should include where the remuneration is exempt from South African tax in terms of section 10(1)(o), or a double taxation agreement.

4. Continuous days

In order for a person tax-resident in terms of the physical presence test to be regarded as not resident from the date if departure, that person must spend the next 330 consecutive full days physical absent from South Africa.

In practice we have seen many expatriate employees leave South Africa to work back in their home country or on another assignment. However, in many cases, it is not practical to remain outside South Africa for 330 consecutive days. There are a number of reasons for this. Example seen in practice are:

the returning expatriate now has head office responsibility for Southern Africa, and is required to attend regional management meetings in South Africa for 2 days every 6 months;

the training was not complete and the expatriate needed to return to South Africa to take an exam;

the expatriate had a property and other investments that were not realised prior to departure, and needed to visit South Africa to wind up matters for a couple of days after departure;

an invitation to speak at a conference in South Africa 4 months after departure.

Whilst it is accepted that it is necessary to have rules to prevent abuse of a concession, it is submitted that the 330 full day period of absence is too long unless there is some relief in respect of breaches of this where the absence is not to avoid tax and the presence in the period is incidental to their main employment offshore, or is for private or domestic reasons, for example, for a family holiday or attendance at a conference within the 330 day period. For example, the UK allows cessation of tax residence from the date of departure on foreign assignment provided that absence will cover a full tax year and that any visits to the UK will be incidental to the main duties of the foreign assignment.

It should be noted that, in most cases, all that the continuation of tax residence will achieve is a more complex SA tax return involving DTA claims. In most cases, there will be no additional tax payable in South Africa, especially on non-SA source income, but considerably more administration for SARS and the taxpayer.

Appendix A
Comparison of SA to other territories



Targeting of intra-group transactions through CFC rules















Czech Republic

















No, Transfer Pricing






No, Transfer Pricing



No, Transfer Pricing

Developed (less dominant)





























New Zealand



Developed (G7)

  1. Canada





No, Transfer Pricing



No, but introducing similar rules to the current SA rules






Yes – inter affiliate sales

United Kingdom



United States


Yes – certain related party sales and services income

Please note that this table was submitted to the Portfolio Committee on Finance in October 2001 and has not been updated.