INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 16): South Africa
By Graeme Saggers, Nolands
South Africa, as a developing country, regards foreign direct investment as a key economic driver and thus is committed to putting measures in place to ensure the ease of doing business in the country. The international tax compliance regulations are therefore designed to be simple and effcient whilst protecting the country’s tax base.
The South African Revenue Service (SARS) has a sophisticated IT infrastructure and regularly performs well under peer reviews conducted by the OECD. All persons who are not residents (non-residents) are subject to tax in South Africa on their income from a source within or deemed to be within South Africa, subject to certain exemptions on, for example, interest and capital gains. Additional to tax compliance regulations, South Africa has a formal exchange control regime which regularises the flow of funds in and out of the country. Thus, any inward or outward flows are required to be reported before the South African Reserve Bank (SARB) will authorise the release of funds.
Foreign Tax and Financial Reporting Requirements for South Africa
1. Main types of business and taxes for each entity
The main types of business can be summarised as follows:
a. Individuals (sole proprietors and partnerships): taxed at an increasing marginal rate with a maximum tax rate of 45% for taxable income that exceeds ZAR 1.5 million. Capital gains are included in taxable income at an inclusion rate of 40% (effective max CGT rate of 18%).
b. Corporations (companies and close corporations): taxed at a flat rate of 28% on net income. There are incentives in place to reduce this tax rate for companies that qualify as either small businesses or micro businesses. Capital gains are included in taxable income at an inclusion rate of 80% (effective CGT rate of 22.4%).
c. Trusts: taxed at a flat rate of 45%. Capital gains are included in taxable income at an inclusion rate of 80% (effective CGT rate of 36%). Trusts that qualify as “special trusts” are taxed on the same basis as individuals).
d. Other taxes that may affect nonresidents include the following (rates are quoted before any possible reduction in terms of a double-taxation agreement [DTA] with other countries):
i. Dividends withholding tax: 20%
ii. Interest withholding tax: 15%
iii. Royalties withholding tax: 15%
South Africa does not impose withholding tax on service or management fees. Despite certain of these withholding taxes being exempt in terms of a DTA, the payer of the amount must submit a return to report said payment to SARS.
2. Types of trusts, foundations and tax rates for each structure
There are many broad ways in which a trust can be classified in South Africa. The most common distinctions are:
a. The way in which they are formed:
i. Inter vivos trust is created during the lifetime of a person; and
ii. Testamentary trust is created in terms of a will on death of a person.
b. The rights afforded to beneficiaries:
i. Vesting trusts give the beneficiaries vested rights to the income and capital of the trust; and
ii. Discretionary trusts give the beneficiaries a contingent right to the income and capital of the trust at the discretion of the trustees.
c. The tax types:
i. Trusts are treated as separate persons from a tax perspective and taxed accordingly at a flat rate of 45%; and
ii. Special trusts are trusts set up to manage finances on behalf of a disabled person or a minor who is the recipient of an inheritance. Special trusts are taxed in the same manner as natural persons.
South Africa has codified the conduit principle and therefore, in most cases, where income or capital gains are distributed to beneficiaries in the same year as they are earned by the trust, the beneficiary is taxed as if it is earned by them. A consideration on this aspect is situations where capital gains are vested in non-resident beneficiaries. Currently SARS treats these gains as being taxable in the trust (effective tax rate of 36%); however, there are differences in opinion in the industry on this interpretation and it is expected that there will be a court case soon that will clarify the position. South African trusts cannot, without specific approval, invest in foreign assets due to exchange control restrictions.
3. Tax compliance requirements for owners of foreign assets such as bank accounts, insurance policies, shares, etc.
Foreign owners of South African assets are subject to domestic legislation in the financial services industry. South Africa has a highly regulated banking system with an extensive KYC process involving, amongst other aspects, proof of source of funds, FATCA declarations, and CRS declarations.
South Africans who wish to invest in foreign assets must obtain approval from the SARB in order to allow the flow of funds out of the country. South African individuals can invest up to ZAR 1 million per calendar year offshore with little regulatory approval. South African individuals can invest an additional ZAR 10 million per calendar year offshore after getting SARB approval, which includes a tax compliance certificate.
4. Tax compliance requirements for estate and wealth planning matters
South African individuals who are ordinarily resident in the country are subject to estate duty on their worldwide assets. Non-residents are subject to estate duty on their South African situs assets only. Estate duty is levied at a rate of 20% for the first ZAR 30 million of a dutiable estate and 25% on anything above ZAR 30 million. There is an abatement for the first ZAR 3.5 million of an estate and certain assets are not dutiable. Deceased estates are administered through the Master of the High Court and included in this process is the submission of an estate duty return with SARS. Furthermore, the executor of the estate is required to submit a date of death tax return wherein a capital gain is recognised on a deemed disposal of all assets owned by the deceased, except those assets that are bequeathed to a surviving spouse. Donations by non-residents to residents in South Africa are not subject to donations tax. Donations by residents to anyone are subject to donations tax at a rate of 20% for the first ZAR 30 million of donations (in a lifetime) and 25% for donations exceeding ZAR 30 million.
5. Tax compliance requirements on sale of real estate
The transfer of ownership of real estate is administered by a conveyancing attorney. As non-residents are required to pay capital gains tax on the sale of South African property, attorneys are required to withhold a portion of the selling price of the property in lieu of CGT. The rates of withholding tax on the proceeds of property transfers by non-residents are:
a. 7.5% where the seller is a natural person;
b. 10% where the seller is a company; and
c. 15% where the seller is a trust.
If the seller believes the actual CGT incurred is lower than the withholding tax, they can apply to SARS for a directive to withhold a lower amount.
Collaboration with Other GGI Members
An example of a collaboration with another GGI member involves the assistance in South Africa of the setup of a subsidiary of a Dutch holding company. The Dutch company was the client of a fellow GGI firm. Our services included consultation on South African tax compliance requirements, as well as the inputs into the remuneration package and employment contract of a director who served in an executive capacity on both the Dutch company and the South African subsidiary company.
Future Developments, Outlook, and Summary
South Africa, and SARS specifically, is consistently looking for ways in which to make the country more investor friendly. South Africa has recently voted in a new president who has appointed a new commissioner of SARS. Both have indicated their commitment to use technology to facilitate the ease of doing business in South Africa.
Graeme SaggersGGI member firm
Advisory, Auditing & Accounting, Fiduciary & Estate Planning, Tax
More than 10 offices throughout Africa
T: +27 21 658 6600
Nolands is an international auditing firm located in 11 offices in all major centres in Africa. Nolands employs almost 200 people and focuses on providing the best possible solutions for its clients. The company prides itself on being “not ordinary” and on its ability to integrate services and respond rapidly to clients’ needs.
Graeme Saggers is the Tax Director for Nolands. He holds a BCom (Hons) degree from Rhodes University and an MCom (Tax) degree from the University of Cape Town. Graeme qualified as a chartered accountant in 2009 after completing his articles at KPMG. He joined Nolands in 2011 as an audit manager and was appointed as a tax partner at Nolands in September 2014. Graeme is Regional Chairperson Middle East Africa of GGI’s ITPG.
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: Alex - stock.adobe.com