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Davis Tax Committee final report on VAT

The following article is an excerpt from our May 2018 newsletter:

The terms of reference of the Davis Tax Committee (DTC) in general required the Committee “to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability”, and in particular as it relates to value-added tax (“VAT”), to give specific attention to:

“…efficiency and equity. In this examination, the advisability and effectiveness of dual rates, zero rating and exemptions must be considered”

Brief summary of recommendations.

Taxpayer compliance: The VAT gap

Essentially the tax gap in the VAT environment is the difference between the tax that is due under the VAT law, and the amount of actual tax collected. The magnitude of the gap “can be seen as an indicator of the effectiveness of VAT enforcement and compliance measures, as it arises as a consequence of revenue loss through cases of fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations”.

The following observations and actions have been recommended to SARS:

  • continue to monitor the VAT compliance gap as a means of evaluating its performance, and to inform strategic decisions about tax;
  • take the opportunity of the release of the supply-use tables in February 2015 to update its estimate of the VAT gap, and its sectoral composition;
  • consider broadening its tax gap analysis to include other major taxes and;
  • further integrate its revenue and national compliance analyses, to support systemic compliance risk management. There is more scope for more detailed revenue analysis of revenues from individual industry sectors and taxpayer segments to support strategic risk analysis.

Zero-rating
The recommendation of the DTC is that no further zero-rated food items should be considered.

Dual (multiple) rates
The DTC recommends that multiple rates not be adopted.

Exemptions
This has been considered mainly from a financial services perspective and the DTC has suggested that the various approaches adopted in other jurisdictions should receive further urgent consideration by National Treasury and SARS.

Place of Supply Rules
Explicit place of supply rules have been adopted in most jurisdictions so as to fix the place in which supplies are to be taxed and accounted for. Given the magnitude of cross-border trade, in particular cross-border services, generally accepted place of supply rules are necessary to prevent double taxation and non-taxation. The OECD has issued the International VAT/GST Guidelines that seek to promote common place of supply rules.

The DTC recommends that the VAT Act be amended to ensure the inclusion of clearly stated ‘place of supply rules’, specifically rules that are in harmony with the OECD Guidelines and which are supported and adhered to by other VAT jurisdictions.

E-Commerce
The new frontier for VAT is its application in an electronic commerce (“e-commerce”) environment, where the supply of electronic services across jurisdictional boundaries has given rise to many compliance challenges for governments. A significant number of foreign jurisdictions have sought to address this conundrum by adopting place of supply rules that apply specifically to e-commerce.

The Committee recommends that a number of technical amendments be made to the South African rules as regards the definition of “electronic services”, while the Committee also recommends that a distinction be drawn between B2B and B2C supplies.

Macroeconomic impact of raising VAT
The recommendation was to not increase VAT, however if it was (as it now has been) the recommendation was that a range of compensatory mechanisms be considered for adversely affected consumers

Traditional Communities
The DTC recommends that the VAT Act be amended to place traditional communities who operate similarly to a municipality on the same footing as municipalities.

It is interesting that despite of the in depth analysis by the DTC, VAT was indeed raised to 15%. The most logical approach would be to close the “VAT Gap” by improving collections disclosure and the like. One can expect an increase in activity in this area as well.

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Davis Tax Committee recommendations on a Wealth Tax

The following article is an excerpt from our May 2018 newsletter:

Since 1994 South African fiscal policy has placed little emphasis on wealth taxes, save for recent increases in the rates of transfer duty and estate duty. Given the disturbing levels of wealth inequality in South Africa, a taxation system that would ignore such disparities of wealth will lack the important requirement of legitimacy in the tax system.

The process of creating a wealth tax in South Africa as a means to redress South Africa’s levels of inequality would need to start with the consideration of a very simple form of an annual net wealth tax.

The decision on whether to implement an annual net wealth tax cannot be made without the following:

Consideration as to the appropriate tax base
The most important single question is whether retirement funds should fall within the scope of the tax. This is a controversial and complex issue which requires intensive engagement from Treasury, SARS and the relevant stakeholders, including the retirement industry and trade unions.

Comprehensive data on the pattern of wealth ownership
The DTC recommends that all taxpayers and beneficial owners of wealth (which includes control of trusts as well as beneficiaries thereof) that are required to submit an income tax return must be required to include the market value of all readily ascertainable wealth in a revised tax return for the 2020 year of assessment.

An evaluation as to the cost effectiveness of implementing a wealth tax
It is apparent from these recommendations that the introduction of a wealth tax cannot be implemented in the short term. Given the DTC’s findings on the extent of wealth inequality and the importance of the legitimacy of the tax system there are interim measures that could be implemented to promote these objectives. For this reason, the DTC recommends that the focus should initially be on increasing estate duty collections given that the necessary administrative capacity already exists.

Finally, most of the wealth tax submissions received by the DTC point to the fact that progress could be made in reducing South Africa’s levels of inequality by eradicating wasteful/corrupt government expenditure and curbing the levels of tax evasion that currently exist.

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The Davis Tax Committee Concludes Its Work

The following article is an excerpt from our May 2018 newsletter:

The Davis Tax Committee (DTC) has announced the conclusion of its work and the publication of the following four final reports:

  1. VAT (replaces the first VAT report);
  2. Corporate income tax (CIT);
  3. Public benefit organisations (PBO’s);
  4. Wealth tax.

The reports are based on the mandate of the DTC as per its Terms of Reference. The PBO and wealth tax reports were done in addition to the specified items in the Terms of Reference. The DTC does not require any further input on the four reports that have now been published as the reports have been finalised.

It is important to note that, as mentioned in the Terms of Reference of the DTC, “the Committee is advisory in nature, and will make recommendations to the Minister of Finance. The Minister will take into account the report and recommendations and will make any appropriate announcements as part of the normal budget and legislative processes. As with all tax policy proposals, these will be subject to the normal consultative processes and Parliamentary oversight once announced by the Minister.”

This brings the DTC to the conclusion of its work within five years of being appointed by the Minister of Finance on 17 July 2013 to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability.

Given the important nature and potential impact of these recommendations we have written abridged versions of the proposals on a wealth tax as well proposals regarding VAT  for your perusal.

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Important Dates

The following article is an excerpt from our April 2018 newsletter:

 

 

25th April 2018 – VAT manual submissions and payments
26th April 2018 – Excise Duty payments
30th April 2018 – VAT electronic submissions and payments
30th April 2018 – CIT Provisional Tax Payments

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The Emergence of Progressive Web Apps

The following article is an excerpt from our April 2018 newsletter:

It’s been a few months now since Progressive Web Apps (PWA’s) have made their way into both the web and mobile domains but are you fully aware of all the advantages and benefits they offer?

The web ecosystem has evolved quite a lot over the course of the past several years. The surge in mobile usage has totally changed our way of using the web. Mobile constraints, like limited space due to small screens, as well as a pointer much less precise than that on desktop (your finger), have pushed designers to create user interfaces that are far from what we were used to using in the early 2000’s. Clearer, more refined, and most importantly more intuitive, these interfaces figured out how to make their way onto larger screens as well – making it essential today to provide perfect user experience, regardless of the device being used.

PWA’s are the next generation apps, by combining the best of apps and the best of the web, offering an unparalleled experience all the way from mobile to desktop.

In addition, PWA’s which are available on the web directly from a URL, allow you to acquire on average 3 times more visibility than native apps do. The user experience that they offer leads users to stay 8 times longer than they do on classic websites.

PWA’s represent a new way to deliver incomparable user experience on the web, by offering features that have been reserved only for native apps up until now. In terms of usage, the number of smartphone users is incessantly increasing—the global percentage has jumped from 56% in 2013 to around 66% in 2018. Today, 57% of web surfers browse with the help of a mobile device, leaving estimations at over 61% by 2020.

Another indicator supporting this trend is Google’s recent move to modify its algorithm to favour sites that have perfect mobile versions. In time, Google algorithms will only use a site’s mobile version of its content to classify its pages, to understand data structures, and to show snippets of the site in search results.

As you can see, all odds are in favour of PWA’s being the new norm for web/mobile usage. Browser suppliers have got this message, as we can see through their efforts to implement all the technology necessary for them to work, so as to get to a point where PWA’s are completely universal.

We’re now facing a mega trend that’s going to revolutionize the way we use the web by having access to the best tools out there for developing your business.

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Save 28% to 45% Using Section 12J Structuring

The following article is an excerpt from our April 2018 newsletter:

Private equity firms, family offices, private individuals, trusts and companies who have invested in start-ups or mature businesses during 2017 may have missed a huge opportunity if they have not considered investing through a Section 12J Venture Capital Company (“VCC”).

At first glance, sophisticated investors may be convinced that Section 12J has no application to their investments. However, if investors are South African taxpayers, the chances that their investment/s may qualify for the Section 12J associated tax incentive are high.

The Section 12J benefit translates into a tax rebate on the full investment (28% for companies and up to 45% for individuals and trusts). This, in turn, results in a significant boost to returns on investment.

When considering whether Section 12J is applicable to an investment, one would need to determine whether any of the below elements exist. If they do, then an investment will be regarded as non-qualifying and thus Section 12J will not have application:

  1. the book value of the target company exceeds R50 million (unless the investment can be broken down into separate special purpose vehicles);
  2. the target company earns more than 20% of its income from investment income (for example, an investment into an investment holding company would not be permissible);
  3. the target company carries on majority of its trade outside of South Africa;
  4. the target company carries on one of the following “Impermissible Trades”:
    1. any trade carried in respect of immovable property, other than a trade carried on as a hotel keeper (i.e. an investment in hotels, serviced apartments, holiday homes and student residences under certain circumstances, will be permissible);
    2. any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements etc., however, this doesn’t prevent an investor from investing in technology within this sector);
    3. any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services; and
    4. any trade carried on in respect of gambling, liquor, tobacco, arms or ammunition.

On the premise that an investor’s investment does not fall into one of the categories above, there is a real opportunity to take advantage of the Section 12J associated tax benefits. Accordingly, if you have just realised that Section 12J may be applicable to your business, or if you are still not sure, feel free to contact us for professional advice in this regard.

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SARS’s Stance on The Tax Treatment of Cryptocurrencies

The following article is an excerpt from our April 2018 newsletter:

Increased attentiveness and speculation regarding the future of cryptocurrencies has prompted calls for the South African Revenue Service (SARS) to provide direction as to how cryptocurrencies should be treated for tax purposes. However, there is an existing tax framework that can guide SARS and affected taxpayers on the tax implications of cryptocurrencies, making a separate Interpretation Note unnecessary for now.

SARS will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued.  Failure to do so could result in interest and penalties.

Cryptocurrency (typified by Bitcoin) is an internet-based digital currency that exists almost wholly in the virtual realm. A growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies. In South Africa, the word “currency” is not defined in the Income Tax Act.  Cryptocurrencies are neither official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.

Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”. Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade.

Alternatively, such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence. Base cost adjustments can also be made if falling within the CGT paradigm.

Value-Added Tax (VAT)
The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.

Should you require further information please do not hesitate to contact us for professional advice in this regard

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Budget Speech Review – Focus on Value Added Tax

The following article is an excerpt from our March 2018 newsletter:

While there were a number of changes announced in the recent budget speech, none were as significant as the increase in the standard rate of VAT from 14 to 15%. While largely anticipated the practical implications need to be reviewed in order to ensure compliance from a vendor perspective, and to gain a better understanding from a consumer perspective. Accordingly this newsletter is dedicated to some of the more pertinent issues arising from the increase.

TRANSACTION DATE

The VAT rate to apply depends on the time of supply rules.
in simple terms, this is the date on which the transaction is deemed to occur according to the VAT Act. The general time of supply rule is the earlier of when –

  • an invoice is issued; or
  • payment is received.

For most transactions the general time of supply rule will apply. However, some transactions have special time of supply rules. Some examples include supplies between connected persons, fixed property transactions and supplies made under instalment credit agreements. In addition, some rate specific rules could apply when there is a change in the VAT rate. Most transactions which occur on or after 1 April 2018 will be subject to VAT at the new rate of 15% unless a special time of supply rule or a rate specific rule applies

PRICES QUOTED OR ADVERTISED

All prices advertised or quoted by vendors for taxable supplies must include VAT at the standard rate (unless the supply is zero-rated). Vendors must state that the price includes VAT in any advertisement or quotation, or the different elements of the total price must be stated. That is, the total amount of VAT, the price excluding VAT and the price inclusive of VAT. Vendors must therefore check that all price tickets, labels, quotations, advertisements, etc., reflect the new VAT rate of 15% from 1 April 2018.

As a practical arrangement, the Commissioner for SARS has granted permission for a vendor to display a notice that the price does not include VAT at the new rate of 15% and prices will be adjusted at the point of payment. The notice must be prominently displayed at all entrances to the business premises and at all points where payments are effected. The notice should be removed by no later than the end of May 2018.

AGREEMENTS

Vendors may generally recover the price increase as a result of the increase in VAT rate from their customers. However, the increase cannot be recovered if there is a specific agreement with the customer in writing that the price cannot be increased as a result of a VAT increase. Vendors must therefore review existing agreements and those relating to offers accepted before 1 April 2018.

SALES AND BILLING SYSTEMS

Vendors must ensure that sales and billing systems are updated to include VAT at 15% from 1 April 2018. Vendors should test the systems for errors, and check that transactions are processed and reflected at the correct VAT rate, in order to avoid disputes with customers. Remember that prices are deemed to include VAT at 15%, so a vendor may incur penalties and interest where the output tax is under declared as a result of the incorrect VAT rate used.

RECEIPT OF QUOTES, TAX INVOICES, CASH REGISTER SLIPS DEBIT OR CREDIT NOTES

Check that any quote received on or after 1 April 2018 correctly reflects the new VAT rate of 15%, and that the total price (including VAT) is correctly calculated before accepting the quote. Remember that an input tax claim must be supported by documentary evidence, so you should check that the amounts on cash register slips and tax invoices received on or after 1 April 2018 have been correctly calculated based on the VAT rate of 15% (subject to certain exceptions) before claiming the VAT on your VAT201 return.

In cases where tax invoices issued on or after the rate change show VAT charged at 14%, you can only claim input tax at that rate. You therefore need to contact the supplier if an incorrect VAT rate is reflected on a document, or the amount is incorrectly calculated

VAT201 RETURNS

Vendors under Category B (March/April), Category E (annual return) and
most farmers registered under Category D VAT reporting periods, will have  transactions subject to the VAT rate of 14% and 15% which must be correctly reflected on the VAT201 return.

The VAT201 return will be updated to reflect the new VAT rate of 15% in time
for VAT reporting periods ending in or after April 2018. Furthermore, the VAT 201 return and related systems will be updated to process the relevant calculations at the new rate of 15%. More details in this regard will be communicated in due course.

RATE SPECIFIC RULES

Supplies starting before and ending on or after 1 April 2018 – Where goods are delivered or services are performed during a period commencing before 1 April 2018 and ending on or after 1 April 2018, the VAT-exclusive price of the supply must be apportioned on a fair and reasonable basis and allocated to the respective periods. The VAT rate is then applied accordingly. That is, the rate of  14%  is  applied   to   the   value   of   supplies   before 1 April 2018 and the rate of 15% is applied to the value of supplies from 1 April 2018 onwards.

This rate specific rule applies to –

  • goods supplied under rental agreements;
  • goods supplied progressively or periodically;
  • goods or services supplied in construction activities; and
  • services rendered over the period concerned,
  • but does not apply to supplies of fixed property (including residential fixed property).

Goods delivered or services actually performed on or after 1 April 2018 in respect of contracts
concluded  between  21 February 2018 and 31 March 2018 – Rate specific rules also apply  where  the time  of  supply  occurs  between  21 February and 31 March 2018 (that is, on or after the date of the announcement of the increased VAT rate, but before the effective date of the increased rate). Under this rule, when goods are delivered on or after 23 April 2018, or services are performed on or after 1 April 2018, but the time  of  supply  is  triggered  between  21 February  and  31 March 2018 as a result of any invoicing or payment in relation to the supply, then VAT at the rate of 15% applies. However, if the goods are delivered before 23 April 2018 (that is, within 21 days after 1 April 2018), or the services are rendered before 1 April 2018, then the supplies concerned will be subject to VAT at 14%.

These rate specific rules do not apply –where it is an established business practice for payments to be made, or invoices to be issued before the supplies are made;

  • in respect of the sale of residential property, certain real rights in residential property and shares in residential share block companies;
  • to the construction of a new dwelling by a construction enterprise.

Supply of residential fixed property

Even if the time of supply is triggered after 1 April 2018 due to payment or registration of the property in the purchaser’s name in a Deeds Registry taking place, the supply of residential fixed property could be subject to VAT at 14%.

This rate specific rule only applies if –

  • the contract for the supply was concluded before 1 April 2018; and
  • both the payment of the purchase price and the registration of the property will occur  on or  after 1 April 2018; and
  • the VAT-inclusive purchase price was determined and stated as such in the agreement.

For purposes of this rule, “residential property” includes a dwelling and certain real rights and shares in share block companies relating to a right of occupation of or interest in a dwelling. The construction of a new dwelling by a construction enterprise is also included.

As can be seen the administrative burden in ensuring compliance is daunting . We strongly advise that you seek professional advice when reviewing the implications for your business.Please don’t hesitate to contact us for professional advice in this regard.

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Tax Deadlines

The following article is an excerpt from our February 2018 newsletter:

SARS encourages taxpayers to submit outstanding returns

The South African Revenue Service (SARS) is embarking on a nationwide awareness campaign to remind taxpayers of their obligation to submit outstanding tax returns.

The campaign kicked off in KwaZulu-Natal on the 22nd January. Other provinces will be covered over the next six weeks. During this campaign, SARS will share information on taxpayer obligations, the submission of tax returns, and consequences related to non-submission.

SARS would like to see higher levels of compliance across all tax types and prompt payment of tax debt. Taxpayers who do not submit their returns are charged a penalty, which can range from R250 to R16 000 per month, depending on the taxable income of the taxpayer. It is a criminal offence not to submit a return and continuous non-compliance will lead to criminal prosecution.

There is a significant budget deficit, and collecting outstanding taxes is certainly one of the first ways of improving liquidity. You can expect a severe clamp down this year so if you have any outstanding returns please contact us for professional assistance in this regard.

Provisional Tax

Note that entities and individuals with February year ends are required to submit their 2nd provisional tax payment by the end of February 2018. Note that penalties are levied on the late or non-payment of provisional tax at a rate of 10%. If provisional tax has been understated a penalty of 20% will apply. Note that the non-submission of the return with four months of year end is deemed to be a submission with an estimate of zero.

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Carbon Tax Bill Released for Public Comment

The following article is an excerpt from our February 2018 newsletter:

The National Treasury has published the Second Draft Carbon Tax Bill for introduction in Parliament, as well as public comment and convening of public hearings by Parliament, which is expected to be early in 2018. Following that process, a revised Bill will be formally tabled in Parliament, which is expected to be by mid-2018.

The actual date of implementation of the carbon tax will be determined through a separate and later process by the Minister of Finance through an announcement during 2018, or at the 2019 Budget, taking into account the state of the economy. This announcement on the implementation date of the carbon tax will be complemented by a package of tax incentives and revenue recycling measures to minimise the impact in the first phase of the policy (up to 2022) on the price of electricity and energy intensive sectors such as mining, iron and steel.

Due date for comments Treasury has invited stakeholders to submit written comments on the draft Carbon Tax Bill by close of business on 9 March 2018 to carbontaxbillcomments@treasury.gov.za. Kindly email any queries to Sharlin Hemraj (sharlin.hemraj@treasury.gov.za) or Dr Memory Machingambi (memory.machingambi@treasury.gov.za).

The Draft Carbon Tax Bill together with the following annexures is available on the National Treasury website: www.treasury.gov.za

  • Annexure 1: Explanatory Memorandum
  • Annexure 2: Socio economic Impact Assessment Report
  • Annexure 3: First Draft Carbon Tax Bill 2015: Response Document

We will keep you informed on any developments in this regard.

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