Deloitte SA Blog

Global Tax Compliance & Reporting

The search for a more effective delivery model

There have been significant changes in the business landscape over the last 10 years,  which have materially affected the global tax compliance and reporting processes  for corporate tax payers. These include changes in regulation and tax laws,  electronic filing requirements, risk-based assessment techniques, and advances  in tax technology solutions among others.

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

Commercial objectives

Recent research commissioned by Deloitte, which included 250 interviews with the tax directors of 250 global organisations, shows that the principal commercial objectives for global tax directors are managing or reducing Effective Tax Rate and ensuring sound risk management. Other objectives include a desire for operational efficiency or cost reduction but these are of less importance.

Likewise, where metrics are in place to measure the performance of the tax department, these are based on managing the Effective Tax Rate in the vast majority of cases.

Resourcing and management

The resourcing of global tax functions appears to vary significantly.

What is clear is that outside of the headquarter location there are often inconsistent levels of in-house tax expertise. As tax directors seek to assert more control over global compliance, making sure there is sufficient expertise is very rarely a straight choice between in-house management and outsourcing. Instead, hybrid models prevail with the ultimate requirement being to ensure there is sufficient tax expertise at each stage of the process, regardless of whether it is resourced in-house or externally. However, where resource and expertise does allow, overall there appears to be a preference for in-house management over outsourcing. 65% of the researched companies manage indirect tax compliance solely in-house, 52% manage statutory accounts in-house and 73% manage the global tax provision in-house. Only when it comes to corporate income tax compliance, a minority of companies manage it in-house (36%).

Across every area of compliance and reporting, where management is not solely in-house, total outsourcing is marginal and ‘co-sourcing’ is far more prevalent. This demonstrates the requirement to bring in external expertise mainly to fill the gaps around in-house capability.

Shared services

There is evidence that as part of the in-house management of global compliance and reporting, businesses are using their own shared service centres. 55% of multinationals state that they operate a shared service centre for finance and in just over half of these, some compliance and reporting work is carried out. However, qualitative assessment suggests that only certain data related tasks reside within the service centres and there is no significant tax expertise apparent.

Technology

Conceptually, the potential benefits of technology in compliance and reporting are well acknowledged: only 13% of global tax directors believe that they could not do more with technology.

However, deeper questioning suggests there are barriers to adoption when it comes to new technology. Typically, these revolve around perceptions that implementation will entail significant disruption, the cost is too high, and there is insufficient return on investment or a view that major technology projects are not something that tax functions would embark upon unilaterally within the business.

Compliance and reporting service provider delivery models

Tax directors show a general preference for external expertise delivered at a local level. When asked whether central service centres or local teams work better, 75% express a preference for local teams while 19% think that central service centres work better. The hypothesis here is that more ‘progressive’ global businesses are seeking to outsource non-core business functions or to achieve integration with their own shared service centres.

The three methods of compliance and reporting delivery are:

Decentralised

Delivered and managed locally

All services are managed and delivered locally. This approach relies on local control and responsibility.

Coordinated

Delivered locally, managed centrally

This method involves local delivery of service but introduces a strong element of central coordination and management. This brings greater efficiency, better control, and less risk.

Centralised

Delivered and managed centrally, supported locally

This method shifts the emphasis toward central delivery as well as coordination and management. Crucially, though, local activity, relationships, and support are also maintained.

It is important that whichever model is adopted it should grow and evolve with the organisation to meet their needs now and in the future, wherever they are on the spectrum. Standardised processes and methodologies underpinned by common technologies and tools are essential in this regard. Tools such as Microsoft Office-based solutions (Excel and Word) that have been in widespread use no longer match much better tax technologies in the market for example MS Dynamics NAV (for data management and statutory accounting), 3rd party tax software (for due date tracking, VAT return production and tax provisioning) and web-based dashboard portals.

Benefits

An organisation should ensure it selects a delivery model and service provider that at a minimum provide the following benefits:

• Increased visibility, transparency, and control over global compliance and reporting
• Flexibility to maximize use of in-house resources, respond to shifting priorities and the ability to provide expertise at the global and local level
• Integration and efficiency to control costs, increase accuracy, minimize risk and to respond to regulatory changes
• A path to improvement without the introduction of significant risks
• Insight to make informed strategic business decisions

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

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Unlocking tangible value from your ERP implementation

Enterprise Resource Planning (“ERP”) provides an opportunity for companies to track and monitor business flows. While this creates a significant benefit across the highly regulated and diverse landscapes in which companies operate, there is additional value to be unlocked through a carefully designed ERP system.

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

Organisations in the midst of implementing or upgrading an ERP system often overlook the importance of the tax department as stakeholders of the system. The organisations invest in deep operational improvements, but ignore broader issues of structural tax planning or they make supply chain decisions without understanding their full tax implications.

Taxes are directly affected by a company’s overall operating model and as such, constitute a structural cost. The choices made today – how contracts are negotiated, who controls manufacturing processes, how inputs are sourced, how products are distributed – determine the structural tax obligations in future. Only when strategic tax planning forms an integral part of the overall business vision will it be possible to drive down a company’s structural tax rate.

However, effective and long term tax planning requires an understanding of the group’s strategic objectives, goals and constraints. Simultaneously, businesses increasingly require their tax functions to provide insight for critical decisions. Fast, accurate delivery of the tax provision and tax calculations for financial reporting purposes, as well as reporting on tax compliance filings and for management decision making, are all minimum expectations today.

Frequently, the unique needs and requirements of the tax function are not adequately addressed when implementing an ERP system, as the current “as is” tax structure is implemented with the new ERP system, relinquishing potential tax benefits and forcing the tax department to continue inefficient manual processes for tax compliance, planning and forecasting.

Therefore, according to Forrester, “Smart (technology) buyers have started to include a new factor in their sourcing decisions: tax implications. Understanding how taxes will be affected can help companies make better sourcing decisions and fund new projects.” In many cases cash tax savings can often deflect the cost of the overall ERP system implementation.

Tax Enabled ERP Solutions: Direct and Indirect Tax Benefits

A well designed Tax Enabled ERP Solution can increase speed, accuracy and data integrity — all of which are important, particularly when working through last minute updates at either quarter-end or year-end.

These improved data collection processes also help companies better manage workflow, which in turn increases visibility. Furthermore, it provides greater control over information and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities such as strategic income tax planning.

A large building materials company recently implemented SAP globally. Tax SAP specialists conducted a systems audit of tax processes, including reviewing and documenting the tax processes end to end, highlighting any controls and training needs going forward and recommending changes required to reduce the risk of tax mis-declarations.

Deficiencies were identified in the following areas: missing/duplicate SAP master data, ownership of processes/data, limited documentation / training, manual processes without robust controls and incorrect tax coding within the Shared Service Centre.

A Tax Enabled ERP Solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations such as: maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.

By considering the tax implications during the ERP design or transformation process, companies are able to ensure that the ERP system produces the critical tax-relevant data and information needed to streamline tax compliance processes, more effectively identify and implement tax savings strategies, and provide better audit support. Currently many ERP-systems do not give visibility of many indirect taxes (VAT and Customs) which results in much data manipulation outside the system to effectively manage these taxes.

A Tax Enabled ERP Solution should be designed and configured to easily provide financial information that may historically have been inaccessible and enable improved capture processing and reporting throughout the financial and tax processes. In addition, it should enable improved data collection processes, allowing the tax department to work more efficiently and to deliver value to the organisation in new ways.

A large international retailer serving over 200 million customers weekly was suffering from tax issues that included inability to track provisions in sufficient detail, lack of fixed asset information and insufficient P&L granularity. Tax SAP specialists were brought in to run the full tax work stream with the responsibility for all tax design, build, testing, remediation and go-live activities with the end result of Tax savings running into the millions.

As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that at best, do not enhance the tax reporting process, and at worst: actually impede access to tax-sensitive information and do not take advantage of potential tax savings.

Tax Enabled ERP Solutions: Overcoming the Challenges Faced by Global Organisations

Operating a global organisation poses very specific challenges in the area of tax management and reporting. These may include unusual taxes being imposed (such as withholding taxes on administrative and technical fees); regulatory approval that is required for certain types of transactions, combined with a lack of relief in terms of double tax agreements. Group Tax Managers need to constantly be up to date with the issues existing in those countries to avoid lengthy delays in payments and penalties. While it is not possible to foresee all challenges, organisations that have, or intend having, a multinational presence can reduce one of their significant risks by ensuring that their ERP solution is tax enabled.

If you have any questions or require a more detailed discussion, contact Clinton Eidelman (Associate Director – TMC Technology – Deloitte South Africa) at ceidelman@deloitte.co.za

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As consumers worldwide shift their media consumption from the tangible to the digital, they are taking their books, movies and music with them on one device, and leaving behind a tangle of tax implications – particularly when it comes to VAT in South Africa. That is why businesses that sell or distribute electronic products to overseas consumers via the Internet would benefit from a clear understanding of their increasing regulatory and financial exposure, as well as a strategy to turn these changes into a competitive advantage.

If you have any questions or require a more detailed discussion, contact Severus Smuts (Director – Value Added Tax at Deloitte South Africa) at ssmuts@deloitte.co.za

European countries have been slowly clarifying their position in relation to this type of service.  In November 2011, Iceland became the latest country to tax the electronic supply of services by non-resident businesses to domestic consumers. Norway introduced a similar rule in July 2011 and Switzerland at the beginning of 2010, as did the European Union (“EU”) in 2003. Additionally, tax authorities in other jurisdictions with a VAT or Goods and Services Tax system are looking to Europe with a keen eye on whether such steps would be practical in their own jurisdiction. Financial executives of global businesses, regardless of where they are based, should understand the compliance and planning implications of these new rules or suffer adverse financial consequences.

South Africa is one of those countries looking at what Europe is doing.  The present position in South Africa is one of uncertainty because there are no clearly defined rules and promises of clarity have been made but not fulfilled for a number of years. However, the legislation is so unclear that it is not possible to make any definitive statements for these global businesses except to say that they are likely to have a VAT liability in South Africa. It may be possible to obtain a ruling in certain circumstances that says otherwise.  One of the main issues for the tax authority in South Africa (SARS) is how to enforce the payment of VAT when the consumer is an individual not registered for VAT.   Strictly speaking under the terms of the present legislation, the individual should voluntarily pay the VAT owing where the purchase exceeds ZAR 100.  It is easier for the authorities to say that the global business should register and pay the VAT, which means that the ZAR 100 threshold will not apply.

Defining electronically supplies services

In South Africa there is no legislative definition of electronically supplied services for VAT purposes.  In South Africa it is clear that intangible goods are defined as services for the purpose of the VAT Act but that is as far as it goes.

In the EU, electronically supplied services include those which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology. The definition of services is wider than an ordinary definition and includes digitized products and what may be referred to as “intangible goods,” such as electronic publications, applications (or “apps”), and software.

The South African definition of services will cover the following affected businesses within the media and entertainment industries which include, but are not limited to:

• Publishers or distributors of electronic publications such as books, magazines or video content
• Suppliers of visual or audio media over the Internet

VAT and online gaming

Business scenario:

Video game suppliers regularly fall under the provisions of the electronically supplied services rules, even when supplying the actual game free of charge. While the games are free to play, players are often given the option to purchase additional credits – often referred to as “in-app purchases”– virtual currency or items that are supplied to continue game play.

Activity in this area has increased exponentially with the surge in sales of tablet devices such as the Apple iPad and the countless apps that market content directly to consumers.

VAT implications:

While the original supply of the game may not be subject to VAT, it is likely that for the purposes of South African legislation these are “imported services” and the unregistered individual is liable for the VAT.  However, the distributor could possibly also be liable for VAT registration and VAT at 14% if the business is carrying on an “enterprise” in South Africa.  The reasoning behind this is that the services are consumed in South Africa and VAT is a tax on consumption.  However, it could be argued that the services are not performed in South Africa (unless the server is here) and the activity is a passive one.  In that instance perhaps the liability should only fall on the individual.  It is important to determine who was liable to account for the VAT as the recipient may as a defence argue that the supplier was liable to collect the VAT.  While specific place of supplies are not forthcoming it would be prudent to obtain a ruling from SARS when these services are marketed to consumers in South Africa.

If there is a liability to account for the tax on these intangible goods by the business in question, it may fall on either the producer or distributor of the content depending on the distribution model – whether the distributor is acting as a disclosed agent or an undisclosed agent or commissionaire.

If you have any questions or require a more detailed discussion, contact Severus Smuts (Director – Value Added Tax at Deloitte South Africa) at ssmuts@deloitte.co.za

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by Coenrad Alberts and Georgina Stubbs of Deloitte Consulting

There has been talk about the demise of Enterprise Resource Planning (ERP), however the ERP industry is thriving. Major ERP vendors are reporting healthy profits and organisations globally are currently implementing or re-implementing ERP systems or going through the planning phase.

The playing field has changed however. There are fewer ERP software vendors and the ERP solutions out there are robust, rich in functionality and stable. Organisations no longer have to make grudge purchases (classic example was the millennium bug) and are a lot more tech-savvy. ERP investments now have to be backed with a solid and sound business case.

This paper provides insight into the key cost considerations of an ERP investment and some of the crucial decisions that should be considered regarding the organisation’s ERP strategy going forward – in order to implement a sustainable, scalable and cost-effective solution that will cater for the organisation’s future growth and requirements.

Here are 8 key drivers to consider when reviewing your enterprise resource planning investment strategy:

1. Software

Select the right solution for the right job.

Vendors no longer advocate ERP solutions as cure-alls. They rather recommend that organisations implement ERP solutions to provide core enterprise functionality and select best-of-breed point solutions to meet specific requirements, e.g. specific billing requirements.

The advent of SOA has made integration of multiple systems easier and more efficient. It is, therefore, often advisable to implement a solution that fits the problem rather than to manipulate both the solution and the problem in an effort to make them fit, sometimes at the expense of critical business requirements.

By carefully selecting a hybrid of solutions that will directly address best-practice business requirements, the initial implementation effort will be reduced, user adoption will be increased and because customised development will be reduced, so will the ongoing cost of ownership.

Investigate Software as a Service offering.

Many ERP software vendors these days offer “Software as a Service” (SaaS).

By subscribing to a SaaS application, rather than purchasing licences outright, you avoid the initial overhead associated with implementing conventional software. You don’t incur the capital investment of a typical software implementation, such as purchasing and maintaining servers, housing them securely, and installing and maintaining the software – an overhead that can be four to five times the cost of the original licence fees.

SaaS applications also leverage economies of scale achieved by “multi-tenancy”, because many customers can run their applications on the same unit of software and even on the same infrastructure, e.g. advances in security and virtualisation make it possible for multiple customers to share databases.

When you subscribe to a SaaS application, you pay a monthly or annual subscription fee. Compared to a traditional software licence, this subscription payment structure can work to your advantage. An ongoing monthly expense is often easier to incorporate into your budget than a large one-time outlay, and if you cancel or change your subscription, you do not lose a large initial investment. And, as SaaS subscriptions are based on metered usage, you pay for what you use.

Another key aspect of SaaS is that you gain immediate access to the latest innovations and upgrades, however the potential downside of SaaS is that you cannot customise the solution to meet your specific requirements.

2. Hardware and Infrastructure

Consider hosting.

Even if you don’t subscribe to SaaS, one option to contain your investment in hardware and infrastructure is hosting, whereby you rent servers and the associated infrastructure from a third party and pay on a monthly basis, rather than investing in the equipment upfront.

Reputable hosting service providers offer holistic IT infrastructure support, meaning that your organisation can have access to a fully redundant IT infrastructure, including disaster recovery facilities, delivered on the latest technology platform and maintained by highly skilled IT technicians, without the associated costs and risks. Service providers guarantee uptime to suit your requirements and often offer other services such as domain management and registration, internet connectivity, 365/24/7 operations monitoring of your servers, physical and information security services, UPS and generator power, daily tape back-up facilities, provision of statistics, reports on bandwidth and network utilisation, fault correction initiation, encryption and LAN and WAN support.

Not only do these services reduce your investment in the actual infrastructure, they also reduce the need for your organisation to have a large IT department with the expertise to service all the different components of the infrastructure, and the availability to provide 24/7 support.

The duration of your implementation is also reduced, as the hardware infrastructure is already in place.

3. Implementation costs

Investigate available industry-specific preconfigured solutions.

By selecting an industry-specific preconfigured solution, you can reduce the impact on your business, the implementation costs and the duration of the implementation, while ensuring that your solution is based on industry best practices. The customisation effort is also reduced because industry specific components are already pre-built, e.g. specific costing models, data templates and load programmes, banking interfaces and workflow.

Quality preconfigured solutions provide organisations with an accelerated implementation that starts with a working and fully pre-documented and preconfigured system, which can be rapidly configured into a productive solution.

These solutions have been developed based on years of hands-on industry experience and are based on best practices which are continually refined over the years.

Choose your implementation partner with care.

Ensure that you have consultants who understand your business and industry and are “business led, but also technology enabled”. Consultants that understand your industry will be able to facilitate design discussions and make meaningful contributions to functional and technical documentation. They will also be better equipped to anticipate and manage scope changes based on a deeper understanding of industry-specific requirements.

4. Training and change management

Ensure that your investment in training and change management provides a real return.

Although it is strongly recommended that you do not reduce the investment in training and change management, it is also important to ensure that the return on that investment adds tangible value to the implementation project and the organisation. Don’t be afraid to ask your service provider for detailed training and change plans that identify clear deliverables aligned to tangible and measurable outcomes.

It is also critical to ensure that you don’t pay lip service to these items and that there is executive sponsorship, without which your investment will be wasted.

5. Ongoing maintenance

Consider outsourcing to meet ongoing maintenance requirements.

By outsourcing the management and maintenance of your applications, you will reduce the need to build, maintain and train a team of specialised and senior application consultants, which is becoming a more cumbersome task as organisations implement a hybrid of solutions, thereby increasing the diversity of skills required.

Ensure that your application management service providers proactively add value through their support services, rather than just react to problems. By providing you with statistics on which types of problems occur frequently, value adding service providers enable you to address those problems at source, i.e. by identifying the root cause – for example: where more training is required or where a different solution should be considered. These statistics can also be used to optimise your support contract by reducing the support hours required over a period, as the solution beds down or your users become more skilled.

6. Process efficiencies

Measure potential process efficiencies.

Effective business process design, based on industry best practices (such as the Deloitte best practice IndustryPrints), is essential to ensure that process efficiencies are achieved and to reap the real benefit of your ERP implementation.

Processes can be measured, costed, benchmarked to similar organisations and then mapped to solutions to identify where real process efficiencies will be achieved, and where manual manipulation, duplicate transaction processing, etc. can be eliminated.

When considering the ERP investment, this tangible benefit should be accounted for.

7. Tax efficiencies

Don’t overlook potential tax efficiencies.

A well-designed, tax-enabled ERP Solution can increase speed, accuracy and data integrity, all of which are important, particularly when working through last-minute updates at either quarter-end or year-end. These improved data collection processes also help companies better manage workflow, which, in turn, increases visibility. Furthermore, it provides greater control over information, and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities, such as strategic income tax planning.

A tax-enabled ERP solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations, such as maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.

As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that, at best, do not enhance the tax reporting process and, at worst, actually impede access to tax-sensitive information and do not take advantage of potential tax savings.

8. Shared services

Ensure that you implement the most efficient and effective operating model.

A large number of support processes in IT, finance, procurement and HR (including payroll) are repetitive and not unique to the individual business but rather add value through operational excellence, delivering zero defect at the lowest cost. Other processes are more ad hoc and knowledge involved, adding value through maximum benefits at appropriate cost, only when necessary. Both transactional and knowledge-involved processes can take advantage of benefits through a shared services model, either internal or outsourced.

An example of such a model is the Deloitte Mining Shared Services (DMSS) platform, which provides cost-effective back-office process support to mining companies with a need to focus on core business operations and also to create a low, fixed-cost overhead structure.

This service delivery model allows mining companies to co-source and/or outsource transactional and knowledge processes and take advantage of the cost benefits offered by consolidating and streamlining back-office processes. While the shared services centre runs these processes, mining companies retain some functionality based on the individual organisation’s requirements and business case.

Summary

So – far from dying – ERP is alive and well and back on the Executive Committee’s agenda. But the conversation today is very different to that of 10 to 12 years ago. Traditionally, organisations invested time and money selecting the right ERP solution to meet their needs; however, nowadays there are fewer Tier 1 products to choose from – and most of them offer similar functionality with some minor variations in their value propositions.

This means that, while it is important to select the right product (whether an organisation is considering an upgrade, reimplementation or replacement), there are other discussions to be had and decisions to be made. The decisions will have a more significant impact on the initial and ongoing cost of the investment and the impact to the business.

These decisions need to consider all the innovative and varied options available to finance this investment, and derive maximum value, and this is what will drive the business case. And, whereas a robust business case was not a requirement when the implementation of a new ERP was not an option, it has now become critical to justify this semi-discretionary investment.

If you have any questions or require a more detailed discussion, contact Coenrad Alberts at calberts@deloitte.co.za or Georgina Stubbs at gstubbs@deloitte.co.za

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This article, authored by Duane Newman (lead director for Deloitte Tax Management Consulting), explains how  the R25 billion allocated by National Treasury will be used to support growth in South Africa. You may contact Duane at dnewman@deloitte.co.za

Click Here to access the original article published on MoneyWeb

Grants and incentives will be a national focus over the next six years

The Medium Term Budget Policy Statement (MTBPS) issued by Finance Minister Pravin Gordhan on 25 October 2011 announced that the Medium-Term Expenditure Framework (MTEF) will introduce an economic support package to encourage improvements in competitiveness and promote structural change within the South African economy.

Following the contraction of capital expenditure during the 2009 recession, private capital investment has started to revive, expanding at an annual rate of 4% during the second quarter of 2011. The growth is largely attributable to purchases of machinery and transport equipment. Despite the capital investment recovery, real investment during the second quarter of 2011, remained 8% below pre-recession peak levels.

In response to the slowdown in the global economy South African’s fiscal and monetary policy remains supportive of growth. The employment gains and poverty reduction that government aspires to achieve require structural reforms to set the economy on a different growth path that increases labour absorption, improves international competitiveness, ensures a more equitable distribution of wealth and a transition to a green economy.

To achieve these goals government will make R25 billion available over the next six years through various grants and incentives to assist enterprises, boost industrial development and accelerate job creation. 

The primary focus of the R25 billion grants and incentives fund is to facilitate investment that attracts employment intensive industry and services to South Africa.  The incentives will build on the current incentives on offer for industrial investment, technology and training. Current incentives have not achieved the jobs creation estimates as initially planned. In many instance less job opportunities have been created. Also the incentives have not been widely accessed. Incentives for IDZs will be improved. At the moment there are no real incentives for investing in an IDZ.  The goal is to develop the IDZs into competitive logistics hubs participating in global supply chains and entrenching South Africa as a crucial gateway for trade into Africa.   Also very important is the alignment of trade, investment and energy policies to support the transition to a green economy.  Policy coherence in this instance is required to successfully transition to a green economy. 

Government acknowledges that investment in economic infrastructure has to coincide with a more competitive labour market that supports higher economic growth.  Transforming the South African labour market can only be achieved through adequate job creation, training and community works projects. These objectives are being pursued by means of the recently launched Jobs Fund administrated by the Development Bank of Southern Africa. The Jobs Fund was established at the beginning of the year with a value of R9 billion. So far only R352 million has been spend. A far more effective administrative system is required going forward to assist with job creation. 

The transition of South African economy to a green economy can only be achieved through major investments in renewable energy by the private sector. To facilitate the required investment the Industrial Development Corporation and the Development Bank of Southern Africa will have a specific focus on funding green projects.

The Department of Energy has moved away from a capital subsidy systems. It will rather provide appropriate feed in tariffs.  Other initiatives include reducing carbon emissions through government’s integrated resource plan, the proposed carbon tax and the introduction of a dedicated fund for green economy initiatives. 

Grants and incentives will be a national focus over the next six years as government attempts to achieve the country’s economic goals through incentivising investment that correlates with these objectives.

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Welcome to the latest edition of Deloitte Tax News, kindly compiled by the Deloitte South Africa Tax services line. If you have any questions or require any information, feel free to contact Nazrien Kader at nkader@deloitte.co.za or Billy Joubert at bjoubert@deloitte.co.za

One of the main focus areas in this edition of Tax News is the international tax arena.

We examine some key considerations relating to supply chain management from an international tax perspective, with examples of practical interventions to mitigate tax risk and create a sustainable benefit in supply chain optimisation.

The Draft Taxation Laws Amendment Bill of 2011 will soon be issued in final form and it proposes a number of changes to our tax legislation. Our article on the international headquarter company regime examines some of the deficiencies in the current headquarter company rules and provides some comments on whether proposed changes to these rules in the Bill go far enough. Similarly, we consider some of the welcome changes proposed in the Bill to our exceedingly complex Controlled Foreign Company (CFC) rules. These two articles are preceded by a thoughtful examination of the “source” principle in the South African tax environment, and what the changes proposed in the Bill to our source rules portend.

In the recent court case of Oceanic Trust Co Ltd, the South African tax authorities challenged the “place of effective management” (and thus tax residence) of the taxpayer. Our article dealing with this case serves as a reminder that it is critically important for companies to continually evaluate the risk of their ‘offshore’ entities being considered tax resident in South Africa, particularly in view of the different interpretations given to what constitutes a “place of effective management”.

In our personality slot, we profile Louise Vosloo, who heads up the International Tax division for Deloitte in Southern Africa.

We conclude this edition with an update on recent developments in the Carbon Tax debate, something that is going to have a profound effect on the business landscape in South Africa.

We trust that you will enjoy and benefit from the content in this publication. Please feel free to provide us with your feedback via e-mail.

Download . . . . Tax News – No 3 of 2011

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Deloitte has recently published various observations around the Draft Tax Amendment Bill 2011 in this blog. As a general comment, Deloitte wishes to express our concern that the volume and drastic nature of some of the proposed amendments will undermine certainty with regard to the application of South Africa’s tax laws. While complete certainty is sometimes elusive, the credibility of a tax system requires that investors are able to conduct their business and plan their affairs within a stable regulatory framework and a degree of certainty as to the tax consequences of their actions. It is Deloitte’s view that the Draft Tax Legislation Bill fails to achieve this level of certainty, specifically in relation to:

• The immediate suspension of section 45 roll-over relief: The suspension of inter-group approvals has come without warning, or without any window period to allow for current restructuring transactions to be finalised. Many organisations which have already planned reforms based on section 45 will now be on hold for 18 months until this section of the Act is finalised.
• The tax treatment of dividends received on preference shares: All preference dividends, except those redeemable after 10 years, will be subject to the proposed amendments. Preference shares have been classified as  debt instruments under the proposed Bill. In our view, it is highly inequitable to treat a dividend payment as a non-deductable expense from the perspective of the taxpayer, but as a taxable interest in the hands of the preference shareholder.
• Perpetual instruments: The amendment in the newly proposed section 8G seeks to treat ‘perpetual instruments’ (instruments with no maturity date, for example, an overdraft facility) as equity rather than debt by treating any amount paid in terms of such instruments to be a non-deductable dividend in the hands of the payer and the recipient (the issuer will not be able to deduct the interest paid, while the holder will not be taxable on the interest received). We believe that instruments that are repayable on demand but have no fixed repayment date should be excluded from the definition of perpetual debt instruments.
• Third-party backed shares: The definition of a third-party backed share is very wide and catches a number of legitimate (non-funding transactions). There will now be ordinary tax treatment of dividends from third-party backed shares. This section could potentially result in double tax for taxpayers that do not qualify for exemption from dividends tax. The dividend would be subject to dividends tax and included as income in terms of section 8EA. We have recommended that a mechanism be inserted that would allow the taxpayer to claim the dividend tax in respect of the dividend as a credit against the normal income tax payable.
• Proposed changes to the ‘headquarter company’ regime: In terms of the proposed  section 91, a newly established headquarter company needs to be approved before obtaining headquarter status. The approval will only be granted if it would not lead to an erosion of the tax base. Deloitte believes this sends the wrong signal to foreign investors interested in establishing headquarter companies in South Africa.  As regards the receipts and accruals test that must be satisfied to qualify as a headquarter company, it is not clear whether foreign exchange differences should be ignored in determining whether the 80% test is met. The Explanatory Memorandum is of the view that forex differences should be excluded, but it is desirable that the legislation explicitly spells this out.

Nazrien Kader is the Service Line Leader of Taxation Services  and  Lead Director of Financial Services Taxation at Deloitte South Africa.

Next Moves?

The Draft Taxation Laws  Amendment Bill, 2011  proposes in essence that if a share is classified as debt in terms of financial accounting rules it should also be classified as debt for tax purposes. This is particularly evident in the treatment of preference shares.

These Anti-avoidance amendments are proposed in clauses 20 and 21.. Dividends on preference shares are generally not subject to income tax, but the proposed amendments will result in preference shares redeemable within ten years now becoming taxable as income, without a subsequent deduction. Treasury is of the opinion that guaranteed preference shares are ‘disguised’ as debt and so the dividends should be taxed.

Preference shares have often been  favoured with new companies as a convenient financing tool, and are often attractive to investors as well. Black Empowerment entities in particular, who are generally more reliant on preference shares as a means of funding are would be detrimentally affected if this amendment is passed into law in this form.

Deloitte holds the view that it is incorrect to equate preference shares funding with debt funding. Fundamentally a preference share is different to a debt instrument because of the rights and obligations it creates. Our tax law is rife with examples where accounting and tax diverge. It is highly inequitable to treat a dividend payment as a non-deductable expense from the perspective of the taxpayer, but as taxable interest in the hands of the preference shareholder.

Ordinary treatment for third-party backed shares and closure of various dividend schemes Further anti-avoidance proposals relate to dividends received  from shares, where the shares are ‘backed’ by third parties, through put or call options (including contingent puts). If the proposals become law, dividends from these transactions may be treated as ordinary revenue (with possible exemptions). These proposals suggest that  a shareholder should  hold a preference share for no less than  ten years if the form of the share is to be respected.

This proposal could potentially result in double taxation for the individual taxpayer. Deloitterecommends that if this proposal is to be pursued that a method be introduced that would allow the taxpayer to claim the dividend tax as a credit against the normal income tax payable. Deloitte suggests that a share only be a third party backed share if the right of disposal or guarantee is in place at the time the share is acquired by the taxpayer, or forms part of the acquisition.

Nazrien Kader is the Service Line Leader of Taxation Services  and  Lead Director of Financial Services Taxation at Deloitte South Africa.

Section 45 of the Income Tax Act- next moves?

It is proposed that there be a suspension of section 45 of the Income Tax Act for 18 months, from 3 June 2011.

Section 45 of the Act allows the tax-free transfer of assets within a group of companies and has become a useful tool to achieve commercially driven group reform in a tax-efficient manner.  The suspension was issued without warning to taxpayers and does not provide for a window period to allow for current restructuring transactions to be finalised.

The original goal of section 45 was to ensure that the tax system did not create a barrier to intra-group transfers. National Treasury believes that section 45 has become a key acquisition tool, with it being used in so-called debt push-down structures, which was not its intended purpose. National Treasury also expressed the view that section 45 greatly facilitates the use of funnel schemes and excessive debt in the production of exempt dividend income.

Deloitte does not condone the suspension of section 45 in the form proposed, because of the following reasons:

• Section 45 plays an important role in the world of corporate acquisitions and allows taxpayers to fund their debt with deductible income. This stems from the unsatisfactory tax position in South Africa where taxpayers are denied any tax deductions for interest incurred on loans obtained to fund the buying of shares. If section 45 is not available to provide relief to the acquiror in respect of its funding requirements, a number of corporate institutions will become unaffordable.
• Deloitte  understands the National Treasury’s and SARS’s concerns with the use of funnel schemes that seek to erode the tax base. Therefore Deloitte recommends that the targeted anti-avoidance legislation be introduced to combat the issue. The failure to use the General Anti-Avoidance Rule (GAAR) means we are presented with legislative interventions which have the unfortunate effect of penalising the majority of taxpayers for the actions of an errant minority.
• Deloitte is of the opinion that the suspension of an important provision such as section 45 undermines tax certainty and impinges the credibility of our tax system.

Deloitte urges National Treasury and SARS to engage with taxpayers to salvage section 45. Possible options include prescribing certain debt:equity ratios to avoid companies being flooded with debt and permitting intra-group transactions where assets are transferred to book value as opposed to market value given the reduced scope for impermissible tax avoidance in these circumstances.

Nazrien Kader is the Service Line Leader of Taxation Services  and  Lead Director of Financial Services Taxation at Deloitte South Africa.

By Billy Joubert, Tax Director, Deloitte Tax Management Consulting

There has recently been considerable publicity regarding the possible introduction of toll fees in Gauteng, with an announcement that Gauteng car drivers could be paying up to 66 cents per kilometre for the use of the new toll roads.  Trucks would pay even more, while motor cyclists would pay less. The standard rates could be reduced in various ways – notably by acquiring an e-tag, or travelling in off-peak times.

Due to public concern,  the Minister of Transport announced this week that a task team would be set up to investigate and reconsider the fees, but apart from the additional cost burden on individuals and companies, this new system would potentially create tax administration challenges.  For example, it would be necessary to deal with the practicalities of claiming VAT on toll charges incurred by individuals travelling on business or by commercial vehicles.  From a PAYE point of view, it would be necessary to deal with various situations, such as, what happens where an individual uses his company petrol card for paying toll fees? Such an arrangement is likely to give rise to an additional taxable benefit in the hands of the individual.

“Full details regarding the payment of toll fees are not yet available, and it will only be possible to determine what needs to be done from a tax administration point of view once this information is released. It is worth bearing in mind however, that toll fees form only one part of a complex web of taxes (and compulsory charges) payable by individuals and companies for the privilege of driving on our roads.  For example, we pay VAT of 14% when purchasing a vehicle.  We also pay a fuel levy equivalent to about 32% or 33% of every litre of petrol or diesel which we put into our cars.

“Then there is the carbon dioxide emissions tax imposed from 1 September last year.  The rate of emissions tax payable depends on the fuel efficiency of your vehicle.  There are certain very fuel efficient vehicles where no emissions tax is payable – for example the Toyota Prius or the Smart.  At the other end of the scale you have thirsty vehicles such as the Jeep Grand Cherokee, where the amount of emissions tax comes to about 4.4 % of the value of the car”, explains Billy Joubert, Tax Director at Deloitte.

There is, of course, also tax embedded in the value of the price which we pay for motor vehicles.  More specifically, most of our motor vehicles are imported and would have been subject to customs duty on importation.  Even if we purchase vehicles manufactured in South Africa (for example a C Class Mercedes or a Three Series BMW), a significant portion of the content of the vehicle would have been imported and would therefore have been subject to customs duty.  It is possible for motor companies to obtain partial relief from these liabilities for customs duties by utilising MIDP credits derived from exporting vehicles or other components manufactured in South Africa.

“It is therefore important to understand that, while toll fees may represent the most recent potential addition to the costs associated with using your motor vehicle, it is only part of a much wider picture”, warns Joubert.

Contact Billy at bjoubert@deloitte.co.za or visit the Deloitte Tax Management Consulting website

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