South Africa

Market overview

South Africa has been a frontrunner in implementing BEPS recommendations into the national tax system. This includes legislation on hybrid instruments and transfer pricing. The South African government has made these changes regardless of the fact that the country is not a member of the OECD.

"The continued focus on base erosion is having a massive impact on tax policy in South Africa," said Brian Dennehy, a partner at Webber Wentzel. "We see it coming through reforms around M&A deals and transfer pricing, intermediary firms in certain regions and we've now got the MLI as an override to double tax treaties."

The South African Revenue Service (SARS) has responded to the changes by enhancing its TP unit as it adopts a more aggressive strategy. As a result, there has been a general increase in the number of TP disputes. Although this may just be the early phase of a crackdown. "We're going to find out in time what the true impact will be," said Dennehy.

At the same time, the country is facing political and economic turbulence. South Africa has seen its credit rating downgraded to junk by two ratings agencies in 2017. The economy is lagging in growth, and unemployment remains above 25%, while President Zuma's administration has been wracked by a slew of scandals.

This is partly due to the sacking of finance ministers Nhlanhla Nene and Pravin Gordhan, which caused a panic on the stock market and hit the value of the rand hard. These decisions have been matched by a shift in rhetoric on economic matters, including tax policy, which has implications for transfer pricing.

"We've seen fairly dramatic jumps in policy around redistribution, wealth taxes and land taxes," said Bernard du Plessis, partner at ENSafrica. "I think those taxes are politically expedient, but they won't yield the amounts needed to plug the deficit. Transfer pricing is increasing steadily and we expect that work to continue to grow. It's going to be a fairly volatile time for the next couple of years."

As the South African elections approach in 2019, the Zuma years look set to end on a down note. Deputy President Cyril Ramaphosa and Nkosazana Dlamini-Zuma have launched their respective campaigns for the leadership of the ruling party. The African National Congress will appoint a new leader in December 2017. Some practitioners believe this may lessen the incentive to make big changes for the time being.

"Both economically and politically, it is an interesting time in South Africa," said AJ Jansen van Nieuwenhuizen, the head of transfer pricing at Grant Thornton. "Over the next few years, the country will hold various local and national elections which could result in leadership that may or may not suport business growth. Within the transfer pricing sphere, we are expecting the imminent finalisation of transfer pricing documentation submissions requirements, which will further solidify South Africa's application and enforcement of the various OECD BEPS initiatives. Now, more than ever, taxpayers will need to ensure their transfer pricing affairs are in order."


Tax authorities

South African Revenue Service
Visiting address: Lehae La Sars, 299 Bronkhorst Street, Nieuw Muckleneuk, 0181 Pretoria
Postal address: Private Bag X923, Pretoria 0001
Tel: +27 12 422 4000
Website: www.sars.gov.za


Tax rates at a glance

(As of July 2017)

Corporate income tax 28% (a)
Capital gains tax rate 18.648%
Branch tax rates 28% (a)
 
Withholding tax
Dividends 20% (b)
Interest 15% (c)(d)
Royalties from patents, know-how, etc 15% (d)
Services 15% (d)
Branch remittance tax n.a.
 
Net operating losses (years)
Carry-back 0
Carry-forward Unlimited

  1. The mining income of gold mining companies is taxed under a special formula, and the non-mining income of such companies is taxed at a rate of 28%. Special rules apply to life insurance companies, petroleum and gas producers and small business corporations.
  2. Dividend withholding tax (DWT) was introduced, effective from April 1 2012. Previously, a tax known as the secondary tax on companies (STC) was levied at a rate of 10%. The DWT applies to dividends declared by South African-resident companies. Certain dividends are exempt from the withholding tax, such as dividends received by South African-resident companies and public benefit organizations. A decreased rate may apply under a double tax treaty.
  3. Interest withholding tax at a rate of 15%, which took effect on March 1 2015, applies to non-residents only. Certain interest income is exempt from this withholding tax, such as interest with respect to government debt instruments, listed debt instruments and debt instruments owed by banks. A reduced rate may apply under a double tax treaty.
  4. The 15% rate applies to royalties paid (or due and payable) on or after January 1 2015. This withholding tax applies to non-residents only. A reduced rate may apply under a double tax treaty.
  5. Services withholding tax at a rate of 15%, which will take effect on January 1 2017, will apply only to payments made to non-residents with respect to South African-source services not otherwise subject to normal tax after taking into account tax treaties.

Source: EY 2016 Worldwide Corporate Tax Guide