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PwC Tax comment on the 2016 Budget Review

PwC Tax comment on the 2016 Budget Review

Sugar tax

It is clear that the Government is serious about social well-being and there is a need to align this with the policy paper issued by The Department of Health.

However, the proposed sugar tax will have a negative impact on beverage companies. The question that arises is why only on beverages and not other industries?

Tyre Levy

The proposed tyre levy is part of Government’s initiatives leading to a cleaner environment. This is also part of the reduction of waste and to encourage recycling. This should also lead to some job creation. However, we will need to understand how this will be regulated - Mornay Schafer, Associate Director, PwC Tax

Hybrid debt instruments

The proposal to provide an exclusion for subordination agreements from the application of the hybrid debt instruments legislation is welcomed. These provisions are anti-avoidance provisions that essentially treat interest on certain debt instruments as dividends in the hands of both the issuer and the holder of the debt instruments.

Due to the wording of these provisions, subordination agreements are negatively impacted, despite the fact that these agreements serve commercial purposes only and not tax avoidance purposes.

In addition, it is interesting to note that consideration is to be given to cross-border hybrid arrangements where there is the possibility of avoiding tax both in South Africa and the foreign country.

Examples of these would be where a tax deduction arises in South Africa for an interest expense whilst the foreign country regards the amounts in question as tax exempt dividends under their domestic legislation or alternatively a situation where the foreign country allows a deduction for a particular amount of interest under their domestic legislation whilst South Africa regard the amount as an exempt dividend due to the hybrid debt instruments legislation - Mike Benetello, Partner, Mergers & Acquistiions, PwC Tax


Indirect Taxes

National input tax on goods containing gold

The prior amendment to the definition of second-hand goods which was intended to avoid abuse, however, created an anomalous situation for legitimate traders of second-hand jewellery, gold coins and computers (i.e. goods containing gold). It is a welcomed proposal and will hopefully achieve tax parity for the affected industries and prevent tax cascading.

Taxation of non-executive directors’ fees 

This proposal is very important in providing certainty on whether VAT and/or PAYE is payable. We are hopeful that it never gets to the point where both taxes are imposed.

It is important to note that the imposition of VAT on directors’ fees would result in companies having a VAT cost on such expenditure as the full amount of VAT incurred on directors’ fees may not be deducted in full.

Loyalty programmes

Loyalty programmes are complex from a VAT perspective. They are designed to incentivise customers to repeat purchase. This proposal should aim to align the VAT treatment to that of discounts currently contained in the VAT Act.

It is indeed a very progressive proposal to address the potential anomalous tax implications. It is very interesting to see that SARS and NT are cognisant of the advancement of vouchers in the commercial environment and that they are taking the necessary steps to align the VAT law to hopefully ensure that VAT is not a cost.

Indirect exports

The proposal is a practical approach to ensure that the deemed VAT charged on exports are effectively reversed when a vendor can satisfy all the documentary requirements imposed by SARS. This has always been SARS’ approach and this proposal will provide the legislative basis. Depending on how one interprets the Export Regulation, it is arguable that this amendment is not required. 

Alternative documentary proof

Section 16(2)(g) of the Value-Added Tax Act is yet to come into effect (1 April 2016) and it is good to see that NT recognises that the Commissioner should have a wider discretion to allow alternative documentary proof to substantiate the deduction of input tax.

Currently, the discretion is limited to circumstances where the vendor is unable to obtain the documents prescribed in section 16(2)(a) to (f).

This initial amendment was very limited and not very progressive and is actually perceived as an attempt to limit the outcomes of the SA Jazz Festival case. A practical approach is required here as all that a vendor needs to demonstrate that it is a legitimate expense and that the VAT was legally charged and paid.