KPMG team comments on budget

Michiel Els, transfer pricing and international tax, states, "As most are aware there are some material changes to our transfer pricing rules coming into effect on 1 April 2012. To date we are waiting for a new Practice Note addressing the application thereof. This issue was not raised in today's budget speech."

However, the following was mentioned which may have an influence on transfer pricing:

• Foreign non-interest bearing loans to be treated as shares in line with the decision to treat certain forms of debt as shares.
  
• The introduction of offshore reorganisation provisions to prevent value stripping from South African multinationals
  
• With the increased rate of dividend withholding taxes, we also anticipate that offshore entities might try to find alternative ways of extracting profits from South Africa.

Withholding tax on foreign payments

Roy Naudé, associate director in international tax, comments, "In order to achieve a uniform rate, it is proposed that the current withholding tax rate in relation to royalties paid to non-residents be increased from the existing rate of 12% to 15% and similarly, the withholding tax on interest will be increased from 10% to 15%, once it comes into effect from 2013. It is further proposed that the various procedures in relation to these regimes be streamlined."

Financial transaction tax

Brokers are exempt from securities transfer tax (STT) on shares bought as beneficial owner. The Minister announced that brokers would become subject to STT on such purposes, albeit at a lower rate than the standard 0.25%. (The lower rate has not been announced.)

Ominously, the Minister announced that the feasibility of levying STT on derivatives would be investigated. However, shares purchased to support derivative hedging will qualify for the lower STT rate. Effective date: 1 April 2013

Mark-to-market taxation of financial instruments

SA tax law adopts a fragmented approach to recognise gains/losses on financial instruments based on market value movements.

Generally, corporate traders may recognise unrealised losses but do not have to account for unrealised gains on financial instruments other than shares. In addition, an elective procedure allows certain but not all classes of debt and derivative instruments to be taxed on a mark-to-market basis. The scope of this dispensation in relation to instruments with residual obligations is currently under dispute. Foreign exchange movements on debt instruments are recognised on a mark-to-market methodology that differs from the accounting methods.

Against this background, the Minister announced that a concerted but cautious move to greater alignment of the tax and accounting treatment of financial instruments.

The treatment of foreign currency instruments will be prioritised. The elective regime will be expanded to cover a wider set of assets and liabilities, subject to pre-approval by SARS. Ongoing changes will be made over several years, comments Stephan Minne, director in tax services.

On the subject of estate and capital gains tax, Mohammed Jada, associate director: corporate tax, points out that Pravin has increased capital gains tax rates and this will have a negative impact on taxpayers' pockets. What is disappointing is that no change to estate duty has been made. It is uncommon to find both capital gains tax and estate duty in the tax system. We welcome a repeal of an estate duty in the near future.