Draft bill risks creating an incoherent tax regime

The Treasury’s proposals to limit the use by companies of their assessed losses will result in SA’s assessed loss tax regime being one of the most onerous in the world, a tax expert says.

The proposed measure will limit the ability of businesses hit by the Covid-19 pandemic and the looting and destruction in KwaZulu-Natal and Gauteng from fully using their assessed losses in future years.

The leisure and travel industry has been particularly hard hit by the pandemic.

The proposal is contained in the draft Taxation Laws Amendment Bill released for public comment by the Treasury and SA Revenue Service last week together with the 2021 draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill and the 2021 draft Tax Administration Laws Amendment Bill.

These draft bills contain

proposals made in the 2021 budget and will be introduced in parliament this year.

The Treasury flagged in the February Budget Review that it planned to lower the corporate tax rate to 27% from 28% with effect for tax years commencing on or after April 1 2022 while broadening the tax base by reducing the number of tax incentives, interest expense deductions and assessed loss offsets.

The draft Taxation Laws Amendment Bill proposes to reduce the full use of assessed losses brought forward to 80% of taxable income, with tax being paid on the remaining 20%. At present, the assessed loss can cover all the profit, meaning that no tax is paid.

The new regime will come into operation on April 1 2022 and apply to years of assessment on or after that date. It will come into effect for company year ends after March 31 2023.

In the memorandum to the draft bill, the Treasury notes the growing international trend to restrict the use of assessed losses against taxable income to lower the corporate income tax rate and thereby improve competitiveness.

But PwC tax policy leader Kyle Mandy said this proposal is problematic in that it adopts a one-size-fits-all approach, applying the rule across the board regardless of the specific nature of an industry.

Real estate investment trusts, for example, would be hard hit because they, rather than their shareholders as is now the case, will have to pay tax. Many of them are making losses because of the lockdowns.

Mandy pointed out that the proposal would cause incoherence in the tax system, which grants tax incentives, such as accelerated capital allowances, which could potentially result in tax losses, and then undermines those incentives by restricting the use of losses. “In effect, it amounts to a partial clawback of those incentives,” he said.

Mandy agreed with the Treasury that many other countries have similar restrictions on the use of assessed losses but noted that most of them also have a group tax system, which allows assessed losses in one company in a group to be transferred to another one. In SA, each company is completely ring-fenced for tax purposes as there is no group tax system.

“With the proposal, SA will be going from one of the most favourable tax loss systems to one of the most onerous when benchmarked against other countries,” Mandy said, because of the combination of the reduction in the use of assessed losses and the absence of a group tax system. Also, some other tax regimes allow tax losses to be carried backwards to previous years of assessment within limitations.

He also noted that the timing of the proposed measure was not great given the losses companies had suffered during the pandemic, which they would not be able to fully use when they started making profits again. Mandy suggested that a special dispensation should be provided for the full use of the tax losses suffered by companies during this exceptional period to shelter their future profits.

The other controversial proposal in the draft bill is to impose an exit charge on the value of retirement funds for people taking up tax residence in another country. The tax plus interest would be payable on withdrawal. Mandy said this would override SA’s double-tax treaties with other countries insofar as they give the sole taxing rights on retirement funds to the country of tax residence.

On the other hand, he understood that the Treasury wanted to recoup a tax benefit from the retirement funds after having granted a tax exemption on the growth within them. Tax is normally paid on withdrawal from a retirement fund.