KPMG analysis of the 2012 budget speech

The KPMG team of tax and economic experts have provided their insights and analysis in response to the 2012 National Budget, delivered by Minister Pravin Gordhan in parliament yesterday, 22 February 2012.

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

Source : bizcommunity.co.za

Tag : budget speech, Budget South Africa 2012, Budget speech analysis

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Budget Speech 2012 what to hope for

Finance minister Pravin Gordhan faces a stern test of his mettle on Wednesday when he delivers his 2012 budget in Parliament.

Not only will Gordhan have to balance the books in uncertain global economic times, but he will also need to find funds for government programmes heavily dependent on spending.

He has been saddled with the challenge of providing details of funding for not only the national health insurance scheme and the ambitious infrastructure programme unveiled in President Jacob Zuma's State of the Nation address, but also several other peripheral social programmes government wishes to introduce.

Faced with the need to increase spending while actual income into government coffers has not increased correspondingly, Gordhan has few options for increasing revenue.

The most obvious strategy would be to raise taxes with an even spread across the income, corporate and value added tax (VAT) base.

But this might be difficult as the South African tax base has not grown in a meaningful manner since the global economic crisis of 2008.

Tim Harris, the Democratic Alliance's spokesperson on matters relating to finance, agreed there was a need to find more funding.

"But any further burden on our taxpayers is not the solution," he told the Mail & Guardian. "Increased corporate taxes discourage job creation, more income tax leads to less spending and an increase in VAT will adversely affect the poor."

Budget Pie Chart Example

Harris said that any moves on taxes would undo the "fine tax-paying discipline" shown by many South Africans.


"If we were to burden people with more taxes, we could easily slip into the same problem experienced by places like Greece, where citizens find ways of shying away from taxes," Harris added.

The DA will deliver their alternative budget later on Monday, in which Harris said the official opposition will be proposing a strictly "growth-driven" budget.

Even spread

Harris's theory was accepted in part by Adenaan Hardien, a senior economist at Cadiz, who said that while there was little scope for it, an increase in taxes might be inevitable.

"If these programmes are funded through national government's coffers, we are going to have to pay it back eventually, and that may well come from taxes," Hardien said.

Hardien suggested a combination of strategies might be employed by Gordhan to fill in any shortfall.

"Funding these projects would require raising revenue from a small tax base, so you wouldn't be able to load one section of the population alone. It may come from an increase in income and corporate tax, as well as VAT," Hardien said.

Waste not, want not
But Chris Hart, the chief economist at Investment Solutions, argued that even if taxes were increased, this would not deal with the "fundamental problem" of a lack of "capacity to deliver".

"I don't know how Minister Gordhan will keep a straight face if he puts up taxes in the face of all this excess wastage by government. Year after year we have a situation where the money is there, but is not used properly. You can't solve that by throwing more money at the problem," Hart said.

This was echoed by the DA's Harris.

"We can increase revenues and get more money coming in, but we need to use it effectively to ensure the promises made are kept," Harris said.

Defeating the purpose
Besides increasing revenues through taxes, there were rumblings that increased costs could be met by introducing so-called "user fees".

This would involve increasing the cost of electricity and water, or presenting levy or toll structures on the infrastructure developed by the government.

But Hart argued that any introduction of fees to users of government infrastructure would be counterproductive.

"We will not taste the fruits of any infrastructure plan if it is not funded properly. If funding it involves end users paying for that service, it defeats the purpose entirely, as we've seen with the furore over the introduction of toll gates in Gauteng," Hart said.

Source : mg.co.za
Tags : Budget Speech,Budget Speech 2012, Pravin Gordhan,Finance minister, South Africa budget speech, Value added tax,President Jacob Zuma,tax news south africa

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