Major tax changes coming for South Africa

Changes to South Africa’s tax legislation are on the cards, with the National Treasury considering VAT adjustments and declaring its intention to review how local businesses with global operations are treated. 

South Africa’s 2024 tax season opened last week, with millions of South Africans gearing up to file their tax returns. 

While very little appears to be changing for individual taxpayers, major changes are on the way for businesses as SARS looks to close loopholes.

The National Treasury also aims to clarify existing rules for South African businesses with foreign operations. 

South Africans may experience some tax relief in the coming years as the Government of National Unity (GNU) looks to expand the list of VAT-exempt food items.

President Ramaphosa, in his Opening of Parliament address, announced the government would review ways to help reduce prices of goods for South Africans.

“Even at a time when many companies are making large profits, millions of South Africans are suffering as a result of rising prices,” Ramaphosa said.

As South Africans grapple with high poverty levels and the cost of living, he said the government will look to expand the range of essential food items exempt from VAT.

In its monthly synopsis of developments in the local tax arena, PwC has outlined some of the changes its experts expect for tax legislation in South Africa. 

In particular, it has flagged potential changes to how VAT is levied on cross-border electronic services, foreign donor-funded projects, and the period when tax deductions can be granted. 

The National Treasury’s Tax Matters and Revenue Laws section of the Budget, released in February, outlined these VAT proposals for further study in collaboration with SARS. 

“This year’s VAT proposals for further consideration are significant and can have far-reaching implications,” PwC said. 

The financial services firm warned that if these proposals become law, they will have a meaningful impact on businesses. 

The following are the most important and notable proposals, according to PwC.

Changes to the electronic services regime

The global growth of electronic commerce prompted changes in VAT collection for cross-border electronic services starting on 1 April 2014. 

Before these changes, the VAT collection system was inefficient. It relied on low compliance with the “reverse charge” mechanism, leading to lost revenue and giving foreign providers an unfair advantage. 

In April 2019, South Africa expanded its VAT scope to include a broader range of foreign electronic service providers, exceeding international guidelines to maximize VAT collection on B2B and B2C services. 

South Africa’s 2024 Budget proposes simplifying VAT administration by limiting collection to direct-to-consumer (B2C) sales.

It reversed the 2019 policy and raised concerns about the fairness of this change for businesses previously required to register for B2B transactions.

Changes to the tax period for permissible input tax deductions

South Africa’s VAT system allows vendors to recoup VAT paid on business purchases through input tax deductions, reducing the overall VAT burden for businesses. 

To qualify, the VAT must be incurred on goods or services used for taxable supplies, and proper documentation is required. 

Ideally, deductions should be claimed in the same tax period as the supply, but a five-year grace period exists if documentation is delayed, aiding in managing VAT obligations and cash flow. 

The 2024 Budget proposal, however, seeks to limit this flexibility by requiring deductions to be made in the original tax period, simplifying tax administration but raising practical concerns. 

Businesses may face challenges with non-compliant invoices or the need for multiple adjustments, and the current eFiling system might struggle to adapt to these changes.

A review of the VAT treatment of foreign donor-funded projects

South Africa’s VAT treatment for Foreign Donor Funded Projects (FDFPs) is designed to refund VAT on project expenses. 

However, implementing agencies face challenges due to changes introduced in 2020, such as lengthy approval processes, complex procedures, and administrative burdens that deter foreign donors. 

The need for tax experts increases costs, and frequent changes and inconsistent application of the legislation create uncertainty. These issues undermine the legislation’s intended benefits and may discourage foreign aid. 

To address this, the National Treasury proposes simplifying the FDFP VAT registration process by allowing agencies to register all their FDFPs under a single VAT number, reducing administrative complexity.

Companies with global operations

PwC’s tax experts warned that the National Treasury might change the country’s tax laws after Coronation’s victory over SARS at the Constitutional Court. 

In June, the Constitutional Court ruled in favour of Coronation in its legal battle against SARS regarding the profits earned by its Irish-based subsidiary, Coronation Global Fund Managers (CGFM). 

SARS had argued that fund management formed the primary operations of Coronation’s subsidiary, and this activity occurred in South Africa, while investment management was outsourced to Ireland. 

This interpretation would result in the company paying tax on the net income of CGFM to SARS. 

However, after several rounds of appeals, the Constitutional Court disagreed and said the Irish subsidiary’s licence only permitted fund management, not investment management. Thus, Coronation’s interpretation was correct, and its net income was exempt. 

PwC’s experts pointed out that the National Treasury indicated it would amend the definition of a foreign business establishment (FBE) if the Constitutional Court’s decision deemed it necessary. 

It said the government would aim to clarify that all important company functions must be performed within the same jurisdiction for the FBE exemption to apply. 

PwC flagged two important areas for businesses to keep an eye on.

• The first is the actual content and wording of the previously proposed amendment, which was “fraught with vagueness and ambiguity”, so the detail of the proposal, if any, will require careful consideration, it said.
• The second is that the proposal, if any, could potentially be made with retrospective effect.

“We note that there have been instances in the past where legislation has been amended with retrospective effect and in accordance with the rule of law,” it said.