Taxation Laws Amendment Bill 2009 Change to definition of trading stock Section 24B (2) Dividends tax Definition of “dividend” Withholding issues Deemed dividends CFC rules – changes to section 9D Repeal of STC exemption 1

Taxation Laws Amendment Bill 2009 Change to definition of trading stock Definition widened to include anything “won...for the purposes of extraction, processing, separation, refining, beneficiation”... SARS’ response to ITC Explanatory Memo states that it is already the legal position that mining stockpiles used for the extraction or separation of minerals are trading stock – highly debatable Far reaching and complex implications Effective almost immediately No consultation with industry 2

Taxation Laws Amendment Bill 2009 Section 24B(2) Fundamentally flawed section A taxpayer will get no base cost for CGT purposes in shares or debt issued to the taxpayer “by reason of or in consequence of”...the issue of shares by the taxpayer or any connected person in relation to the taxpayer Not clear what mischief is being targeted and causes enormous problems for ordinary commercial (and non abusive!) transactions 3

4 Taxation Laws Amendment Bill 2009 Section 24B(2) - example Foreign seller SA Co Swedish Co Sale of plant Issue of shares Debt owed to SA Co Foreign seller sold a manufacturing plant located in Sweden to the Swedish subsidiary of SA Co, a listed South African company SA Co paid part of the purchase price in the form of an issue of SA Co shares to Foreign seller This resulted in a debt owed by Swedish Co to SA Co As and when this debt is repaid CGT will be payable by SA Co on the full amount of the debt as a result of section 24B(2) Justification?

Taxation Laws Amendment Bill 2009 Dividends tax Definition overly broad and vague – should be limited to payments other than out of contributed tax capital Withholding tax issues Communication to shareholders when CTC transferred Need to submit all declarations of beneficial ownership to Commissioner Refund mechanism where dividends paid infrequently Deemed dividends Company ceasing to be tax resident – tax should not be imposed on contributed tax capital Financial assistance – should be a deemed dividend only if the interest rate is below a market rate. The reference to prescribed rate is unnecessary and could be very inequitable Provision is needed for a tax credit when loan repaid, if loan was treated as a deemed dividend 5

Taxation Laws Amendment Bill 2009 CFC rules –changes to section 9D Conversion from rulings to exemptions welcomed Foreign business establishment why have paragraphs (b) – (e) of existing definition been removed? It is proposed that FBE status will be denied if the sole or main purpose behind the location of the CFC is to postpone or reduce “any tax imposed by any sphere of government …in any other country”. This is impractical and not in SA’s own interests. Captive insurance companies – denial of deductions for short term insurance reserves. Not clear why CFCs conducting insurance business should be treated more harshly than SA companies conducting the same business Proposals will hit genuine activities in high tax countries the hardest 6

Taxation Laws Amendment Bill 2009 Repeal of STC exemption for profits received as foreign dividends but previously subject to South African tax or arising directly or indirectly from any South African dividend (section 64B(3A) (d)) No justification for removing this exemption prior to the abolition of STC 7