Standing Committee on Finance Submission on the Draft Taxation Laws Amendment Bills, 2010 June 1, 2010 JAMES AITCHISON

Page 2 of 6 June 1, Employee share schemes 2.Limitation of interest deduction 3.International aspects Restriction of cross border interest exemption Thin capitalisation of branches 4.Other Retrospective change to dividend definition Ability to offset foreign losses Contents

Page 3 of 6 June 1, 2010  Proposed Taxation of Dividends  Scope – should only be to “restricted equity shares”  Only equitable to give company a deduction (also for distributions taxed by reason of s8C(1A))  General anti-avoidance provisions require SARS to apply consistency across parties  Vast majority of share schemes are not avoidance driven so should not be treated less favourably than avoidance transactions  STC relief per explanatory memorandum, not present in Bill  Should be subject to PAYE to avoid nasty surprise for smaller taxpayers later (also for s8C(1A))  PAYE calculation currently includes gains under s8C – should also include losses  Double tax not addressed where employee share trust used  Issue remains avoidance provisions are drafted too widely Employee Share Schemes

Page 4 of 6 June 1, 2010  Unduly broad scope  Understood to be targeted at avoidance by sophisticated taxpayers  Applies to all taxpayers  Likely only sophisticated players such as the “modern financial institutions” referred to in the explanatory memorandum that can escape the effect with their tracing ability  Unduly harsh basis, even in the example used in the explanatory memorandum  Total income of R15m, R10m of taxable interest and R5m of exempt dividends  Expenses of R6m  Denial of deduction of R5m (equal to exempt income) and not R2m (R6m x 5/15)  Suggests that exempt income is not profitable whereas taxable income is very profitable – not commercially valid  No provision made for extraordinary events such as unbundlings / reorganisations  Issue with escape clause requiring income generating asset to be funded “solely” from non-deductible sources  “solely” is too restrictive  Assets acquired many years ago and requirement to keep records has passed  Lack of clarity as to interaction with purpose test Limitation of interest deduction

Page 5 of 6 June 1, 2010  Restriction of cross border interest exemption  Question as to wisdom in current global environment  Multinationals with investments in South Africa  Impact on South Africa as competitive destintation  Foreign banks lending to South African corporates  Subject to SARB approval  Gross up clauses and early redemption clauses  Ability to pay / refinance in existing market  Would appear to be at odds to introduction of favourable headquarters company regime  No removal of s10(1)(h)  Thin capitalisation of branches  Lack of “connected” or similar requirement (again provision cast too widely)  Has cognisance been taken of double taxation treaty provisions? International aspects

Page 6 of 6 June 1, 2010  Retrospective change to dividend definition  Conversion of exempt dividend (with company paying STC) to taxable proceeds (revenue or capital)  Intended to be taxpayer friendly and avoid double tax in the case of open market purchases where buyer and seller are not aware of other’s identity  Need to carve out transactions where parties are known to each other  Retrospective effect (start of years of assessment ending on or after 1 January 2010)  Ability to offset foreign losses  South Africa taxes worldwide income  Ability to offset foreign trading losses limited to other foreign trading profits  Not able to offset against either foreign investment income or foreign capital gains  When limitation introduced was done so on basis of insufficient information held by SARS  10 years ago, so SARS must surely have the information  The avoidance referred to then can be specifically targeted not by such a broad denial Other