Notable corporate tax proposals in the 2023-24 budget, including Pillar Two announcement

02 March 2023

South Africa’s Finance Minister delivered his annual National Budget speech on 22 February 2023, against a backdrop of persistent power cuts, referred to euphemistically as “load-shedding,” high unemployment and low economic growth, in Africa’s most developed economy.

In the previous Budget, the Minister announced the lowering of the relatively high corporate income tax rate from 28% to 27% and certain base-broadening measures to fund the decrease (for prior coverage, see the article in the November 2022 issue of Corporate Tax News). Although National Treasury’s aim is to reduce the corporate income tax rate further, it will only consider further reductions if they can be done in a revenue neutral manner. Given the economic constraints caused by power cuts, a further reduction this year was always unlikely and did not transpire. Instead, the corporate income tax rate will remain at 27% with slightly below-inflationary relief in the personal income tax rates and no increases in fuel levies.

To relieve pressure on the national electricity grid, the Minister announced a meaningful incentive allowance for businesses of 125% of the cost of renewable energy plant and equipment that is used to produce electricity. This allowance will apply to plant and equipment that is brought into use for the first time between 1 March 2023 and 28 February 2025 and will be fully claimable in the year in which the plant and equipment is brought into use.

A tax rebate for individuals who invest in solar PV panels for their domestic homes was announced. The maximum rebate on offer is ZAR 15,000 (approximately USD 833) per individual and, given the miserly amount relative to the total cost of installation of a solar system, is unlikely to prove a meaningful incentive. This rebate will apply to solar PV panels that are installed between 1 March 2023 and 28 February 2024.

To limit the impact of the power cuts on food prices, food producers will be entitled to reclaim a portion of the fuel levies for diesel they use in the manufacturing process (such as for generators). This will take effect from 1 April 2023 and remain in place until 31 March 2025.

Significantly, the Minister also announced that during the 2023 legislative cycle, the government will publish a draft position paper on the implementation of the Pillar Two proposals of the OECD for public comment and draft legislation will be prepared for inclusion in the 2024 Taxation Laws Amendment Bill.

In addition to the Pillar Two announcement, there are several proposals in the budget that will be of interest to businesses:

Tightening the foreign business establishment (FBE) exclusion from the controlled foreign company (CFC) imputation rules to require that all the important functions for which a CFC is compensated will have to be performed by the FBE. This proposal stems from the fact that in some cases, taxpayers claim the FBE exclusion, even if important functions relating to the business of the CFC are outsourced and are not performed by the FBE.
Amendments to the rules disallowing the deduction of interest expense when incurred by a debtor in favour of a person who is not fully subject to tax on the corresponding interest income, and where a “controlling relationship” exists.
Amendments aimed at closing down a dividend withholding tax loophole that currently exists where an intermediate holding company that is a nonresident becomes a resident, and thereby establishes its contributed tax capital at the market value of its shares.
Following the 2021 publication of a review of the tax regime for oil and gas companies, the Minister proposed the retention of the royalty rate that is determined by the profitability of the company, instead of the introduction of a flat rate of tax for these companies. However, the minimum royalty rate will be increased from 0.5% to 2%, with the maximum remaining at 5% (of gross sales).

Overall, the Budget contained few surprises. From an economic perspective, there are downside risks, especially given government’s perennial difficulty in keeping within its budgeted expenditure ceilings.

David Warneke
BDO in South Africa