Expanding into South Africa Support for your Business
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Are you looking to expand your business into South Africa? Dynamic Irish businesses are looking to new markets to expand and grow. Inevitably, tax can be an important factor in deciding upon the best operating structure. KPMG’s international team both in Ireland and South Africa can help you quickly identify the key decisions you will need to take to ensure that your business expands as smoothly and as profitably as possible. Our Irish tax teams can act as your point of contact and link you to our local South African colleagues to provide the support and advice you may need. We also provide a range of useful information for your business through our portal (‘Expanding into New Markets’) with materials dealing with specific South African issues. www.kpmg.ie/newmarkets
We look forward to hearing from you
Som me ke ey con nside erattio ons Expanding into a new market triggers a range of issues and we can help you manage these to the best advantage of your business. These include: How
should I structure my business? do I decide the tax residence of subsidiaries? Do I need a holding company? How should I finance my business? What is transfer pricing? What employment issues will I face? What taxes do I need to be aware of? What tax incentives are available? Are there local reporting issues that I should be aware of? How
Ho ow sho ould d I stru uctture e my bus sine ess s in n So outh Africa? Initial marketing and business development Individuals travelling to South Africa on behalf of an Irish company should be able to carry out initial marketing and business development activity without creating a local taxable presence for their employer company. This assumes that the activity is confined to marketing and business development and does not include negotiation or conclusion of contracts with South African customers as this can result in a taxable presence with the company’s profits from those contracts potentially taxed in South Africa. The Irish employees’ earnings should not be subject to South African income tax where they spend less than 183 days in a calendar year performing these duties in South Africa for their Irish employer. They may be eligible for relief from Irish income tax under the Foreign Earnings Deduction regime where they spend a defined minimum period of time performing their employment duties in South Africa. Local temporary visa requirements apply but of themselves should not trigger an obligation to register as an employer in South Africa or to operate payroll taxes on the Irish employees’ earnings.
Remote servicing and direct sales Depending on the business sector, delivery of services to South African customers from an Irish place of business should not create a local taxable presence for the Irish company. Care should be taken if the delivery of services requires locally based support and infrastructure such as locally situate servers, a local office, customer aftercare, etc. as these can create a taxable presence for the supplier company. The nature of arrangements for use of local agents and distributors should also be carefully considered as their activities may create a local taxable presence for the Irish company. If delivering goods manufactured outside South
Africa to local customers, customs and VAT issues should be addressed at an early date. Identifying the appropriate channel for delivery and processing of goods can result in significant customs savings and efficiencies. The business will need to consider South African currency and exchange control restrictions in looking to structure receipt of payments from its customers including appropriate invoicing.
Establishing a presence Ireland has a double tax treaty with South Africa which provides a threshold for activity from a local fixed base before the activity creates a local taxable presence. The obligation to register and operate employment taxes and VAT in South Africa can often arise even where the company’s local presence is confined to marketing and support activities which do not create a taxable presence for corporation tax purposes. There are a number of local registration, approval and documentation requirements involved in the set up of a representative office, branch or local subsidiary so that thought should be given at an early stage to the local operating structure best fitted to the business over the medium term.
Wh hen n you u haave decid ded d it is s ces ssaryy to havve a lo ocaal pres sence nec how w sh hou uld you u strruc cturee itt? Representative office Where the business is engaged in limited activity in South Africa confined to market development and customer liaison activities it may be attractive to establish a representative office (RO). Prior approval from the South African Reserve Bank (SARB) is required for funding provided to the RO. Due to the limited nature of its activities, an RO may not create a corporation tax presence in South Africa but is likely to give rise to the obligation to register for and operate employment taxes for RO employees. VAT implications may also arise in relation to the activities conducted by the RO. Branch As in the case of an RO, the provision of funding for a South African branch requires SARB approval in order that branch funds can be freely repatriated to head office. Profits of a branch are broadly taxable in the same manner as those of a South African resident company. The rate of corporation tax on profits of branches of foreign companies is 28%, the rate applying to locally resident companies. A range of local registration requirements apply to the set up of a branch. The branch is not a separate legal entity from the head office. Where an Irish company establishes a South African branch, the branch’s profits are taxed as part of the Irish company’s worldwide profits with relief given against Irish profits for losses of the branch.
Expanding into New Markets | Support for your Business
Acquiring a local company You may look to acquire a local business through the acquisition of assets or shares in a South African company. It is possible that SARB approval will be required in order to ensure that funding provided to the local subsidiary and/or business may be repatriated freely without exchange control restrictions. In addition, other legal and commercial due diligence may be required. Our South African colleagues can assist you in identifying the most appropriate acquisition structure. Incorporating a new company locally The most commonly adopted forms of doing business by foreign investors are private companies and branches. A company (whether public or private) incorporated under the South African Companies Act 2008 is broadly similar to private and public companies formed under the Irish Companies Acts.
Capital gains on sale of a business conducted through a branch are taxable in both South Africa and Ireland with credit relief given in Ireland against Irish corporation tax for South African corporation tax on the branch’s capital gains. Ireland taxes dividends from foreign subsidiaries. Ireland’s generous tax credit relief regime for foreign withholding tax and corporate income taxes borne on subsidiaries’ profits usually means that dividends from the South Africa subsidiary’s profits can be paid to an Irish holding company without additional Irish corporation tax. The effective rate of tax on the profits of the South African subsidiary which are paid as a dividend to an Irish parent is likely to be a combination of 28% corporation tax on profits and a 5% dividend withholding tax. If the Irish parent is a closely held company, additional Irish tax considerations may arise.
Ho ow do I decid de the ta ax res sid denc ce of sub bsid dia arie es?
Ho ow sho ould d I financ ce m y bus sine ess s in n So outh Africa?
The profits of a foreign subsidiary are taxable in Ireland if the subsidiary is centrally managed and controlled in Ireland. This can give rise to tax on the subsidiary’s profits both in Ireland and in South Africa if the central management of the subsidiary is carried out in Ireland. Alternatively, if the foreign subsidiary is more autonomous and is managed and controlled in the local country, it may not be resident in Ireland.
The introduction of capital or the acquisition of shares does not require SARB approval but acceptance of foreign loans by a South African branch or subsidiary is subject to prior approval by SARB. Approval is also required for the repayment of foreign loans by the South African branch or subsidiary.
It will be necessary to consider the extent to which the Irish parent oversees the activities of its South African subsidiary, usually through the appointment of Irish based directors to the board of management of the company and the actual exercise in South Africa of the management and control of the subsidiary. Care will need to be taken to balance South African requirements for the governance and management of the South African entity with appropriate operating guidelines to ensure the South African company’s activities are aligned with group policy. It should be possible to appoint Irish resident individuals to the board of the local subsidiary. Subject to obtaining visas for their time in South Africa spent attending board meetings, the Irish employment earnings of Irish resident group directors appointed to the local company board should not be subject to additional income tax or social insurance in South Africa.
Do o I nee ed a ho old din ng company? Ireland’s holding company regime provides for a tax exemption on capital gains arising on disposal or wind up of a South African resident subsidiary provided that the subsidiary and/ or its parent company are together engaged mainly in trading activities. Capital gains arising on disposal of its South African subsidiary by an Irish company should not be taxed in South African unless the company derives its value from South African immovable property.
The rate of interest on loans is also subject to SARB approval although interest on SARB approved loans may be paid freely. The branch or subsidiary can obtain local working capital finance without exchange control restrictions. Other financial transactions including hedging arrangements remain subject to exchange control restrictions. In practice, the Irish group is likely to finance its local business with a mixture of local working capital facilities together with equity and loan capital advanced by the parent group. It should be possible for the Irish parent to obtain tax relief against Irish profits for funds borrowed to invest whether as equity or loans into its South African business although complex conditions apply in order to obtain relief. Limits apply on the deductibility of interest for South African tax purposes under thin capitalisation provisions and proposed interest deductibility limits. The tax limits on deductible interest can apply even where the loan and its applicable interest rate have received SARB approval.
Wh hat is Transffer Pric cin ng? Transfer pricing is concerned with the pricing of transactions between connected companies and is a concern for foreign businesses engaged in activities in South Africa. Steps need to be taken to ensure that the level of profits attributable to operations in South Africa can be justified under transfer
pricing rules as South Africa has a relatively sophisticated regime for transfer pricing and this is actively reviewed by the local taxing authorities. Transfer pricing principles generally support the attribution of profits to the country where entrepreneurial risk and value added functions are located. Ireland and South Africa both follow OECD transfer pricing guidelines in setting the transfer price. However, experience suggest that the South African application of these provisions can differ from the Irish analysis, so that care should be taken to confirm that the group’s pricing policy for intra group payments for goods and services can meet both countries’ requirements. KPMG’s network of teams providing advice on Transfer Pricing Services can assist you in managing the issues and complexities that can arise on the documentation and pricing requirements for each entity that will deal with the new South African enterprise.
Wh hat em mplo oym mentt is ssues willl my bus sine ess s facce in South h Afrric ca? The key to success in managing the growth and development of international expansion are employees who can effectively execute the business’s plans in new markets. Achieving this success is likely to involve a combination of skilled mobile employees and a local work force.
A range of local work permits may apply to assignees to South Africa, depending on the length of period of the assignment and the skill set of the assignee. Foreign employees will be obliged to obtain visas and work permits to work in South Africa. Approvals required include SARB clearance on import of foreign currencies/remittances of foreign currencies to foreign bank accounts, etc. In general, an Irish resident individual paid by the Irish employer should not trigger an obligation for the employer to operate and apply South African payroll tax deductions. In these circumstances, the tax will be payable via the provisional tax system if the individual is registered as a provisional taxpayer or upon assessment of the individual’s annual income tax return by the South African Revenue Service. Non residents are taxed on South African sourced income subject to tax treaty protection. For mobile assignees, it is possible to reimburse a wide range of relocation costs without operation of local tax. There is no special local tax incentive regime for expatriates.
Wh hat tax xes s do o I nee ed to o be aw ware e off? In the diagram below we have provided a high level overview of taxes operating in South Africa. Tax Types
KPMG’s network of teams providing advice on International Expatriate Services can assist you in managing the issues and complexities that can arise on the deployment of mobile employees as well as helping you identify in a timely manner South African employee related compliance obligations.
Employer Statutory employer contributions and levies Unemployment insurance fund contributions – 1% up to certain thresholds Skills development levy – 1 % Monthly PAYE/SITE deductions
Local employees
Indirect
In general, businesses are free to hire local employees as required to meet their business needs. However, businesses may be required to address equality matters related to Black Economic Empowerment (‘BEE’) in their hiring strategy and should ensure that HR policies fit with this strategy.
Value Added Tax – 14% Customs and excise duties – varying rates Transfer duty real estate 0 - 8%
Locally resident individuals are broadly taxed on worldwide income. A 33.3% inclusion rate applies to capital gains realised by individuals which are taxed in accordance with the individual’s marginal tax rate (18% - 40%). The maximum effective tax rate applicable to capital gains realised by individuals is therefore 13.3%.
Mobile assignees When operating across borders you need to consider the legal and tax issues which may affect your employees such as whether moving will affect their entitlements and whether existing employment contracts deal with issues faced by mobile employees. This can include developing policies on assignments.
Withholding* Dividend withholding tax 15% Interest 15% (from 1 March 2014) Royalties 12% (to increase to 15% from 1 March 2014) Services 15% (from 1 March 2014) * Reduced rates of withholding taxes may be available for dividend, interest and royalty payments to non-residents under a tax treaty. The withholding tax relief available under the Ireland-South Africa tax treaty is summarised in the table overleaf.
Corporate Corporation Tax (non-mining) 28% Capital gains tax 18.6%
Other Donations tax 20% Estate duty / tax 20% Fuel levies, motor vehicle licence Electricity levies, plastic bag levies
Incandescent light bulb levies Municipal taxes on owners of real estate Airport taxes Environmental levy Road accident fund levy
Expanding into New Markets | Support for your Business
Employment taxes
Direct taxes
A skills development levy applies at a rate of 1% on payroll which is deductible from the profits of the employer for corporation tax purposes. Employers with annual payroll below certain thresholds are exempt from the levy. Employers make monthly unemployment insurance contributions at a rate of 1% of employees’ earnings up to certain income thresholds. Employers may also make contributions to benefit funds including pension, provident, retirement, medical aid, etc.
South African resident companies are subject to corporation tax in South Africa at a rate of 28% on their worldwide profits. The measure of profits broadly follows the measure of income in the financial statements of the company with capital allowances on assets replacing book depreciation on assets. Certain payments including dividends or distributions and expenditure of a capital nature is not deductible in computing the taxable profits of the company.
The employer will be allowed a deduction against taxable profits for these contributions of not less than 10% of the employees’ approved remuneration and, in practice, at levels up to 20%.
Losses may be carried forward against future profits of the business.
Employees’ income tax on salary and benefits-in-kind are collected by their employer through monthly payroll tax deductions under the PAYE system. A standard income tax on earnings (SITE) system applies to deduct tax that represents the final income tax liability on employees with earnings not exceeding a certain annual threshold.
Capital gains are subject to a different taxation regime. The effective rate of tax on capital gains is 18.6%.
Indirect taxes South African VAT applies at a rate of 14% to a broad range of supplies of goods and services. The South African VAT system works in a manner very similar to the EU VAT system.
Withholding taxes
A zero rate of VAT may apply to certain export activities provided that detailed documentation requirements are fulfilled.
Profits can be remitted by a South African branch or RO to the head office without withholding tax.
A range of customs and excise duties apply in South Africa.
Withholding tax of 12% applies to royalties. This rate can be reduced to nil under Ireland’s tax treaty with South Africa. There is no withholding tax in South Africa on interest payments to non-residents at present. From 1 March 2014, a withholding tax at 15% will apply, unless tax treaty protection is available. Interest may be paid subject to a zero withholding tax rate to an Irish resident lender under the tax treaty with South Africa. Where a dividend is paid to an Irish resident company holding at least 10% of the South African company, the dividend withholding tax rate of 15% may be reduced to 5% subject to meeting appropriate treaty clearance procedures. Withholding Taxes Source of Income/Gains
Domestic WHT Rate
Rate for Irish Corporate Investors
Royalties
12%
0%
Interest
0/15%*
0%
Dividends
15%
5/10%**
Capital gains on share sales
0%***
0%***
* From 1 March 2014 ** From 1 January 2013 *** Unless shares derive value from immovable property
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Other taxes There are a range of other taxes that need to be considered. These include a donations tax of 20% and an estate duty or tax at a rate of 20%. A Securities Transfer Tax applies to dealings in shares in certain instances. A transfer duty applies on real estate transactions not subject to VAT at rates ranging from zero to 8% depending on the value of the transaction. Fuel levies, motor vehicle licence, electricity levies, plastic bag levies, incandescent light bulb levies, municipal taxes on owners of real estate, airport taxes, an environmental levy and a road accident fund levy also apply.
Are e th here e lo ocal tax x ince enttive es ava ailable e? Relief from customs duty and VAT can apply to businesses established in industrial development zones (IDZ). These provide a variety of customs reliefs related to inward processing primarily related to goods manufactured for export. Various requirements must be met in order to meet the South African VAT zero rate applicable to supplies to non-residents. A corporation tax benefit in the form of an enhanced deduction at a rate of 150% may be available for expenditure on research and development activity. Accelerated capital allowances are available for investment in plant and machinery and on certain industrial buildings and hotels. There are also a range of urban development allowances designed to stimulate investment in and regeneration of urban areas. Taxpayers involved in infrastructural development, public/private partnerships and in investment in rolling stock may be eligible for additional tax incentive reliefs. A range of tax incentives apply to energy efficient investments including carbon reducing charges and energy expenditure allowances.
Are e th here lo ocal rep portin ng isssue es tha at I sho ould be aw ware e of? ? South African branches and South African companies are obliged to annually prepare and file returns including financial statements. These may generally be prepared in accordance with international accounting standards. However, as these accounting standards may not always align with Irish GAAP or International Financial Reporting Standards as applied in Ireland, it may be necessary to introduce additional reporting procedures to include the results of the South African business in the Irish consolidated financial statements.
How w ca an KPM MG he elp? South Africa has its own complexities in relation to business operations, regulation and taxation and we can help identify the issues for you once you have identified where you wish to expand. We are committed to helping ambitious Irish businesses expand abroad. Our approach is focussed on helping you cut through the potential complexity of expanding into new markets so you can achieve your South African business objectives as quickly and as simply as possible. Your local point of contact in KPMG Ireland can link you to the South African teams that can help your business exceed in the local marketplace.
To find d out more e on ho ow we ca an help your busiine ess su uccee ed ple ease e do ge et in n tou uch. ook k forrward d to he eariing g fro om you.. We lo Contact Ken Hardy Partner, Direct Tax KPMG in Ireland T: +353 1 410 1645 E: ken.hardy@kpmg.ie
Natasha Vaidanis Partner, International Tax KPMG in South Africa T: +27 11 647 5712 E: natasha.vaidanis@kpmg.co.za
Niall Campbell Partner, VAT KPMG in Ireland T: +353 1 410 1174 E: niall.campbell@kpmg.ie
Ferdie Schneider Partner, VAT KPMG in South Africa T: +27 82 771 4157 E: ferdie.schneider@kpmg.co.za
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