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Katz report offers few surprises
TAX REFORM
THE Katz Commission released its fifth interim report on Friday, offering few surprises apart from the reintroduction of withholding tax on interest flowing from South Africa. The commission also proposed to tax residents on investment and royalties earned abroad (see BT Money). The commission's report represents a crucial move from purely source-based taxation to a blend of source- and residence-based tax and brings the country in line with international taxation trends. Commission chairman Michael Katz said on Friday the recommendations were designed to recognise South Africa's place in the international arena. The report says since April 1994 South Africa has rapidly rejoined the global economy and this has created the need to analyse international dimensions of the tax system. In his report, Katz says the SA system was developed on a source basis. The commission now recommends that active income - derived from direct, operational activity - continue to be taxed on a source basis, but that passive income - income derived from passive forms of investment - be taxed on a worldwide basis. This means that SA corporates or individuals should pay SA tax on their passive income, irrespective of the source. The commission says as long as SA tax rates are effectively higher than most of its trading and investment partners, taxing on a residence basis will see SA companies compete in foreign countries at a major competitive disadvantage as they will pay more tax in those countries than the host or even third-country competitors. At the same time, by taxing active income on source, foreign companies operating in South Africa will pay the same tax as local competitors. The recommendations on passive income "will protect the tax base from possible erosion when exchange controls are lifted. Capital has become highly mobile and passive income can be relocated with little inhibition in pursuit of tax objectives rather than financial or commercial ones." Tax experts said they were surprised to see the reintroduction of a withholding tax on interest flowing from a SA source to a non-resident who is a connected party. Katz said: "We are now saying that with the relaxation of exchange control and now that we are able to invest abroad, we are wanting to protect the tax base of South Africa." The commission said implementation of its recommendations "will provide a unique opportunity to ensure that our law is compatible with international conventions and terminology". This will enable foreigners to quickly understand the system, "equip domestic business to plan in a more familiar environment" and both taxpayers and authorities will be able to rely on international expertise to understand and implement tax law. The law will be compatible with international norms and will be able to easily absorb changes internationally. Tax experts said there were few surprises in the report, other than the withholding tax. One said the report was sensible and pragmatic "and totally appropriate to SA and its need to lock into international concepts" ý See BT Money
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