Image: Gallo-Thinkstock

No Caption

The Budget delivered important news that could pave the way for more investment into Africa by removing some of the barriers, he said.

Wednesday's Budget announced a surprise dividend withholding tax increase to 15% from an expected 10%, while capital gains tax for companies also goes up.

"It is the first time I've seen tax rates go up under the ANC," said Joubert in reaction.

The Budget Review document said that to enhance equity, effective capital gains tax rates would be increased with the inclusion rate for individuals and special trusts increasing to 33.3%, shifting their maximum effective capital gains tax rate to 13.3%. It said the inclusion rate for other entities would increase to 66.6%, raising the effective rate for companies to 18.6% and for other trusts to 26.7%.

Joubert said the dividend withholding tax was supposed to be 10%, while all withholding taxes on royalties will be 15% from 12%.

Withholding tax on foreign inbound investors, where interest is expected, is set to go to 15% - though this tax is not effective yet and will only apply from 2013. But the current rate in the legislation is 10%.

"This is important for intragroup financing. It is quite investor unfriendly," said Joubert.

But interest deductions for buying a 70% share in another company could potentially see qualification for an interest deduction on money borrowed, he pointed out, “which is quite beneficial for business”.

Joubert, however, does not feel the 15% change would necessarily crimp back on merger and acquisition activity as foreigners were often not subject to CGT on shares in SA anyway.

Steven Kilfoil, director Grant Thornton Corporate Finance said, however, an increase in capital gains tax for individuals and trusts could result in a slight decline in transactions in the short term, as sellers’ after-tax receipts will be lower than expected.

"This combined with possible targeting of leveraged transactions, could scupper a number of M&A transactions, particularly in the private equity and BEE space."

But one area that could be beneficial is changes to promote investment into Africa.

"At the moment, if there's too much management assistance from SA, SA regards the foreign company as effectively managed from here and effectively an SA tax resident, pulling taxable income into the South African tax net," explained Joubert.

"The Budget said this causes difficulties as with investment into Africa you need a lot of services for operational reasons." So Treasury intends to try to remove dual residence rules if the tax in the foreign country is "roughly on a par with SA".

"I think that will help quite a lot with SA-based companies. They are trying to encourage SA as a springboard into Africa," said Joubert.

This could also apply to local managers of foreign funds via a "carve out" special exception so that it does not give rise to worldwide taxation for that foreign company.

"Local fund managers have lost out because of the tax problem, so this is a way to remove a barrier to investment in and from SA," said Joubert.

Go to Budget 2012 Special Report