27. May 2013 · Comments Off · Categories: Tax News · Tags: , ,

TAX SOUTH AFRICA

South Africa Puts Tax Compliance As Priority

In their parliamentary speeches regarding the vote on South Africa's 2014 Budget, both Finance Minister Pravin Gordhan and Deputy Finance Minister Nhlanhla Nene stressed the priority the National Treasury is giving to an improvement of tax …
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Payments from the franchisee to the franchisor generally include:

- an initial franchise fee
- franchise renewal fees
- franchise service fees or royalties
- advertising fees
- training fees.

Such payments can be deducted against income earned if it is in the production of income and not of a capital nature (Section 11(1)(a) of the Income Tax Act).

Payments that are of a capital nature can not be deducted for income tax purposes, but it is important to keep good records of capital expenses, as it will become relevant in determining the capital gains tax implications of a resale of the franchise.

Capital or Revenue?

Payments that form part of the cost base for the franchise business, for example expenses related to the establishment of a business and initial training, are of a capital nature and can not be deducted as an expense against income.

In the High Court case of Seeff Properties cc v CIR (60 SATC 407) , for example, the court held that a payment for early cancellation of a franchise agreement was expenditure of a capital nature since the payment related to the acquisition of an income-producing asset, rather than being part of the cost of performing the taxpayer’s income earning operations.

In CSARS v Kajadas Cosmetics (Pty) Ltd (64 SATC 200), the court held that an annual license fee to acquire the exclusive distribution right of a product for a lengthy period over a vast area was a capital expense. Such payments are regarded as related to the establishment of a business and the court found that the exclusive distribution rights formed part of the company’s income earning machine and as the license fee was more closely related to the company’s income earning machinery than to its income earning operations, it was of a capital nature.

The importance of establishing the true nature of payments made to the franchisor is illustrated in Tax Court Case No 1738 (65 SATC 37), where it was found that the initial fee paid by franchisees were not of a capital nature.

In terms of the franchise agreement in this case, the initial fee was “a one-time entry charge payable in return for the grant to the Franchisee of the right to use the Identifications and Know-how”. The agreement also made it clear that the ownership of the Identifications and Know-how at all times belong to the franchisor and is not transferred to the franchisee.

The gross income definition in the Income Tax Act specifically provides that any amounts received for the right to use a trade mark (par g) and for know-how (par gA) are included in taxable income.

Recurring payments of royalties or levies for the use of intellectual property, head office expenses such as administration, advertising and technical support, are of a revenue nature and can be deducted against the annual income of the franchisee for income tax purposes. Such fees form part of the recipient’s gross income and are therefore subject to income tax in the franchisor’s hands.

The supreme court confirmed this principle in 2007 when it overturned a well-publicised High Court judgement against BP. (BP Southern Africa (Pty) Ltd v CSARS [69 SATC 79])

In this case the payments were made on a regular annual basis and BP SA did not acquire ownership of or any enduring right to the trademarks but merely paid for their use. BP SA’s parent company remained the sole rightful owner of the licensed marks, and all rights and goodwill attaching or arising out of their use accrued to the benefit of the parent company. Upon termination of the license agreement, BP SA would no longer be entitled to use the name “BP” or any of the licensed property.

The court held that the annual license fees that BP paid its parent company were deductible under section 11(a) as a revenue expense, because it was incurred in the course of a trade, was related to the running of the business and produced no enduring benefit beyond the end of the year.

It is therefore crucial to pay attention to the way in which payments are defined in the franchise agreement, as this will influence the tax treatment thereof. A franchise fee may represent expenses of both a capital and revenue nature and the distinction should be made clear in the way the agreements are worded.

Section 11(f)

Section 11(f) of the Income Tax Act provides that a premium or like payment for the use of patents, designs, trade marks, copyrights or similar assets in the course of a trade is deductible for income tax purposes if the payment is to a South African resident. In the case mentioned above, BP SA argued that if the license fees were not deductible in terms of section 11(a), they would be deductible under section 11(f) even if they were capital in nature. The court did not comment on this argument, so it is still unclear whether section 11(f) deductions can include amounts of a capital nature.

Section 11(gD)

Section 11(gD) of the Income Tax Act allows for a deduction of the cost of a license if it is purchased from the Government, a provincial administration or municipality and if it relates to gambling, telecommunications, or the production or distribution of petroleum.

Section 23I

Section 23I of the Income Tax Act is an anti-avoidance provision aimed at disallowing a deduction for royalties paid on intellectual property that was at some stage owned or developed by the person paying the royalties (or any of its connected persons), if the royalties received is not taxable in South Africa as well.

Withholding tax

Franchise fees (royalties) paid to non-resident franchisors are subject to withholding tax. It is the responsibility of the franchisee to calculate and pay the withholding tax over to SARS. The rate of the withholding tax depends on the relevant double taxation agreement between South Africa and the country in which the franchisor is a tax resident.

TAX SOUTH AFRICA

Living in south africa and wanting to import a winnebago for personal pleasure will require plenty of tax. Just how much exactly? A new winnebago costs $ 304500.

Answer by Chas
Try the South African embassy if you’re currently in the US. No one here will know.

Answer by Go AZ
How difficult will it be for you to get the replacement parts that you need? Is 50 amp what is used in SA for motor homes?

Check out the difference between new and used. There’s usually a break-in period for the coaches. Used can be a coach that has been licensed to one person, ans then sold to a second party. (Import laws might be picky about it)

I think Prevost is Volvo

http://motorhome.prevostcar.com/

Check with your import agency, as it will be them who determine the taxes. If they give you figures, get them in writing, signed or initialed.

TAX SOUTH AFRICA

Payments from the franchisee to the franchisor generally include:

- an initial franchise fee
- franchise renewal fees
- franchise service fees or royalties
- advertising fees
- training fees.

Such payments can be deducted against income earned if it is in the production of income and not of a capital nature (Section 11(1)(a) of the Income Tax Act).

Payments that are of a capital nature can not be deducted for income tax purposes, but it is important to keep good records of capital expenses, as it will become relevant in determining the capital gains tax implications of a resale of the franchise.

Capital or Revenue?

Payments that form part of the cost base for the franchise business, for example expenses related to the establishment of a business and initial training, are of a capital nature and can not be deducted as an expense against income.

In the High Court case of Seeff Properties cc v CIR (60 SATC 407) , for example, the court held that a payment for early cancellation of a franchise agreement was expenditure of a capital nature since the payment related to the acquisition of an income-producing asset, rather than being part of the cost of performing the taxpayer’s income earning operations.

In CSARS v Kajadas Cosmetics (Pty) Ltd (64 SATC 200), the court held that an annual license fee to acquire the exclusive distribution right of a product for a lengthy period over a vast area was a capital expense. Such payments are regarded as related to the establishment of a business and the court found that the exclusive distribution rights formed part of the company’s income earning machine and as the license fee was more closely related to the company’s income earning machinery than to its income earning operations, it was of a capital nature.

The importance of establishing the true nature of payments made to the franchisor is illustrated in Tax Court Case No 1738 (65 SATC 37), where it was found that the initial fee paid by franchisees were not of a capital nature.

In terms of the franchise agreement in this case, the initial fee was “a one-time entry charge payable in return for the grant to the Franchisee of the right to use the Identifications and Know-how”. The agreement also made it clear that the ownership of the Identifications and Know-how at all times belong to the franchisor and is not transferred to the franchisee.

The gross income definition in the Income Tax Act specifically provides that any amounts received for the right to use a trade mark (par g) and for know-how (par gA) are included in taxable income.

Recurring payments of royalties or levies for the use of intellectual property, head office expenses such as administration, advertising and technical support, are of a revenue nature and can be deducted against the annual income of the franchisee for income tax purposes. Such fees form part of the recipient’s gross income and are therefore subject to income tax in the franchisor’s hands.

The supreme court confirmed this principle in 2007 when it overturned a well-publicised High Court judgement against BP. (BP Southern Africa (Pty) Ltd v CSARS [69 SATC 79])

In this case the payments were made on a regular annual basis and BP SA did not acquire ownership of or any enduring right to the trademarks but merely paid for their use. BP SA’s parent company remained the sole rightful owner of the licensed marks, and all rights and goodwill attaching or arising out of their use accrued to the benefit of the parent company. Upon termination of the license agreement, BP SA would no longer be entitled to use the name “BP” or any of the licensed property.

The court held that the annual license fees that BP paid its parent company were deductible under section 11(a) as a revenue expense, because it was incurred in the course of a trade, was related to the running of the business and produced no enduring benefit beyond the end of the year.

It is therefore crucial to pay attention to the way in which payments are defined in the franchise agreement, as this will influence the tax treatment thereof. A franchise fee may represent expenses of both a capital and revenue nature and the distinction should be made clear in the way the agreements are worded.

Section 11(f)

Section 11(f) of the Income Tax Act provides that a premium or like payment for the use of patents, designs, trade marks, copyrights or similar assets in the course of a trade is deductible for income tax purposes if the payment is to a South African resident. In the case mentioned above, BP SA argued that if the license fees were not deductible in terms of section 11(a), they would be deductible under section 11(f) even if they were capital in nature. The court did not comment on this argument, so it is still unclear whether section 11(f) deductions can include amounts of a capital nature.

Section 11(gD)

Section 11(gD) of the Income Tax Act allows for a deduction of the cost of a license if it is purchased from the Government, a provincial administration or municipality and if it relates to gambling, telecommunications, or the production or distribution of petroleum.

Section 23I

Section 23I of the Income Tax Act is an anti-avoidance provision aimed at disallowing a deduction for royalties paid on intellectual property that was at some stage owned or developed by the person paying the royalties (or any of its connected persons), if the royalties received is not taxable in South Africa as well.

Withholding tax

Franchise fees (royalties) paid to non-resident franchisors are subject to withholding tax. It is the responsibility of the franchisee to calculate and pay the withholding tax over to SARS. The rate of the withholding tax depends on the relevant double taxation agreement between South Africa and the country in which the franchisor is a tax resident.

The South Africa airline industry is currently being strangled by ever-increasing operating costs on the one hand and rapidly escalating government taxes and parastatal charges on the other.

On the cost side, the fuel price has increased by more than 70% and this cost item currently constitutes between 30% and 40% of an airlines direct operating cost.

On the tax side, the newest increase to befall the airline industry is an increase in the so-called Air Passenger Tax (APT) .The Minister of Finance recently announced a dramatic 27% increase in the APT on international flights and a 25% APT rise for regional flights with effect from October 2014.

The APT is a tax that has existed since 2000, the proceeds of which are paid into the National Revenue Fund. This tax is collected from passengers by the airlines as part of the ticket fare and on international flights the APT currently amounts to R150 and on regional flights, R80.

The obligation for the payment of the APT is created in terms of the Customs and Exercise Act. This Act provides that an Air Passenger Tax is chargeable for every passenger departing from an airport in South Africa to destination outside of South Africa.

These financial; increases, like that of the APT, all add to the cost of an air ticket coming  at a time when the air travel market is extremely price-sensitive at South Africa consumers wrestle with the greatest economic downturn in eighty years.

In response to the announcement of the increase in the APT, Chris Zweigenthal, the CEO of the Airlines Association of SA (AASA), issued the following statement.”AASA notes with great concern, the proposed increases in the Air Passenger Tax .The airline industry is currently struggling with the impact of cost increases brought about by tariff increases such as those from State-owned enterprises like ACSA, still to be finalized through the regulatory process and increased ATNS charges as well as escalating fuel costs.

“The volatile state of the industry means that further costs are likely to be absorbed by the airlines themselves.

We believe that the proposed tariff increases need to be reviewed urgently to ensure the sustainability of the airline industry in South Africa.

AASA has also written a letter to the Minister of Transport to protest against the ever-increasing service charges, and taxes which impact on the total cost of an airline ticket which in all probability will have to be absorbed by the airlines themselves.

As nearly all government services to the aviation industry operate on the basis of user pay and that ACSA dividends have, since 1993,contributed large amounts to the national fiscus,the lumping of a tax like the APT on air travel in the first instance is unfair and an increase therein is definitely unwarranted.

Some in the airline industry also question the very legality of imposing the APT in the first place. Those that oppose the APT on legal grounds believe that Article 15 of the Chicago Convention outlaws this very type of tax.

Article 15 of the Convention contains a sentence that reads: “No fees, dues or other charges shall be imposed by any contracting state in respect of the right to transit over or entry into or exit from its territory.”

In order for the APT to fall within the prohibition of Article 15 there are two questions that must be answered in the affirmative.

The first question is whether a government tax can be equated with a “fee, due or charge” as outlawed in Article 15?

The second question is a matter of whether the APT is charged in respect of “the right to transit over or enter or exit from a country’s territory”.

With respect to both questions, in the case of the South Africa APT, the most probable answers are in the affirmative. On  the meaning of the words “fees dues or charges”, although the Chicago Convention does not define these words, the Russian and Spanish texts of the Convention use words  in Article 15 that translate unequivocally as “taxes”.

Also, the practice in English is to regard the word “due” as a synonym for a “tax” .This all indicates that a due is synonymous with a tax. The fact that the APT is called a tax and not a due is immaterial.

Regarding the second question, the wording of section 47B of the Customs and Exercise Act clearly indicates that the ATP is levied on passengers carried on aircraft departing, namely: exiting South Africa. It is also noteworthy that the APT is only levied on cross-border flights and is not applicable to domestic carriage by air.

Admittedly, South Africa is not the only country to charge an APT .There is currently about10 States that charge an Air Passenger Duty/Tax.

However, given that the Chicago Convention currently has some 190 state parties, the small number of States levying APTs indicates that there is a lot of doubt that the practice of the 10 States is legal in terms of the Convention.

As indicated, the legality of the APT is so questionable in light of the prohibition contained in Article 15 of the Chicago Convention, that were the airlines to challenge the APT in court, their chances of success are extremely good.

However, rather than proceeding down the rocky road of litigation, it would seem sensible for Government and the airlines to agree a settlement with respect to the APT that suites the interests of both parties.


TAX SOUTH AFRICA

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