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South Africa has a modified worldwide system of taxation. In order to alleviate double taxation, a credit is allowed for foreign taxes paid. Certain income, like foreign services income remunerated by entities resident in other African nations, may be eligible for a unilateral credit that operates as an exemption of tax on this income. Dividends received by a South African company from a 10 %-owned foreign company may be eligible for a full or partial exemption from tax. South Africa addresses harmful tax competition through transfer pricing, controlled foreign corporation provisions, and tax information exchange agreements. It has instituted tax measures to attract economic development, primarily in the areas of manufacturing, research and development, foreign film and television, and industrial innovation.
South Africa has a modified worldwide system of taxation. Although residents are taxed on worldwide income, limited types of income arising from foreign sources may be exempt from tax. To alleviate double taxation, a credit is allowed against South African tax liability for foreign taxes paid. The credit is limited to the amount of the South African tax that would have been paid absent the credit. A credit is also available in certain circumstances for foreign taxes paid on South African source income. This is a unilateral credit allowed South African residents in the special case in which the foreign country (in particular, other African nations) imposes a tax on services provided from South Africa when paid by the foreign country’s resident.
Foreign dividends received by a South African company may be eligible for a full or partial participation exemption. To qualify for the exemption, the recipient must hold at least 10 % of the equity interest and voting rights in the distributing company. If a foreign dividend is paid in cash on a share listed in the Johannesburg Securities Exchange (JSE), the dividend is exempt from corporate tax, but generally subject to a South African tax on dividends.
While there are no express anti-harmful tax competition rules, tax avoidance is addressed through transfer pricing and controlled foreign corporation provisions. These rules discourage investment in harmful tax regimes. In addition, there are no anti-tax haven rules. The absence of double tax agreements with these regimes has eliminated bilateral relief. This has been addressed by recent negotiation of tax information exchange agreements. Although it is typically viewed as a tax haven, Mauritius has had a favourable double tax agreement with South Africa. It has been updated, but the revised version has not yet entered into force.
The Southern African Development Community (SADC), of which South Africa is a member, has acted to cooperate in tax matters and to harmonize the disparate tax regimes. A Memorandum of Understanding (MOU) to effect these changes, issued in 2002, encourages a common approach to tax incentives. It also has identified factors, similar to those described by the OECD, that indicate the presence of harmful tax competition and recommends avoidance of those types of regimes.
South Africa participates in the OECD Global Forum. As a result it has taken action to align its tax system with international trends and norms.
South Africa is party to more than 70 double tax agreements and 7 Tax Information Exchange Agreements (TIEAs). Exchange of information is by request or, occasionally, spontaneous. It has positioned itself to engage in automatic exchange, having joined a pilot program. It has also entered into an Inter-Governmental Agreement (Model 1 IGA) with the U.S. under FATCA.
South Africa’s Department of Trade and Industry (DTI) is involved in supporting African regional economic integration and development. It works with regional organizations to develop the free trade area and to extend African integration.
South Africa has instituted measures to attract economic development. Film production and post-production (primarily foreign film and television, manufacturing, and research and development) are activities which benefit from special allowances that reduce the effective tax rate. Other special regimes are provided for industrial innovation. Some of these regimes are provided by legislation and managed by the South African Revenue Service. Most are managed by grant by the DTI under a process that is not transparent.
South African companies and branches of foreign companies are taxed at a flat rate of 28 %. Small businesses are taxed at reduced rates.
South Africa has entered into a substantial number of bilateral and multilateral trade and investment agreements.
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