Currently, international shipping transport conducted by South African companies is subject to a corporate income tax rate of 28%, with limited incentives such as a depreciation allowance for capital investments. Internationally, the trend is towards reduced taxation for shipping companies through a tonnage tax, or a total exemption for shipping activities. In light of these trends, a new shipping tax regime is proposed by the bill to provide tax relief for qualifying South African shipping companies.
The proposed relief will apply to an "international shipping company", being a South African resident company that holds shares in one or more ships that are registered in South Africa in terms of the Ship Registration Act 58 of 1998, and used in the international transportation of passengers or goods for reward (South African ship).
The receipts and accruals derived by the international shipping company from the operation of a South African ship will be exempt from income tax. Furthermore, capital or revenue gains or losses realised from the sale of a South African ship engaged in international shipping will be disregarded. However, as a result of the income and capital gains tax exemptions, South African ships will no longer be depreciable. Other ships will remain depreciable over a fiveyear period at a rate of 20% per year.
Any dividend paid by the international shipping company will be exempt from dividends tax, provided that the dividend is derived from income generated from the operation of a South African ship. Similarly, any interest paid to a foreign person by the international shipping company in respect of a debt used to fund the acquisition, construction or improvement of a South African ship will be exempt from the withholding tax on interest (the 15% interest withholding tax will become effective on January 1 2015).
The officers and crew of a South African ship will further be exempt from tax on their salaries, irrespective of the number of days spent abroad.
In respect of a foreign company which constitutes a controlled foreign company (CFC) (by virtue of the extent of its South African resident shareholders), it is proposed that a South African ship engaged in international traffic will specifically constitute a "foreign business establishment" for purposes of that exemption in the CFC rules. Income attributable to such a ship will, therefore, effectively not be taxable in the hands of the South African resident shareholders.
In summary, these amendments will effectively provide international shipping companies operating South African ships with exemptions from income tax, capital gains tax, dividends tax and the crossborder withholding tax on interest. In terms of the bill, the proposed amendments will come into operation on April 1 2014 and will be effective for years of assessment beginning on or after that date.
It should be noted that the bill may still be amended as it passes though both Houses of Parliament, but to date we have not often seen this happen.
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