South Africa: Proposed amendment limiting loss carryforwards, implications for foreign tax credits

The “Draft Taxation Laws Amendment Bill 2021” (28 July 2021) includes proposed amendments to revise the rules relating to the use of assessed losses by companies.

The loss carryforward rules are regulated by section 20 of the Income Tax Act 58 of 1962. The draft bill—in an attempt to broaden the corporate income tax base—would amend section 20 to permit companies only to set-off the balance of an assessed loss carryforward to the extent that the set-off does not exceed 80% of the taxable income determined for that year (before taking into account the assessed loss).

Under the proposal, taxpayers would be subject to tax on a minimum of 20% of their taxable income calculated for any year, irrespective of the quantum of any assessed loss brought forward. 

A rebate for foreign taxes on income as calculated under section 6quat(1A) of the income tax law must be deducted from “normal tax” if any income from a foreign source as listed in section 6quat(1) is included in a resident’s taxable income.

“Taxable income” is defined in section 1(1) and consists of the aggregate of, among others, the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II. It follows that when the amounts that qualify for a deduction exceeds income, then taxable income will be a negative amount. Part I of Chapter II includes section 20 which deals with assessed losses.

Consequently, an assessed loss may still exist even when all amounts from a foreign source have been included in taxable income. Accordingly, assuming all the other requirements of the Income Tax Act are met, the foreign tax would potentially qualify for a rebate although not in that particular year. The reason is that section 6quat(1B)(a) provides that the rebate cannot exceed an amount which bears to the total normal tax payable the same ratio as total foreign taxable income bears to total taxable income. If taxable income for a year of assessment is a negative figure, normal tax for that year is nil (zero), and the amount of the rebate in that year of assessment is also nil. However, it will be possible for a person to carry forward the balance of excess qualifying foreign taxes determined under paragraph (ii) of the proviso to section 6quat(1B)(a) to the immediate succeeding year of assessment to potentially qualify for a rebate in that year.

• In terms of the proposed amendment to section 20, as soon as a company has taxable income in any particular year, tax would be payable on 20% of that taxable income with only 80% of the taxable income capable of being set-off against any available assessed loss carried forward from the previous year.
• On the basis that only 80% of taxable income may be set-off against an available assessed loss, there would be taxable income that would be subject to normal tax against which a foreign tax rebate may be claimed, subject to meeting the various requirements in section 6quat of the Income Tax Act.

Accordingly, there could be an opportunity for taxpayers to accelerate the use of all or part of their foreign tax rebates that were carried forward from previous years against the normal tax created on the 20% taxable income. This may also alleviate the position when certain tax credits may become redundant after the lapse of seven years.

The proposed effective date for the amendment is 1 April 2022, with the amendment being applicable for years of assessment commencing on or after that date. The limitation would apply to assessed losses generated prior to the effective date as well as those arising after that date.

Read an August 2021 report [PDF 270 KB] prepared by the KPMG member firm in South Africa