New tax regime takes effect today

MBONGENI MGUNI
Staff Writer | Friday July 2, 2010 00:00

The tax year begins today and for planning purposes, any changes to tax law are required to begin today. Having failed to present the reforms to the last sitting of the House, the government is expected to approach legislators in the winter session that begins on July 5 (Monday).The reforms - the result of an 18-month-long consultative process between Government and the private sector - have stalled over the latter's fear that millions of pula in tax credits could disappear into the system when the new regime kicks in.

High level and drawn out discussions between finance ministry, BURS and BOCCIM have revolved around the status quo of tax credits earned by the private sector and what will happen to these when the two tier system is abolished.

Until yesterday, the Income Tax Act provided for companies to offset withholding tax against additional company tax due for that tax year, with the Additional Company Tax (ADT) paid being carried forward as a credit for five years, in the event that dividends are not declared.

Private sector players fear that the new regime means tax credits earned from ADT paid will disappear into the system.

This week, senior finance ministry officials said Minister Kenneth Matambo was due to approach Parliament after its opening next week to seek retroactive approval of the new tax regime. 'The Minister will make an announcement in Parliament and hopefully the amendments will take effect retroactively,' one official said. It is understood that along with the amendments to the Income Tax Act, the finance ministry will attach transitional measures giving the private sector time to use up their credits and conform to the new regime.

'We are in discussions to come up with a transitional period to help companies with their accumulated ADT,' the official continued. 'Some feel we should give them 12 months for the transitional period while others are saying six months. The relevant amendments are being drafted.

'However, there are other measures that they can implement. They can issue debentures if they do not have cash to declare dividends. This is something that we are still discussing as a ministry.'

The officials said the transitional measures would accompany the amendments to the Income Tax Act, for Parliament's approval. 'The private sector has no need to panic,' another official said. 'The idea is not to inconvenience or deny them anything.

'When this process began, it was influenced by an outcry that the tax laws were complex and there was need to simplify them to a one- tier system. Through the new regime, we will no longer link taxation of dividends with taxation at company level. We are trying to de-link the two.'

The Executive Director of BOCCIM, Maria Machailo-Ellis, said the private sector federation was scheduled to meet the Minister of Finance next Thursday on the various issues concerning the new tax regime.

'We have not heard anything and we have not received any notification from the ministry,' she said. 'We expect the reforms, as proposed in the Budget, to come into effect on Friday. What we need to discuss are the overall reforms and that we have been engaged in.'

Machailo-Ellis said BOCCIM has proposed a transitional mechanism 'to make sure companies do not lose out'.'It's a question of the length of the transitional period,' she said. 'But this also depends on whether Government agrees with that or they have their own idea. The new tax regime will, however, go ahead.'

Finance and BURS officials say the tax reforms follow the most extensive consultation ever done by Government on tax. Prior to these amendments, a multi-ministerial Tax Review Committee essentially decided on reforms and formulated the relevant amendments.

The new tax regime, which is expected to improve the country's investment climate, will not affect IFSC-registered and manufacturing companies which will continue paying a company rate of 15 percent.