The fifth report from the Katz Commission on a source or residence-based tax system will be made available to the public this week. It will add substance to the bare details described in the Minister of Finance's Budget speech in mid-March.
The need to resolve the issue of a source or residence basis for taxation is related to the prospect of South African residents being able to invest more freely overseas.
It is no secret that many South Africans have funds offshore in contravention of exchange control regulations. These funds have been smuggled out through various methods ranging from travel allowances to more elaborate schemes.
In discussions after this year's Budget, the possibility of an amnesty to encourage people to declare these funds was raised. These funds would then be taxable, but no longer illegal. However, no concrete proposals have followed.
James Cross, deputy governor of the Reserve Bank, told Personal Finance there had been no progress on the amnesty issue. "It is difficult to say if anything will be set up," he said. "It is up to the Minister of Finance to decide."
South Africans can repatriate their overseas funds, but income on these funds would be taxed in South Africa, Cross said.
The latest Katz Commission report recommends that active income, defined as business profits arising from a permanent establishment, should continue to be taxed at source, in other words according to the tax laws of the government of the country where the income is generated.
However, passive or other income should be taxed on a residence basis, which means it should be taxed according to the laws of the country in which the recipient of the money resides.
The Katz Commission report also makes recommendations for interest income.
It suggests that the source of interest be defined as where the credit or funds generating the income are used. Interest generated on investments made in South Africa by foreign portfolio investors should continue to be exempt from tax.
The commission also recommends anti-avoidance legislation be extended to prevent taxpayers from re-characterising taxable passive income into tax-exempt income, or deferring the liability to pay tax on possible foreign income.