New bill to regulate tax on intellectual property transfers

South Africa’s draft Revenue Laws Amendment Bill, released for comment in September, includes provisions designed to increase the difficulty of transferring intellectual property to other countries, especially those with lower tax regimes.

Currently, a South African entity can develop intellectual property (e.g. in the form of a patent or patent application) and transfer it to a foreign holding company, which can then charge a royalty to the South African entity for use of the intellectual property. The royalty payments are tax-deductible and the receipts by the foreign company are subject to a lower tax. The royalties are then transferred back to the South African entity, for example in the form of tax-free dividends. The bill proposes that such royalty payments for the use of intellectual property will no longer be tax deductible if the intellectual property was previously owned or developed by a South African entity.

Also, the South African Revenue Service (SARS) can currently adjust the price of cross-border royalties if the parties are linked. Taxpayers circumvent this restriction by entering into transactions with foreign entities that are more than 50% owned by an independent third party. The Bill proposes reducing this 50% threshold to 20%.