Upload File

south africa: property sector tax alert - foreign exchange · property sector tax alert - foreign...

  • Home
  • Documents
  • South Africa: Property Sector Tax Alert - Foreign Exchange · Property Sector Tax Alert - Foreign Exchange Tax consequences of foreign exchange movements amid the COVID 19 crisis
3
May 2020 Property Sector Tax Alert - Foreign Exchange Tax consequences of foreign exchange movements amid the COVID 19 crisis for Real Estate Investment Trust The outbreak of the COVID-19 pandemic has had a significant impact on the global foreign exchange (forex) market, which has been reflected through increased volatility in forex. In addition to the adverse effect that COVID-19 has had on the South African economy, ratings agency Moody’s downgrade of South Africa at the end of March 2020 also adversely impacted the Rand against major other currencies. The volatility in the forex rates is evident from the recent fluctuations in the Rand/Dollar exchange rate. The strength of the Rand varied from R14.75/$1 at the end of January 2020 to just under R18.00/$1 at the end of March 2020. This is a weakening of the Rand against the Dollar of 22% in only 3 months from January 2020 to March 2020. What are the tax implications Section 24I of the Income Tax Act [1] , (the Act) governs the income tax treatment of forex gains or losses made in respect of both realised and unrealised forex transactions. Simplistically unrealised forex gains and losses are treated as taxable or deductible unless the deferral provisions [2] apply. In the context of deferred unrealised forex differences a cash event will only occur upon settlement of the exchange item. Assuming the taxpayer is not in an assessed loss position, there is a tangible cash tax impact in instances where the deferral provisions are not applicable to unrealised gains or losses. This impact is magnified in periods of forex volatility. This is especially relevant where an unrealised forex gain is recognised which does not result in any cash inflow but the same non-cash gain creates taxable income which results in a tax cash outflow. The converse is however also true for an unrealised forex loss which does not result in any cash outflow but the same non-cash loss creates a reduction in taxable income and tax cash payable. Impact of unrealized forex on a Real Estate Investment Trust (REIT)

Upload: others

Post on 05-Jun-2020

4 views

Category:

Documents


0 download

Report

TRANSCRIPT

  • May 2020

    Property Sector Tax Alert - ForeignExchange Tax consequences of foreign exchange movements amid the COVID 19 crisis for RealEstate Investment Trust

    The outbreak of the COVID-19 pandemic has had a significant impact on the global foreign exchange(forex) market, which has been reflected through increased volatility in forex.

    In addition to the adverse effect that COVID-19 has had on the South African economy, ratings agencyMoody’s downgrade of South Africa at the end of March 2020 also adversely impacted the Randagainst major other currencies.

    The volatility in the forex rates is evident from the recent fluctuations in the Rand/Dollar exchange rate.The strength of the Rand varied from R14.75/$1 at the end of January 2020 to just under R18.00/$1 atthe end of March 2020. This is a weakening of the Rand against the Dollar of 22% in only 3 monthsfrom January 2020 to March 2020.

    What are the tax implications

    Section 24I of the Income Tax Act[1], (the Act) governs the income tax treatment of forex gains orlosses made in respect of both realised and unrealised forex transactions. Simplistically unrealisedforex gains and losses are treated as taxable or deductible unless the deferral provisions[2] apply. Inthe context of deferred unrealised forex differences a cash event will only occur upon settlement of theexchange item.

    Assuming the taxpayer is not in an assessed loss position, there is a tangible cash tax impact ininstances where the deferral provisions are not applicable to unrealised gains or losses. This impact ismagnified in periods of forex volatility.

    This is especially relevant where an unrealised forex gain is recognised which does not result in anycash inflow but the same non-cash gain creates taxable income which results in a tax cash outflow.The converse is however also true for an unrealised forex loss which does not result in any cashoutflow but the same non-cash loss creates a reduction in taxable income and tax cash payable.

    Impact of unrealized forex on a Real Estate Investment Trust (REIT)

    From: Rea, Robert-WASH CTo: Grams, John W; Valladares, Christine MSubject: may 5/ need a PDF for South AfricaDate: Tuesday, May 5, 2020 8:41:57 AMAttachments: image001.png

    image003.pngimage006.pngimage002.png

     

    mailto:[email protected]:[email protected]:[email protected]

  • There are two key aspects REITs should consider:

    1. Cash flow impact on the amount the REIT is able to distribute as a qualifying distribution

    In terms of the gross income provisions of the Act, read with section 24I of the Act, a REIT orControlled Company, (CC), must include both realised and unrealised forex gains and losses in thecalculation of its taxable income. However, dividends/qualifying distributions (QDs) the REIT declaresand pays to its investors are generally limited to actual cash the REIT/CC has earned, and thereforewould exclude unrealised forex differences.

    Accordingly, there may be a mismatch between the timing of the inclusion of the unrealised forex gainin the taxable income and the corresponding inclusion of the forex gain in the QD. This mismatch mayresult in the REIT or CC not being able to make a large enough QD to reduce its taxable income tozero, applying the REIT provisions of the Act[3]. In the subsequent year when the forex gain isrealised, the REIT or CC may have surplus cash from which limited/no benefit will arise by way of aQD deduction, as the deduction is limited to taxable income, which will exclude the prior yearunrealised forex gain now realised.

    The timing mismatch in respect of an unrealised forex loss may result in the REIT or CC having asurplus amount of cash from which limited/no benefit will arise by way of a QD deduction, as thededuction is limited to taxable income (i.e. may not create an assessed loss ). In the subsequent yearonce the forex loss is realised, the REIT or CC may not be able to make a large enough QD to reduceits taxable income to zero, which will exclude the prior year unrealised forex losses now realised.

    2. Impact of forex gains on the 75% qualifying distribution assessment

    Given the instability of the Rand, many REITs/CCs entered into hedging instruments which result inforex gains and losses, both realised and unrealised. The recent significant volatility in the Rand mayresult in REITs/CCs having large forex gains. Forex gains which do not fall within the rental incomedefinition (recently amended in the 2019 Taxation Laws Amendment Act) may have a negative impacton the 75% QD assessment.

    The impact is such that both realised and unrealised forex gains are included in gross income but maynot form part of the rental income definition. The result is that there may be a risk that the REIT/CCmay not meet the 75% rental income to gross income ratio requirement. In turn this may result in theREIT/CC not being able to claim the dividend as a qualifying distribution deduction and ultimately theREIT/CC may be in a taxable income position.

    Careful consideration needs to be given as there is a risk that REITs/CCs may fall prey to the potentialadverse consequences noted above.

    Other considerations

    Apart from the matters highlighted above you would also need to consider:

    — The VAT implications of the above scenarios (refer to the attached VAT Alert)— Whether there are any aspects to consider from a Corporate Law perspective— The treatment and tax consequences of cross currency and interest rate swaps. 

    How can we help?

    We are able to assist you with determining the appropriate tax consequences and preferred approachbased on your specific circumstances.

     Contact us 

    Joubert BothaDirector, KPMG Tax and LegalEmail: [email protected] M: +27834567734 

    Creagh SuddingAssociate Director: Corporate TaxEmail: [email protected] M: +27660108755

    mailto:[email protected]:[email protected]

  • Carl NelAssociate Director: Corporate TaxEmail: [email protected] M: +27827195611

    Deepti DarjiSenior Tax ManagerEmail: [email protected] Tel: +27827189054

    RegardsKPMG Tax and Legal

    FOOTNOTES

    1 No 58 of 1962, as amended2 Section 24I(10A) of the Act3 Section 25BB of the Act

    Privacy | Legal

    © 2020 KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative('KPMG International'), a Swiss entity. All rights reserved.

    kpmg.co.za

    [1] No 58 of 1962, as amended[2] Section 24I(10A) of the Act[3] Section 25BB of the Act

    mailto:[email protected]:[email protected]://home.kpmg.com/xx/en/home/misc/privacy.htmlhttps://home.kpmg.com/xx/en/home/misc/legal.htmlmailto:[email protected]://home.kpmg.com/za/en/home.html?utm_source=newsletter&utm_medium=email&utm_campaign=footerhttps://twitter.com/KPMG_SAhttp://www.linkedin.com/company/kpmg-south-africahttps://www.facebook.com/KPMGSouthAfricahttps://www.youtube.com/user/KPMGZAhttps://plus.google.com/+kpmgsouthafrica/postshttps://instagram.com/kpmg_sa

Foreign Exchange Controls and Efficient Cash Management · Management 2016 Latin America Tax Summit, ... Foreign Exchange Controls and Efficient ... rate risk) Non-Tax Considerations

1 Foreign Exchange Foreign Exchange Foreign Exchange Foreign money, including paper money and bank deposits that are denominated in foreign currency Foreign

Law on Foreign Exchange Operations€¦ · (13) Foreign exchange market is the market where foreign exchange and foreign cash are purchased and sold. (14) Exchange operations are

Unit 4 Foreign Exchange Market. I. Definitions of Foreign Exchange & Foreign Exchange Market

Foreign Exchange and Foreign Bills

Foreign Exchange Markets The Foreign-Exchange Market and Exchange Rates

Lecture 5: The Foreign Exchange Market Understanding Foreign Exchange Quotes

Cambodia Tax Profile - KPMG · The Cambodian Tax Law provides the following CIT/ToI rates: ... The Foreign Exchange Law of 1997 provides for foreign currencies to be freely purchased

Foreign Exchange and Foreign Exchange Market

OF FOREIGN EXCHANGE GAINS AND LOSSES*TAXATION OF FOREIGN EXCHANGE GAINS AND LOSSES I. INTRODUCTION The Tax Reform Act of 1986 (TU)substantially changed the taxation of foreign exchange

The Foreign Exchange Market Exchange Rate Quotations Forecasting Foreign Exchange Rates Foreign Exchange Risk Exposure Managing Foreign Exchange Risk

Schedule of Charges - firstcaribbean...Aug 18, 2020  · Charges Foreign Exchange Tax State Ordinance Exchange Tariff Final Charges (pre-tax) 1.30% 0.250% Schedule of Charges SUNDRY

OF FOREIGN EXCHANGE GAINS AND LOSSES* · TAXATION OF FOREIGN EXCHANGE GAINS AND LOSSES I. INTRODUCTION The Tax Reform Act of 1986 (TU)substantially changed the taxation of foreign

Foreign Currency Exchange Act, Foreign Exchange Law

EXPOSURE TO FOREIGN EXCHANGE RISK, HEDGING, AND TAX

Presentation On Foreign Exchange Meaning of Foreign Exchange Ordinarily, the term foreign exchange connotes two things: (i) Foreign Currency, and (ii)

3. Foreign Exchange Market and Management of Foreign Exchange Risk

On the Feasibility of a Tax on Foreign Exchange Transactions

THE KINGDOM OF BHUTAN FOREIGN EXCHANGE REGULATIONS, 2013 exchange regulations.pdf · THE KINGDOM OF BHUTAN FOREIGN EXCHANGE REGULATIONS, ... FOREIGN EXCHANGE TRANSACTIONS, ... Guidelines

 · Tax Basics About Us - Global tax news in brief ... Foreign exchange gains and losses — the practice Foreign exchange differences may be classified into

Foreign Exchange

Chapter 3 Foreign Exchange Market and Foreign Exchange Rate

On the Feasibility of a Tax on Foreign Exchange …wiwi.uni-frankfurt.de/professoren/spahn/tobintax/Tobin...On the Feasibility of a Tax on Foreign Exchange Transactions To the Federal

GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY | FOREIGN … · 2018-06-06 · june 1, 2018 global economics & foreign exchange strategy | foreign exchange outlook