Evaluation of the need to introduce a system of group taxation in South Africa

Abstract

In a group structure, individual companies comprising a group are effectively managed as a single 'economic unit'. The economic unit concept refers to a group of companies that are collectively integrated on a financial, an organisational or an economic basis by virtue of common control, so that they are working towards a common purpose or goal. The South African income tax dispensation currently makes no provision for group taxation. Each legal entity within a group is taxed as a separate taxpayer. This study aims to evaluate whether there is a need for a system of group taxation in South Africa. In order to do so, the definition of a group was considered, the different tax treatment of divisions as opposed to a group structure were investigated, the current income tax dispensation for inter-group transactions was analysed, and anomalies arising from that were highlighted. The recommendations of the Katz Commission in its Third Interim Report, which addressed the issue of group taxation, were also examined to determine whether the report supports the implementation of a system of group taxation in South Africa. The impact of a system of group taxation for meeting the requirements of the canons of taxation, as well as the implications for the fiscus and the taxpayer, were also examined. The analyses and the conclusions clearly show that the status quo with regard to the inherent tax anomalies arising from the taxation of intra-group transactions is unsustainable, and that a system of group taxation should be implemented in South Africa.