New tax bill threatens South Africa’s BPO industry
CAPE TOWN, SOUTH AFRICA — The draft Taxation Laws Amendment Bill 2023 could severely impact South Africa’s booming Business Process Outsourcing (BPO) industry.
Released for public scrutiny last July 31, 2023, the bill tightens exemptions for controlled foreign companies (CFCs) under Section 9D of the Income Tax Act.
The existing law allows CFCs certain tax breaks if they meet specific criteria, such as having a fixed office and adequate staffing. The amendment, however, adds that CFCs must “carry out all significant business functions” themselves to retain these tax benefits.
The amendment could create practical difficulties for businesses that outsource important functions, such as call centers, logistics chains, and website or app development, as the new requirements may force them to employ their own staff or contract with developers employed by another group entity in the same country as the CFC’s fixed place of business.
The ambiguity of “significant business functions” also raises questions. For instance, whether a CFC can outsource activities like customer service or logistics and remain eligible for tax breaks is unclear. Additionally, the bill restricts outsourcing to companies within the same country as the CFC’s main office, limiting global partnerships.
Set to take effect on January 1, 2024, the looming changes give companies limited time to adapt. Law firm Webber Wentzel has already expressed concerns to the National Treasury.
If passed, this legislation will compel South African multinational firms to overhaul their outsourcing models, likely increasing costs and dampening global competitiveness.
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