Up Again South Africa: Government Relief and Tax

The South African government developed a five-level approach for a phased reopening of the economy, and implemented measures to curb the transmission of COVID-19. Accordingly, certain businesses (other than those providing essential services) are permitted to reopen and operate, depending on the alert level. South Africa is currently at alert level 4, and is due to move to alert level 3 from 1 June 2020. We will provide more details when once available.

Restructuring

1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?

In addition to the relaxation under the CIPC practice note referred to in the Governance section of these FAQ, the government has announced the following funding measures to assist businesses:

  • The SMME Relief Finance Facility is administered by the Department of Small Business Development (DSBD). It will provide soft-loan funding for small, medium- and micro-sized enterprises (SMMEs) distressed due to the effects of COVID-19. The aid will be available for six months from 1 April 2020, though businesses may apply for a longer period of assistance if additional assistance is required.
  • The Business Growth and Resilience Facility has been implemented by the DSBD to provide liquidity, stock, bridging finance, order finance and equipment finance to small businesses that supply in-demand medical supplies like hand sanitiser, with funding dependent on the business’s requirements.
  • The SEFA-Debt Restructuring Facility is geared towards SMMEs already funded by the Small Enterprise Funding Agency (SEFA) and negatively affected by COVID-19. SEFA will grant a payment holiday for up to six months.
  • The government has introduced an addition ZAR200 billion loan guarantee scheme in partnership with the major banks, the National Treasury and the South African Reserve Bank (SARB). The scheme will allow qualifying businesses (SMMEs) to apply for loan funding from their primary bank for three months to fund operational costs (such as salaries, and rent and supplier payments). The COVID-19 loan scheme will be backed by SARB and the National Treasury and all loans will be subject to participating bank credit approvals.
  • The Industrial Development Corporation has put a package of more than ZAR3 billion together for industrial funding to address the situation of vulnerable firms and to fast-track financing for companies critical to efforts to fight COVID-19 and its economic impact.
  • ZAR200 million in aid has been made available by the Department of Tourism to assist SMMEs in the tourism and hospitality sector under particular stress due to the travel restrictions.
  • ZAR200 million has been set aside by the Department of Trade, Industry and Competition in partnership with the National Empowerment Fund to provide financial relief assistance to black businesses supporting the manufacture of various medical supplies and the production of food.

Sector-specific regulations have been published and should be considered.

2. Is there anything else I should look out for?

Yes. See the Tax questions below.

Tax

3. What is the position with respect to the applicability of emergency tax measures , including

a. what they are and apply to;

b. when they are expected to be phased out on or following a return to business; and

c. whether any transitional periods are likely to apply.

Pay-as-you-earn and provisional tax relief

Tax compliant businesses with an annual turnover not exceeding ZAR100 million can defer:

  • 35% of their employees’ tax liabilities over the next four months (beginning 1 April 2020 and ending 31 July 2020); and
  • a portion of their first and second provisional corporate income tax payments without suffering penalties or interest (available until 31 March 2021).

VAT

Smaller VAT vendors in a net refund position will be temporarily permitted to file monthly instead of once every two months. This should assist these VAT vendors to obtain VAT refunds faster.

The tax relief relates to the tax period beginning 1 April 2020 and will remain in operation until the tax period ending on 31 July 2020.

Excise tax

Due to the restrictions on the sale of alcoholic beverages and tobacco products, excise tax payments on alcoholic beverages and tobacco products due in May 2020 and June 2020 will be deferred by 90 days for excise-compliant businesses.

Excise duties accounts must still be submitted.

Skills development levy

From 1 May 2020, there will be a four-month holiday for skills development levy contributions (1% of total salaries) payable by companies.

Carbon tax

A carbon tax was introduced on 1 June 2019, and the first carbon tax filing and payment is, as things stand, due by 31 July 2020. To provide additional time to complete the first return and cashflow relief, the filing and payment date will be delayed to 31 October 2020.

Solidarity Fund

The COVID-19 pandemic has led to the establishment of the Solidarity Fund to provide relief from the impact of COVID 19. The Solidarity Fund is an approved fund benefit organisation and donations to the fund qualify for deduction. To encourage donations to the fund:

  • the tax deductible limit of 10% will be increased to 20% for donations to the fund; and
  • PAYE relief for employees where donations are made through an employer to the Solidarity Fund.

4. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of

a. payment obligations (and therefore likely pressure on cash flow); and/or

b. filing of returns?

Many of these tax relief measures require the business to be tax-compliant and the specific administrative processes must be complied with.

In many instances the relief is in the form of a deferment of tax (as opposed to a waiver of tax), and the tax liability will ultimately be payable by the business. Businesses will therefore still have to make provision for these cash payments and continue to submit returns (if applicable).

5. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?

No.

6. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?

No.

7. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?

No.

8. Which taxes might be increased to address the financial burden caused by the crisis, for example,

a. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)

b. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)

It is possible a wealth tax may be introduced to address the financial burden of the crisis.

As part of the 2020 budget speech, the Minister of Finance initially announced measures to broaden the corporate income tax base by:

  • imposing stricter interest deduction limitation rules; and
  • limiting the use of assessed losses carried forward to 80% of taxable income.

Both measures were to be effective for years of assessment commencing on or after 1 January 2021. However, these measures have been postponed to at least 1 January 2022.

9. Are there other actions that ought to be considered by businesses in your country e.g.

a. revisit past tax filings to claim carry back of losses;

b. revise or update preliminary tax assessments;

c. claim bad debt relief for VAT output tax

Businesses should consider whether, apart from any of the relief measures discussed above, tax relief may be available in terms of the existing tax provisions (e.g. relief from interest/penalties, specific provisions dealing with bad/doubtful debts).

Finance

10. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?

A business should carefully analyse its cashflow position and funding requirements in order to return to business, including whether its existing facilities will provide the required liquidity to return to business or whether further funding will be required.

The business should conduct an assessment of its compliance with any existing financing arrangements, including to identify any potential defaults, actual defaults or drawstops that may have occurred as a result of COVID-19 (or any associated lockdown or other measures). Clauses or concepts in the finance documents to consider include:

  • payment default provisions (and remedy periods);
  • cessation or suspension of business restrictions;
  • cross default provisions (particularly in group financing arrangements);
  • financial covenants;
  • material adverse effect (MAE) or material adverse change (MAC) provisions; and
  • information undertakings (insofar as they relate to impacts as a result of COVID-19 or associated lockdown measures, such as force majeure).

In light of the above, a business should, where applicable, seek to engage its funders on appropriate concessions or waivers to allow further utilisation of those facilities or avoid any acceleration or enforcement of the facilities.

If additional funding or facilities are required to return to business, the business should carefully consider any restrictive covenants in its existing funding arrangements, such as negative pledges (including restricting the provision of security) and restrictions on incurring additional financial indebtedness.

To the extent any such restrictions do apply, these should be addressed with the existing lender and appropriate permissions or concessions should be obtained to ensure the conclusion of any additional indebtedness does not result in a breach of the business’s existing funding arrangements.

Existing lenders will likely be conducting a similar set of assessments (on some of the same issues, as above) and, in doing so, will be analysing the credit and liquidity risk of that business to determine:

  • whether it is prudent for the lender to continue to provide financial support; or
  • whether they need to take any steps to manage any such risk and mitigate their exposure.

With this in mind, it is not uncommon for lenders to grant concessions or waivers (of the type referred to above) subject to certain conditions (such as, for example, increased information and monitoring undertakings).

Several government funding schemes are available to help businesses (in particular, SMEs) manage the impact of the COVID-19 pandemic and national lockdown measures.

Please see question 1 above for more detail.

11. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?

As above, a business should conduct a careful analysis of contractual restrictions in its existing funding arrangements on incurring financial indebtedness. To the extent any such restrictions do apply, these should be addressed with the existing lender and appropriate permissions or concessions should be obtained to ensure the incurring of additional indebtedness does not result in a breach of the business’s existing funding arrangements.

Where a business is able to incur additional indebtedness (through an express permission under the existing finance documents or with the consent of a lender, for example), it should still be mindful of the potential effect the incurring of such indebtedness may have on its compliance with existing financial covenants.

As such, a business should conduct an analysis on how the additional indebtedness would affect the calculation of the financial covenants and whether this could result in a breach of any of these covenants. If at all possible, the business should deal with any risk of potential breach proactively and as part of any waiver or approval process, to ensure the covenant levels are amended or relaxed appropriately to allow for the additional indebtedness and to take into account the business’s projected financial performance.

The business should always remain mindful of its legal obligations in times of financial hardship (as a result of COVID-19 or otherwise). This is particularly so where it incurs additional indebtedness, as it must ensure it is not, in doing so, trading recklessly or in a state of financial distress or insolvency.

12. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?

Contractual terms related to funding should be carefully analysed both from the perspective of actual or potential breaches arising from COVID-19, but also in respect of potential remedy or alleviation measures available for a business to mitigate its position.

In South Africa, margin ratchets have historically been used as a punitive measure to increase interest rates where there is perceived increased risk (i.e. the occurrence of an event of default).

In recent years, downward margin ratchets have increasingly been used as an incentive to permit a borrower to benefit from decreased interest rates when certain conditions are fulfilled (and risks mitigated). Often these (downward) margin ratchets apply where, for example, certain financial covenant levels are achieved (indicating, for example, a positive shift in the borrower’s financial position).

Equity cure mechanisms have also evolved in South Africa in recent years, and many finance documents have incorporated the ability for the borrower to use equity contributions or proceeds of subordinated debt to cure financial covenant defaults (either proactively or as a remedy (after the fact), or both).

In the case of a margin ratchet, one would obviously need to review the terms of the finance document to ascertain how any such downward interest ratchet is triggered (i.e. through increased revenues or a positive shift in the borrower’s financial position). Given the impact of COVID-19, it is perhaps unlikely many businesses will have increased revenues that might trigger such a downward margin ratchet in the near-term. As such, a business may need to consider the effect shareholder support may have on its financial position – and whether this might give some alleviation to the borrower in terms of interest cost.

In the case of an equity cure, the ability to make use of such a mechanism does, of course, assume the availability of funds at shareholder level for such use (and one should have regard to the timing as to when such cure can be made, which is often linked to the periods related to the testing of the financial covenants).

A business and its shareholders should therefore carefully asses the costs and benefits (to each of them) of using such mechanisms. In doing so, businesses and their shareholders should be acutely aware of some of the restrictions contained in the Companies Act about the granting of financial assistance to related companies. For example, the requirement for the board of directors of the party granting financial assistance to pass a solvency and liquidity test and for the shareholder of that party to have approved such financial assistance.  

13. What practicalities do you need to consider in relation to audit requirements?

Due to uncertainty about the ultimate economic consequences of the COVID-19 pandemic, some businesses may be at risk of receiving qualified audit reports (particularly about its going concern status) in connection with their financial statements. This, in turn, could affect compliance with the terms of the business’s finance documents and its disclosure obligations to shareholders and creditors.

Additionally, some of the effects of COVID-19 (including restrictions on the ability for accounting firms to conduct certain aspects of their business, such as inspecting the inventory of their clients) may affect the timely delivery of audited financial statements and potentially result in a business breaching reporting deadlines in its finance documents.

Businesses should also be mindful of the possible impairment of financial and non-financial assets (including accounts receivable, investments, intangible asset and goodwill) as a result of COVID-19.

A business should therefore discuss the above issues with its lenders, keep them up to date with developments, and (where applicable) proactively obtain the appropriate concessions or waivers.

14. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?

There is no formalised process for this in South Africa, but a fairly well-established market practise has developed.

Most finance documents contain restrictions that require any waivers or amendments to be in writing. As such, practice dictates that a well-formulated written request for a waiver or amendment should be submitted to the lender, containing the relevant information relating to the waiver or amendment required.

On a practical level, the borrower should disclose all relevant information and evidence relating to the requested waiver or amendment – in part to avoid follow-up requests for information by the lender, but also to help as much as possible in the lender’s deliberation on granting the waiver or agreeing to the requested amendment. Many lenders will have investment or credit committees, who are not necessarily client-facing, and who will want as much information as possible to make an informed decision.

Where waivers for payment breaches or breaches of financial covenants are requested, this may require the submission of an updated financial model or set of projections for consideration by the lender, so that lender can assess the financial position of the borrower on a forward-looking basis. The lender may wish to interrogate some of the sensitivities or assumptions on which the borrower has prepared the financial model or set of projections.

As above, it is not uncommon for lenders to grant waivers subject to certain conditions, some of which may seek to mitigate their risk and would be formulated based on the information submitted by the borrower.

Where there is a syndicate of lenders, and a representative (such as a facility agent) has been appointed by the lenders, then the request should be directed to the representative. The finance documents will usually contain voting majorities or thresholds applicable to decision-making by the lenders, including the percentages of votes required to grant waivers or agree to amendments.

15. Dealing with creditors, including amendments and waivers – Bonds

a. If I can’t comply with the terms of my bond covenants who do I need to notify?

This will depend on the terms of the specific bond document. However, generally the bondholders should be notified as soon as possible. Where where a representative has been appointed to represent all the bond holders (such as an agent or bond trustee) then such a representative must be notified.

b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?

This will largely follow the process set out above, and come with much the same set of considerations. The bond documents (or applicable trustee or agency agreement) will usually contain voting majorities or thresholds applicable to decision-making by the bondholders, including the percentages of votes required to grant waivers or agree to amendments.

c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?

Again, this will depend on the terms of the specific bond documents. However, generally speaking, either the issuer or the representative of the bondholders can convene a meeting by notice according to the timeframes in the bond documents (or applicable trustee or agency agreement).

Often, the bond documents (or applicable trustee or agency agreement) contain provisions for convening physical bondholder meetings or contain written or electronic consent mechanics as an alternative to physical meetings.

It may not be the case that virtual meetings are expressly contemplated. So, if this is required in light of COVID-19 restrictions, the bond documents should be consulted to ascertain whether this is possible and how such a meeting could be convened (giving due consideration to such issues as meeting platform, quorums, voting and attendance).

16. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?

Government-support packages are generally not contingent on sustainability-related outcomes or specifically earmarked for green purposes.

However, all of the government support packages we’re aware of (highlighted above) have some level of social-support requirement, which are prescribed either through the qualification criteria or the purpose for which the funding may be used (e.g. SMME support, job preservation or salary payments). These are set out in the relevant sections above.