Cape Town — The treasury's plan to make its proposed new tax regime for capital distributions executed on the sale of companies retrospective has raised an outcry among tax experts, who say the net has been cast too wide.

The proposal is targeted at tax-avoidance schemes in which shareholders try to avoid paying tax on the sale of company shares by "disguising" the sale as capital distributions that are tax free.

The capital distribution proceeds are simply added to capital gains tax proceeds when the shares are sold.

Treasury chief director of tax policy Keith Engel said yesterday these schemes had been used widely in private equity deals. He was addressing Parliament's finance committee during a briefing on the Revenue Laws Amendment Bill.

In terms of the bill, each capital distribution will be treated as a part disposal of the share, triggering an immediate capital gain or loss, which cannot be deferred. The effective date for the amendment will be July 1 next year. All capital distributions before the effective date will trigger a deemed part sale on this date.

A director at PricewaterhouseCoopers Osman Mollagee said retrospective application would cause a "huge outcry" as transactions entered into under the existing tax regime would trigger unexpected tax liabilities.

The amendment forms part of a number of changes to the secondary tax on companies (STC), which will be reduced from 12,5% to 10% from October 1.

Engel said the treasury expected a lot of comment on the effective date, which was proposed both to give companies enough time to adjust while at the same time making clear that the deferral of tax expected would not be permanent.

However, concessions on the effective date might be possible after considering the views of stakeholders.

The STC regime for intragroup transactions has also been simplified so that all dividends will be exempt from STC even if the dividends relate to pregroup profits.

Another change will deem all extraordinary dividends paid out two years before the sale of a company as part of the proceeds.

Measures have also been proposed to avert leakage of tax that occurs when locally developed intellectual property is taken to offshore tax havens and taxdeductible royalties are paid for its use by the SA-registered company. The royalty receipts are then returned tax free in the form of dividends.

Tax-deductibility of payments made for the use of intellectual property will not be allowed if the property was once owned or developed locally. Engel said this abuse of intellectual property was a growing international problem which the US and UK tax authorities were battling with.