The South African franchise industry is growing. Newspaper headlines and social media feeds abound with news of iconic international brands opening their doors on South African shores. This growth is apparent not only from the arrival of international coffee houses, burger chains and retail stores, but is also reflected in the expansion of many popular South African chains offshore.
There are over 31 050 franchise outlets in South Africa, 26 percent of which are owned by previously disadvantaged individuals, employing 323 519 people nationally. The impressive growth of the franchise industry is in direct contrast to the exceedingly low South African Gross Domestic Product (‘GDP’) growth rate of 0.6 percent for the first quarter of 2016 (forecasted to drop to 0.5 percent in the second quarter).
Against this backdrop, the South African Revenue Service (‘SARS’) has issued a Draft Guide on the Taxation of Franchisors and Franchisees (the ‘Draft Guide’).
The Draft Guide was released on 7 January 2016 and closed for comment on 12 February 2016. The Draft Guide summarises the typical payments made between franchisees and franchisors under a standard franchise agreement and sets out the tax implications attendant upon those payments for franchisors and franchisees alike. Whist comprehensive in respect of the payments it covers, the Draft Guide is limited in that it only considers the income tax consequences of franchise arrangements for resident franchisors and franchisees.
Indirect taxes and international tax considerations are regrettably not considered, notwithstanding that these are pertinent issues for an industry where cash flow is of paramount importance and where cross-border transactions are becoming ever more common.
The Draft Guide is further limited in that many of the practical challenges that face the industry are not considered, particularly those challenges faced by franchisees.