Draft Taxation Laws Amendment Bill [B28-2010]: Public hearings

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Finance Standing Committee

30 May 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Committee held public hearings to receive submissions on the Draft Taxation Laws Amendment Bill 2010.

PriceWaterhouseCoopers gave a submission covering regional
investment funds, the discretion to waive interest, rates and thresholds, as well as interest exemption for natural persons and non-residents. This firm commented on the short time given for consultation, particularly in view of the complexity and volume of the proposed amendments. PWC believed that the general anti-avoidance rule would take time and effort to develop and legislate, and believed that specific anti-avoidance rules would complicate tax laws and weaken the general rule. It commented on restriction of interest exemptions, and felt that denial of the interest deduction created a mismatch or double taxation. The proposals in regard to regional investment funds were noted, but only offered certainty to investment partners. Not enough was done to address fiscal drag in relation to rates and thresholds. There were concerns about the inflexible penalty for transfer fixing. PWC believed the outright withdrawal of the discretion to waive interest would not be appropriate.

The South African Institute of Chartered Accountants commented that the narrowing of the interest threshold exemption would affect small businesses and would favour some types of interest-bearing products. It submitted that taxpayers were entitled to certainty and consistency. SAICA also commented on the company car submissions, giving examples. Comments and proposed solutions were also submitted in relation to the t maintenance plans, tool of trade vehicles, employee tax, Unemployment Insurance Fund (UIF) and tax-free fringe benefits for employer-provided professional fees.

Deloitte and Touche also commented on the proposals around employer-provided motor vehicles, and submitted that the 4% fringe benefit calculation was excessive in relation to the cost of the vehicle to the employer and should be recalculated. Submissions and proposed solutions were made in regard to the merging of lump sum termination employment payments into the pension withdrawal tax table and executive share schemes. This firm also commented on the anti-avoidance rule and said it was important to prevent financial instrument mismatches. Issues around default elections involving intra-group rollovers and devalued financial instruments, participation exemption, restriction of cross- border interest exemption, regional issues, thin capitalisation and currency matters were also raised.

Bravura’s submission related to employee share schemes, the limitation of interest deduction, international aspects around the restriction of cross border interest exemption, and the thin capitalisation of branches. It also commented on the retrospective changes to dividend definition as well as the ability to offset foreign losses. It suggested that in relation to taxation of dividends, scope should be given only to restricted equity shares, and that Secondary Tax on Companies should be mentioned. Avoidance provisions were too widely drafted, and the scope was also too broad in relation to employee share schemes. No provision had been made for unbundling and reorganisation. Bravura questioned whether the policy around limitation of interest deducations was wise in the current financial climate.

The South
African Tax Institute of Tax Practitioners commented on the short time to table proposals. It commented on the Seventh Schedule, setting out problem statements and proposed solutions. Comments were also tabled on the severance benefits in terms of a problem statement and proposed solution. It suggested that interest exemptions, covered in the new Section 10C, should only be applicable to savings that flowed into the general economy and that other forms of interest should be taxed at marginal rates. Section 7 excluded lump sums and these were not defined as including severance benefits. The Institute recommended that employees and employers should be given easier access to South African Revue Services (SARS) so all parties could agree on the value of the disputed benefits.

Members did not pose individual questions to entities, and it was decided that the entities should be given a chance to consult with the National Treasury, who would then, in its further report to the Committee, comment on the submissions, Members’ questions and the outcome of the discussions. Members commented that revenue proposals had been approved and asked what impact this would have on the fiscal framework. They asked about the SAICA maintenance plan, noted that tax laws needed to be simplified, and proposed that consideration be given to setting up a Tax Commission. Questions were also raised about taxation of professionals, the company car issues, and whether double taxation and share options were still correct in the current climate. Members were also concerned about consistency and the effect of these upon the poorer sectors, and the possible negative effects on small businesses.


Meeting report

Draft Taxation Laws Amendment Bills 2010: Public hearings
PricewaterhouseCoopers submission

Professor Osman Mollagee and Mr David Lermer, Directors, PriceWaterhouseCoopers, tabled the PriceWaterhouseCoopers (PWC) submission on the Draft Taxation Laws Amendment Bills (the Bill). Mr Lermer noted that the submission focused on policy matters. A more detailed submission was directed to National Treasury (NT) and the South African Revenue Services (SARS). He said that there were some concerns relating to the SARS and NT strategies, but initiatives to promote growth, such as the  'Gateway into Africa' initiative, were applauded.

Professor Mollagee noted that more technical submissions included comments on regional investment funds, the discretion to waive interest, rates and thresholds as well as interest exemption for natural persons and non-residents. Professor Mollagee said that the consultation period was short, and noted the complexity and volume of amendment. He noted that there would be no chance for further debate after the Committee meeting, although further submissions would be made to the NT and SARS.

He specified the specific versus the general anti-avoidance rule (GAAR), noting that GAAR would take time and effort to develop and legislate. PWC believed that specific anti-avoidance rules would complicate tax laws and weaken the GAAR.

A technical submission pertaining to the restriction of interest exemption for natural persons and non-residents was tabled. He also commented on the denial of interest deduction, in terms of the prevention of financial instrument mismatches, and employee share schemes in relation to the denial of dividend exemption. PWC felt that the denial of exemption created a mismatch or double taxation. Deduction was indeed required for the preservation of fairness and equity.

Issues pertaining to regional investment funds were noted. Proposals had only offered certainty to investment partners. Not enough had been done to address fiscal drag in relation to rates and thresholds.

Professor Mollagee noted that in regard to transfer fixing, there had been concern about the inflexible penalty on adjustments.

Finally, he submitted that the outright withdrawal of the discretion to waive interest would not be appropriate.

South African Institute of Chartered Accountants (SAICA) submission
Mr Muneer Hassan, Project Director for Tax, South African Institute of Chartered Accountants, commented on behalf of the Institute (SAICA) on narrowing of the interest threshold exemption. He said in regard to the problem statement, that taxpayers were entitled to certainty and consistency. He submitted that narrowing the interest threshold exemption would affect small businesses hugely, and the amendment would favour specific types of interest bearing products. Legitimate transactions would also be affected. He submitted some proposed solutions, divided into main and alternative solutions (see attached presentation for details).

Mr Wessel Smit,
National Tax Council Member, SAICA tabled the section that dealt with company cars to the Committee. He noted the explanatory memorandum but gave examples of how this would affect someone with a car costing R300 000. He noted problems pertaining to the 'determined value' of company cars in relation to Value Added Tax (VAT) and presented SAICA's proposed solution.

Mr Smit also noted other problems and proposed solutions about maintenance plans, tool of trade vehicles, employee tax, and Unemployment Insurance Fund (UIF) were also noted.

Mr Puleng Manyaka, Project Manager for Tax, SAICA, spoke to the tax-free fringe benefits for employer- provided professional fees and indemnity insurance in terms of current law, and set out a problem statement and a proposed solution (see attached presentation for full details).

Deloitte and Touche submission
Mr Roelofse Le Roux, Director, Deloitte and Touche, tabled that firm’s submission to the Committee.

He also made reference to the Income Tax Act proposals around employer-provided motor vehicles, and stated that according to his calculations, the 4% fringe benefit had been excessive in relation to the cost of the vehicle to the employer. He submitted that the levels at which fringe benefits were taxed should be reconsidered, to promote equilibrium between a car allowance and a company car.

He also made submissions and proposals around the merging of lump sum termination employment payments into the pension withdrawal tax table.

Mr Le Roux also made reference to the further revision regarding executive share schemes, as well as to issues pertaining to the anti-avoidance rule, to prevent financial instrument mismatches.

Mr Le Roux said that Deloitte and Touche welcomed the introduction of Islamic Financing legislation.

He noted the issues surrounding the default elections that involved intra-group rollovers, as well as devalued financial instruments held as trading stock.

He tabled comments relating to the refinement of the participation exemption, restricting cross- border interest exemption, regional holding company regime, regional investment fund regime, thin capitalisation, currency translations and abandoned hyperinflationary currencies.

Bravura Equity Services Submission  
Mr James Aitchison, Head: Debt Services, Bravura Equity Services Ltd, tabled a submission to the Committee. This covered employee share schemes, the limitation of interest deduction, international aspects about the restriction of cross border interest exemption, as well as the thin capitalisation of branches.

Other issues noted by Mr Aitchison were the retrospective change to dividend definition as well as the ability to offset foreign losses.

With regards to proposed taxation of dividends, he noted that scope should only be given to restricted equity shares.

He added that the Secondary Tax on Companies (STC) relief, which was covered in the explanatory memorandum, was not covered the Bill. He recommended that Pay as You Earn (PAYE) should apply, to prevent surprises for smaller taxpayers at a later date. He said that PAYE calculation was currently inclusive of gains under Section 8C and noted that it should also include losses.

Mr Aitchison said that the issue of double tax had not been addressed in circumstances where the employee share trust had been used. He said that avoidance provisions were too widely drafted.

In regard to employee share schemes, he said that there was an unduly broad scope. Whilst it was understood to be targeted at avoidance by sophisticated taxpayers, it applied to all taxpayers. He added that it was likely only sophisticated players such as the “modern financial institutions” referred to in the explanatory memorandum could escape the effect with their tracing ability.

Mr Aitchison said that no provision had been made for extraordinary events such as unbundling and reorganisation.

With regards to the limitation of interest deduction, there were questions about the wisdom of this policy in the current global environment.

With regards to the thin capitalisation of branches, he questioned if cognisance had been taken of double taxation treaty provisions.

South African Institute of Tax Practitioners (SAITP) submission
Mr Stiaan Klue,
Chief Executive, South African Tax Practitioners Association, tabled the SAITP submission to the Committee. He noted that the submission had been prepared at very short notice and that he would make a full written submission to the Committee on 4 June 2010, and to the National Treasury (NT) on the 7 June 2010.

Mr Klue's specific comments pertained to specific paragraphs of the Seventh Schedule. He noted a proposed amendment as well as the problem statement. He concluded issues relating to the Seventh Schedule with a proposed solution (see attached presentation for details)

Mr Klue made reference to the severance benefit in terms of a problem statement and proposed solution.

In terms of the new Section 10C, he said that the interest exemption should only be applicable to savings that flowed into the general economy.

He added that all other forms of interest were to be taxable at marginal rates. A problem statement and a proposed solution, in terms of the new Section 10C, were also noted (see attached presentation).

Mr Klue set out a problem statement regarding Section 7, and said that the proviso excluded lump sums. The definition of a lump sum did not include severance benefits.

He concluded with comments relating to the Second Amendment using a problem statement and setting out a proposed solution. In line with his proposed solution, he said that employees and employers should be given easier access to South African Revue Services (SARS) in order for both parties to agree on the value the disputed benefits.

Discussion
The Chairperson said that the Committee would not be posing questions to each individual entity that had made a submission, but that Members would instead be raising general concerns.

Dr D George (DA) made reference to SAICA's maintenance plan and wanted to know if that had been a deemed amount.

Dr George noted that, in regard to Money Bills, there had been approval of revenue proposals and displayed concern as to what impact that would have on the fiscal framework.

Dr George was concerned about the complexity of issues pertaining to tax laws. He said that simplification was necessary, and proposed that consideration be given to setting up a Tax Commission.

Mr N Koornhof (COPE) commended the entities for their submissions. However, he was concerned about SARS's taxation of professionals.

Mr Koornhof was in full concurrence regarding the company car issues but was concerned that SARS was targeting the motor-car industry.

Mr Koornhof was not in favour of share options and double taxation. He wanted to know if double taxation was still considered to be a fair option in South Africa.

Ms Z Dlamini-Dubazana (ANC) said that she was aware of the short time frames that had been given to the entities to make their submissions.

Ms Dlamini-Dubazana spoke to the PWC problem statement and agreed that tax payers were entitled to consistency.

Mr E Mthethwa (ANC) noted his concern about company car schemes.


Dr Z Luyenge (ANC) was concerned about the question of consistency. He said that if there were inconsistencies, he was not sure whether or not these amendments could accommodate the poorest of the poor.

Dr Luyenge also remarked upon the car allowances.

Dr Luyenge was concerned about the insertion pertaining to the tools of trade.


Mr M Motimele (ANC) was concerned about the negative impact on small businesses in relation to the amendments. He wanted to know whether those making submissions felt that there were areas of the tax law regime that had been overlooked.

The Chairperson said that there were two ways of dealing with responses about concerns that had been raised. Firstly, he assured all those making submissions that their concerns had been noted by the Committee. He suggested that those entities be given a chance to interact with National Treasury (NT), and then that NT would come back to the Committee with the outcomes or responses following those interactions.

The Chairperson added that the issue raised by Dr George regarding the impact on the fiscal framework would be looked at in the following meeting.

Dr M Oriani-Ambrosini (IFP) requested that the Committee be provided with the full copies of the principal legislation, such as the Income Tax Act, for present and future reference.

The meeting was adjourned.

 

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