Taxation Laws Amendment Bill [B28-2010]: input by National Treasury & SARS

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Finance Standing Committee

01 August 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

 

The National Treasury and the South African Revenue Service briefed the Committee on their responses to the public’s comments on the draft taxation laws. The Draft Taxation Laws Amendment Bill had been published on 10 May 2010. National Treasury had briefed the Committee on 18 May 2010. The Committee had held hearings on 01 June 2010. Written comments had been invited by 11 June 2010. National Treasury had received 60 written submissions or comments, and it had held, in association with the South African Revenue Service, four workshops - on international and business income tax issues, on individuals, savings and administration, on minerals and petroleum royalties, and on Islamic finance. The biggest policy issues were, firstly, individuals and savings: employer-provided motor vehicles, narrowing of the interest exemption, executive share schemes, employer-provided professional fees, and key person insurance policies. Secondly, business: prevention of financial instrument mismatch schemes, and terminating residential entities. Thirdly, international: narrowing of the cross-border interest exemption and foreign hybrid entities. Fourthly, royalties: permissible rollovers, and specified condition for minerals. And fifthly, administration: interest on underpayment of provisional tax raised on assessment. Schedule and rules relating to the vehicle carbon dioxide emissions tax were published for comment on 02 July 2010. Four written comments were received. National Treasury would finalise this document and table the amended Bill, taking into account Members’ comments in this meeting, at the end of August 2010.

Members asked if the major responses of the public were negative or positive, what the tax status was of foreigners who had acquired citizenship, if a foreigner married to a local person was regarded as one who had acquired citizenship, if a foreigner was considered separated a local spouse for taxation purposes, noted the need to ensure that the country was sustainable, asked about dividends, and why the Government did not derive any benefit from them, noted the need a collective effort, and the cooperation of other departments, and noted why the African National Congress Youth League was hotly debating nationalisation.


Mines generated far more wealth than was benefiting the country through tax revenues. A Democratic Alliance Member asked if there had been a fundamental change in the renegotiation of the treaties. An Inkatha Freedom Party Member said that the reported mismatch problem was a presumption against the tax payer – he found it quite repugnant, raised issues of equality of treatment, asked why banks did not pay taxes, and asked about the research on which the “luxury tax” on certain motor vehicles was justified. The Chairperson agreed with Members about the royalties on minerals. It was important for strategic minerals, for example, platinum, to be reviewed under the Mineral Resources Act.

 

Meeting report

Introduction and welcome
The Chairperson welcomed Members, delegates from the National Treasury and the South African Revenue Service (SARS), representatives of the media, and members of the public. Observers included partners of and consultants to PriceWaterhouseCoopers.

The Chairperson said that Members would consider a very important part of fiscal policy. Members would recall in the budget speech, among other matters that the Minister raised, the tax proposals, a subject that led to public hearings on 01 June 2010, when the National Treasury was present, after the Committee had received a number of submissions. The Committee had then given National Treasury the opportunity to go and interact with the stakeholders on both written and oral submissions. Now National Treasury had returned to report back to the Committee.  

National Treasury and SARS: response document highlights - briefing
Mr Ismail Momoniat, Deputy Director-General, Tax and Financial Sector Policy, National Treasury, said that the Draft Taxation Laws Amendment Bill had been published on 10 May 2010, and National Treasury had briefed the Committee on 18 May 2010. The Committee had held hearings on 01 June 2010 at which representatives of business were present. Written comments were due by 11 June 2010. National Treasury had received 60 written submissions or comments, which it had taken very seriously; and it had held, in association with SARS, four workshops in late June and early July on certain themes, since the issues raised often tended to be common issues.  

Mr Momoniat said that the first of these workshops was on international and business income tax issues; the second was on individuals, savings and administration (income tax); the third was on minerals and petroleum royalties; and the fourth was on Islamic finance (income tax and direct).  Schedule and rules relating to the vehicle carbon dioxide emissions tax were published for comment on 02 July 2010. Four written comments were received.

Mr Momoniat referred to the ‘National Treasury and SARS. Taxation Laws Amendment Bills, 2010, Draft response document’. This document tried to capture National Treasury and SARS’ key points in their responses to all the comments that were received. The presentation would highlight these key points. The draft response document would be made available to members of the public. National Treasury would finalise this document and table the amended Bill, taking into account Members’ comments in this meeting, at the end of August 2010. The amended Bill would be the formal version of the Bill. 
 
Professor Keith Engel, Chief Director, Legislative Tax Design, National Treasury, said that many adjustments had been made, but that he would not discuss the minor alterations. He indicated the biggest policy issues that would be discussed in the meeting – individuals and savings: employer-provided motor vehicles, narrowing of the interest exemption, executive share schemes, employer-provided professional fees, and key person insurance policies; business: prevention of financial instrument mismatch schemes, and terminating residential entities; international: narrowing of the cross-border interest exemption, and foreign hybrid entities; royalties: permissible rollovers, and specified condition for minerals; and administration: interest on underpayment of provisional tax raised on assessment.    

Individuals and savings
Mr Cecil Morden, Chief Director: Economic Tax Analysis, National Treasury, spoke firstly on employer-provided motor vehicles and interest exemption. The initial proposal was to amend the fringe benefit inclusion rate for employer-provided motor vehicles, commonly known as company cars, from 2.5% to 4%. Also the deemed value on which the car value was based was changed to include the maintenance plan and value added tax (VAT). An 80% withholding was added. This reduced the monthly withholding to 3.2% per month in respect of pay-as-you-earn (PAYE) withholding. Following public comment, the proposal had been refined. The proposal was now to reduce the monthly inclusion rate to 3.5% instead of the formerly proposed 4%. That seemed to be corroborated by data that had been obtained from various players. With regard to the deemed value, it was very difficult in some circumstances to separate the maintenance plan from the actual price of the car, because the price of some new cars included the maintenance plan. In such cases it was necessary to go through an exercise to dissect the price to determine the price of the maintenance plan. It was proposed that, by default, it would be allowed to include the maintenance plan in the price of the vehicle, but a deduction would be allowed of 0.25% for the maintenance plan. It was acknowledged that there were different levels of maintenance plan. So the inclusion rate for fringe benefits would be reduced from 3.5% to 3.25%. VAT would be included as part of the deemed price. VAT input credit was not allowed to companies for passenger vehicles. Mr Morden said that he would return to the definition of passenger vehicles later.

Mr Morden said that there was a big issue that people used their cars for businesses, predominantly as a tool of trade, with only a small component for private use. In these cases, it was felt that the PAYE withholding could go as low as 20%. This, apparently, was a reasonable average for people, like sales people, who used their cars for business. However, there was provision for a claw-back should 20% in the end seem completely out of line. In such a case the employer would have to take full responsibility for the miscalculation. 

Mr Momoniat said that the format of the presentation was that firstly the initial proposal was illustrated, followed by the revised proposal.

Mr Morden said that the next issue, which had generated much comment, was the exemption of tax-free interest that someone might have. Initially this provision in the Bill was called a diminish rule to deal with people who earned very little interest. One would ignore that amount if it was too small. It had turned out to be a kind of tax incentive for people to save. It had to be asked if this did what was required. Also it turned out that this might be used for other purposes, such as tax planning purposes. This was National Treasury and SARS’ concern. So it was proposed to restrict it. Having listened to all the comments and the unintended consequences of this particular proposal, National Treasury and SARS had decided to withdraw this proposal completely. However, the whole provision would be considered and it would be decided whether National Treasury and SARS should produce some alternative provision to give incentives to savings, if it was indeed worth doing so. For the time being, this proposal had been withdrawn.

Professor Engel spoke about executive share schemes. Under the original proposal, and under National Treasury’s general rule, National Treasury endeavoured to ensure that when employees received shares these would be taxed as ordinary revenues. So National Treasury did not create incentives for executive share schemes.  National Treasury had some proposals to restrict some kinds of tax avoidance, whereby employees tried to convert shares that they received into capital.

One of these was what someone might hold with a restricted instrument: in this instance, one held a share, but was not allowed to sell it for five years. National Treasury was worried about this. The share would be held in the company for five years, and then converted into cash as a kind of salary payment.  National Treasury had received a proposal whereby if anyone received any distribution on a restricted share, that distribution would be taxed at ordinary rates, because that was cash from the share. Simultaneously, there would be no deduction from then employer. This had created many problems.

There was concern that there were many Black Economic Empowerment (BEE) deals, in which BEE players were receiving dividends as a finance share. Therefore the tax on the dividend as ordinary revenue would undermine the financing. So National Treasury had adjusted the proposal to the effect that National Treasury would treat dividends as ordinary revenue only if they were shares that were not ordinary shares, in other words that they were restricted preference specific shares. It had been found that certain executives would receive a share, and the share would ultimately be worth nothing, but then they would cash out on the share by excessive dividends. It was thus a self-liquidating share. It was decided to treat this as ordinary revenue and as a no-go area.

There was no reason to hold a preference share in a restricted way as an employee; it did not make sense: However, the proposal had been narrowed to solve the BEE concern. The original legislation said that if one acquired shares as an employee and by virtue of one’s employment, then one was subject to taint. However, it was found that tax payers found ways of actually determining things. In the original proposal, if one acquired shares as an employee, these would be considered as restricted shares and they would be subject to the anti-avoidance rules. That proposal was being modified slightly, since the original proposal had accidentally included all acquisitions of shares by employees. This was unfair.

There was a strong push to track disguised salaries. There were rules under current law whereby if one’s employer paid one’s professional subscription fees, those were exempt from taxation.  However, it was now proposed to add an exemption for indemnity insurance. Also National Treasury and SARS had wanted to change the language regarding professional fees in order to clarify the law. Professor Engel said that the aim had been to clarify the law, not to make fundamental changes. However, there was much opposition to that. When it came to actual professional subscriptions, after all the comments received, National Treasury and SARS had decided to keep the law as it was. If payment of a professional subscription was a condition of employment, this payment remained exempt. People seemed happy with that arrangement, so it would not be changed. However, an exemption would be added for indemnity insurance.

Professor Engel said that the theory of fringe benefit taxation was that if an employer had a deduction (slide 6) and was providing a salary or benefit to an employee, the employee should have a simultaneous inclusion in his or her salary. This was a concept of matching.

With regard to fringe benefits and insurance, that was generally the case, but there had developed a number of different ways of effecting insurance. One of the areas of concern was key person insurance. In key person insurance the idea was that the employer was not trying to help the employee; but what the employer was really trying to do was to take out insurance on the employee out of concerns about possible lost profits, if the employee left.

Such loss of a key employee could mean loss of most of the employer’s clients. The current law said that in this case the employer obtained a deduction, but the employee did not have an inclusion, since the insurance was not for the benefit of the employee. However, people were trying to use the plan as if it were for the employee; the employer obtained a deduction if the employee received an income. However, if it was for the employer’s benefit, it must be a genuine key insurance plan. However, the law had been made a little more flexible, in the light of comments, which were not many in number, since most areas of the industry accepted that this area needed to be reformed.

The key changes that National Treasury and SARS made were firstly that these plans had to be pure risk plans. Secondly, it would be allowed that a bank could handle these plans in cases where the company had borrowed money from the bank.  Thirdly, it was to be allowed that these plans could be ceded to the employee before maturity. Although such a plan would be for the benefit of the employer, there would come a time when the employee would retire.  Such a plan had no cash value. All the employee would want to do would be to continue to pay the premiums, since otherwise if the employee had to obtain his or her own insurance, it would be very expensive, as obtaining insurance at age 55 or 60 was very difficult. So the employer could cede the plan and it would not have any cash value, but the employee would have the benefit of the lower premiums thenceforth.

The other issue which National Treasury and SARS had to address with regard to the above was the transitional leap, since some people had taken out plans and were now trapped.  National Treasury and SARS decided that, if a person had taken out such a plan, National Treasury and SARS would allow the employer to shift the plan to employee tax free. The employee still received the existing benefits in the plan; however, thenceforth there would be no deductions. Whatever benefits an employee had received would be frozen and accepted, but thenceforth the employee would not receive any new benefits.  

Business
Professor Engel said that with regard to business, the two issues which confronted National Treasury and SARS were the prevention of financial instrument mismatch schemes, and terminating residential entities.

The first was fairly contentious. He gave a simple example of a mismatch problem (page 8).  What clever people did was to play games of simple mathematics, whereby, if a person borrowed money, he or she received a deduction, but if he or she received a dividend, it was not taxable income. The existing judicial law prevented the simple mismatch scheme. However, people engaged in more attenuated schemes.

National Treasury and SARS were concerned about the Standard Bank case. The case had been misapplied, but still people were using that as precedent to allow these kinds of mismatch schemes. National Treasury and SARS proposed to be very specific and say that, if one could not prove that the money borrowed was not connected to other sources, an anti-avoidance rule would be applied. National Treasury and SARS would be firm about tracing. That proposal was not received very happily by the tax paying community (page 8); who felt that the proposal was overly broad. National Treasury and SARS acknowledged serious problems in dealing with this proposal. So reluctantly, National Treasury and SARS had withdrawn the proposal. No matter how hard National Treasury and SARS had tried, what they found was that the proposal was so overly broad that it affected many innocent transactions, or that it was so narrow that it did not affect anything.

One of the problems that National Treasury and SARS had faced was that they were trying to apply legislation to a specific aspect of judicial law: “one piece without touching all the other pieces.” One could not do that; it had to be all or nothing. So, at the moment, National Treasury and SARS were withdrawing the proposal. However, National Treasury and SARS did take note of strong concern here.

National Treasury and SARS were aware that there were many other dividend cession schemes and other financial schemes designed to achieve a very complicated mismatch. National Treasury and SARS would have to return to this issue more directly. Some comments received had acknowledged the problem that National Treasury and SARS faced. Although it was now for the Minister to decide, National Treasury and SARS hoped to return to the matter in the next year: “we cannot allow people to arbitrarily undermine the tax base.” 

Another issue which was very much smaller but it had generated a great deal of heat was liquidation of residential property. National Treasury and SARS had been trying to be “nice” but had never been “nice” enough. Many people in past years had tried to avoid the transfer duty. The simple way to avoid the transfer duty was if you bought the house directly you had to pay transfer duty. So what people did was that they put their residential property into a company or a trust. Then they sold the company or the trust and thereby avoided the transfer duty. This had been quite successful until about 2001 or 2002.

People had been quite happy until National Treasury and SARS changed the law to the effect that if one sold a company, the greater part of the value of which was residential property, the sale would be taxed as if one had sold a house. There was another problem in that capital gains tax was added in. This made for a double charge. In 2002 National Treasury and SARS gave a chance for a reprieve of one year, however, people did not take advantage of this.

In 2009 National Treasury and SARS had decided to create another window of opportunity to let people terminate these entities. However, people complained that National Treasury and SARS’s 2009 regime was not flexible enough. National Treasury and SARS acknowledged a mistake in the 2009 tax regime in that there was to be a quid pro quo: that if anyone was to benefit from this relief, he or she had to do something in return, namely, liquidate the entity. However, National Treasury and SARS had inadvertently forgotten the termination part in the law. So this year National Treasury and SARS had revised the regime to make it more flexible, but to require liquidation of the entity. That was the proposal. Many people thought that this was somewhat helpful, but they did not think that it was helpful enough. One of the issues was that the original proposal required one to give back the property to the original funder or the spouse, and the complaints were that the original funder was already dead, or that it was not flexible enough. What National Treasury and SARS had done since was to make the regime much more flexible; all that anyone had to do was to terminate the entity. If there was a multi-tier structure, like a trust which owned a company, the vendor would be expected to terminate both the trust and the company. If such a vendor did so, he or she would be excused from paying tax, including estate duty, on the transaction. It no longer mattered if the residential property went back to the spouse or not.  However, Professor Engel could guarantee that there would be some people who would want something more.

The Chairperson asked if Members wished to ask questions at this stage.

Dr Z Luyenge (ANC) suggested hearing the entire presentation first.

The Chairperson agreed.

International
Professor Engel said that the biggest of the international issues was cross-border interest exemptions. Under current law, if a South African borrowed money from a foreigner and had to pay interest, that interest was exempt from taxation. The main purpose of the exemption was to attract foreign portfolio investment. However, while it was important to attract foreign capital, there was strong concern that this exemption was not aligned with international practice. South Arica’s exemption was a blanket exemption, while most countries limited such exemption to narrow categories of foreign borrower.

A number of treaties were being negotiated, with the aim to reduce them to five. What one saw basically was a double tax system. However, if one had R100 income but paid out interest, that reduced the income to zero. So the money going offshore was exempt and the payment of interest could actually undermine South Africa’s corporate income tax base. The essence of corporate tax planning was, from the viewpoint of a company, to use debt to avoid tax: this undermined the tax base.

While one wanted to encourage funding, one did not want to undermine the domestic tax base. The initial proposal was to narrow the exemption, so that it applied only to portfolio debt capital and trade finance. Throughout the world governments were trying to attract debt, and so, generally what one found was that most countries exempted the portfolio debt. So if a government issued a bond it was exempt. If a listed company issued a bond it was exempt.

Once the United Kingdom (UK), the United States of America (USA), and Germany “had gone zero”, in order for South Africa to attract capital, “we also had to go zero”. However, that had only applied to the portfolio, the mobile flow, not the immobile. The other category for which there were exemptions was trade finance and a few other minor areas.  So South Africa had narrowed its exemption in line with international practice.

Professor Engels explained that with mobile capital one could do things quickly without much work. If one wanted to buy a United Kingdom government bond, one could do so. It was available to the retail investor. There were thus certain kinds of capital in the market that flowed very easily. The movement of that capital was based on the slightest change of interest. One of the issues that one saw in the area of cross-border interest was that money moved very quickly. This was what was meant by mobile portfolio capital. Wall Street capital was mobile capital; the moment it was taxed, this kind of capital left the country.

Immobile capital was that which required obtaining a loan from a bank, which could take from six months to one year. 

However, there were countries that were reconsidering taxation of mobile capital, for example, Brazil and China. South Africa had not ventured to tax such capital, which remained exempt as before.

Trade finance – for example, letters of credit - was often exempt, because the amount of interest tended to be very small.

National Treasury and SARS’s proposal was to pursue other forms of debt. There were a number of arguments for and against. South Africa was trying to keep in synchronisation with international tax practice. If one allowed a blanket exemption for interest, a foreign-owned company had an advantage over a South African-owned company. This meant that such companies could be targets for take over, since if one acquired them one could use the interest deduction to generate better bids. Professor Engels also alluded to circle schemes, where money went offshore tax exempt and returned tax free. Thus a big tax bill could be avoided. Such schemes could have as many as 20 layers, and unless one taxed the source, one could not tax the scheme at all.

One of the objections to National Treasury and SARS’s proposal was that it would increase the cost of foreign capital. Then there was a counter argument that South African banks did not pay tax. There were also concerns that international practice should allow a free flow of debt. It was a question of balance. 

With regard to trade flows there was about amount of money going to low tax countries, including Guernsey, Jersey, and the Isle of Man, and this was reducing South Africa’s tax base since it was exempt from tax. This was a substantial revenue loss to the fiscus.

National Treasury and SARS had considered this in terms of treaty and non-treaty countries. South Africa had treaties with eight low tax countries. It would be necessary to renegotiate these treaties. When the money came offshore, South Africa exempted it from tax, the low tax country exempted it from tax, and the money remained tax free. These countries were a major concern to the National Treasury and SARS.   

A secondary concern was that even if one was dealing with a country that had a high rate of tax, for example, the United States, if the money went to the United States, the United States taxed it while South Africa did not. This remained a concern because people did treaty shopping through the United States or the United Kingdom. 

The United States and the United Kingdom had rules applicable to treaty shopping. It was not possible to go from South Africa to the United Kingdom and then to the Isle of Man. If one did so, the treaty did not apply.

However, there was another group of treaties in which those articles of limitation of benefit did not apply. There was some Organisation of Economic Cooperation and Development (OECD) common law jurisprudence to prevent avoidance there, but it was more difficult. That remained under study and discussion would be deferred.

South Africa was going to retain the initial proposal but was going to revise it in line with international practice. Originally, it had been proposed that the interest would be taxed as ordinary revenue, at the full rates of up to 28% to 40%. It was more consistent with international practice to apply a holdings tax of 10%. South Africa wanted the proposal to take effect as soon as possible. This led to the problem of having to renegotiate a number of the treaties. This would take some time. The effective date of the amendment was now 01 January 2013 in order to give South Africa time for renegotiation. 

Mr D van Rooyen (ANC) asked for clarity.

Professor Engel explained the new proposal that was not contained in the Bill, but was a collateral consequence of the Bill. Offshore there were limited liability companies and partnerships. These had emerged in the 1990s. They had begun in the United States of America; the United Kingdom had adopted them strongly; a number of low tax countries had them, and they seemed to be spreading around the world. They were an outgrowth of partnership law. Traditionally, the way partnership law worked was that if one was a partner in a partnership, one was different a shareholder in a company, in that a company had limited liability. If a partner did something wrong, one could pursue the partner. However, if one owned a share in a company, one could sue only the company; one could not sue the shareholders. The tax laws had always made a distinction between the two: companies which were taxed one way, because of their limited liability status, and partnerships which were taxed on the basis of the flow-through income of the partners. This was the classic model of the taxation of partnerships. This would remain.

People had developed hybrid entities in which they essentially achieved limited liability, but which had the benefit of flow-through treatment as a partnership for tax purposes. This was called the limited liability companies and partnerships, where one achieved the best of both worlds: flow-through for tax, and limited liability.

Professor Engels said that a new dividends tax was to be introduced. Reform of the Companies Act was on the way. A number of questions were raised as to how one would tax a hybrid entity. Under current law a hybrid entity was treated as a company.  National Treasury and SARS had decided that a hybrid entity should not be treated as a company, since, even though there was limited liability, it was a partnership offshore. By treating it as a partnership for offshore purposes and a company for South African tax purposes, one created difficulties. If another country treated it as a partnership, South Africa would accept that. This would be in line with international practice. This clarified the law and reduced many instances of tax avoidance.

There was also concern over a proposal of National Treasury and SARS on regional investment funds.  National Treasury and SARS had created a rule to allow South African partnerships to establish a regional investment fund using South African management. Under that rule, if one was a foreign investor, one would be treated like a shareholder. Therefore one’s tax would be very limited. That allowed for South Africa to be a good place for regional investments. T

The problem with the original proposal, however, was that it covered only domestic partnerships, and it did not effectively cover foreign limited liability companies and partnerships. Most of these investment funds wanted to deal with foreign limited liability companies and partnerships because these were foreign investments. By treating them as a partnership one was allowing them to work. Because this was a new thing, this proposal would not take effect until 01 October 2011. National Treasury and SARS were concerned that some taxpayers might face transition problems.  

Royalties
Professor Engel explained the Royalty Bill. There were two sets of anomalies that were emerging. One anomaly was that smaller miners often just extracted minerals but could not add value they did not have the facilities. Such miners would have to take their production to a bigger company to carry out the refining. However, if a miner did not bring the mineral to a certain level of processing, that miner was subject to a higher charge. There had to be a minimum level of beneficiation. The smaller companies could not do that.

The second concern was stockpiles. If one sold a concentrate, one had to ask what one was selling; one often did not know what was in that mineral. The original proposal had allowed a rollover relief, whereby the royalty could be rolled-over to the other party, usually the bigger party. People objected to National Treasury and SARS’s “win or recover” proposal. So National Treasury and SARS simplified the   initial proposal, to the effect that the second party did not have to refine the mineral. Manufacturers previously not in the royalty regime were to be allowed to elect into it and take the royalty as if they were the original extractor. However, if one elected into the royalty regime, one could not roll on the royalty. National Treasury and SARS thought that the proposal would give people the flexibility that they needed

Mr Morden explained the compromise with regard to minerals. He said that National Treasury and SARS tried to distinguish between a refined and an unrefined mineral. He referred to the Minerals Act. Different rates applied. For the refined mineral there was a lower rate, and for the unrefined mineral a slightly higher rate. The reason was that National Treasury and SARS did not want to discourage beneficiation. So when one beneficiated a product such as gold or platinum, National Treasury and SARS would offer a lower rate to help one to beneficiate.

For most of the minerals that distinction was clear. For a few minerals, National Treasury and SARS had a range where there had to be beneficiation up to a certain level to be classified as refined. It was not possible to put a value for the mineral when it was taken from the ground, as it was quite difficult to determine the level of processing that had to be done. There was a question of how one interpreted the range – whether to adjust the value to the bottom of the range or to the top of the range. So National Treasury and SARS decided to do away with the ranges, especially for the two key minerals – coal and iron ore.

Administration
Mr Franz Tomasek, Group Executive, Legislative Research and Development, SARS, referred to the ability of SARS to waive interest on underpaid provisional tax. Currently, SARS had a discretion that allowed SARS to waive that interest on assessment, if the taxpayer was able to argue convincingly that he or she had reasonable grounds for taking the position that he or she had taken. Normally this arose when SARS had made an adjustment. The fact remained, however, that the tax payer had possessed the money. The question of whether the tax payer had reasonable grounds was more to do with deciding whether a penalty should be imposed. It had been proposed originally to do away with discretion. However, it was thought that there might be limited circumstances outside the tax payer’s control where discretion was appropriate.   

Mr Morden said that what constituted a passenger vehicle had to be determined. Industry’s view was that all light commercial vehicles should be excluded. National Treasury’s view, however, was that double cabs were mostly used for passenger purposes and wanted to include them. Therefore, as recognised in the Value Added Tax (VAT) legislation, it was important to include double cabs. Exclusion would create a distortion.

Mr Momoniat said that voluntary disclosure of foreign exchange was not covered in the Bill; SARS had since published a draft of their regulations on the SARS website.

Discussion
Dr Luyenge asked what, out of the sixty comments received from members of the public, the major responses of the public to this amendment were: negative or positive. He asked about foreigners who had acquired citizenship, and what their status as to taxation was. He asked if a foreigner was married to a local person, was regarded as one who had acquired citizenship. If the marriage was in community of property, was the foreigner considered to be separate from the local spouse for taxation purposes. He asked if cost implications had been considered.

Ms Z Dlamini-Dubazana (ANC) thanked the National Treasury and expressed confidence in it. She understood the dilemma of National Treasury and noted the need to ensure that the country was sustainable.

Ms Dlamini-Dubazana asked about dividends, and why the Government did not derive any benefit from them. She appealed for assistance to National Treasury with the mismatch, since this was where the country was losing money. A collective effort and the cooperation of other departments were needed.

Ms Dlamini-Dubazana said that one could see why the African National Congress Youth League (ANCYL) was debating nationalisation to such an extent. The Act was not clear. In 2007 the tax scooped from minerals was about R32 billion. Yet the mines alone generated trillions of rands. The share holders also received much. When one spoke about the wealthy people of South Africa and the commanding heights of the economy, it was not that one wanted to own the mines but for the country to get something out of them. The National Treasury was still having difficulty in identifying the fetters preventing it from recovering more tax revenues from the mines. South Africa could do much better in exploiting its mineral wealth in that regard.

The Chairperson asked that questions and contributions be to the point

Dr D George (DA) referred to the private use assumption (page 3, slide 6). His understanding was that it was life insurance only. In theory key insurance meant that a person was a key person. It would be interesting to know if the provision was successful in its objective.

Dr George referred to the renegotiation of the treaties (page 14, slide [28]) and asked if there had been a fundamental change. With regard to the draft response from National Treasury, there was a reference to a major tax evasion.

Mr M Oriani-Ambrosini (IFP) joined Ms Dlamini-Dubazana in expressing gratitude for the presentation. He was thankful that his original comment had been taken into account. Referring to page 8, slides [15-16], he said that the mismatch problem was a presumption against the tax payer –he found it quite repugnant. He raised issues of equality of treatment.

Mr Oriani-Ambrosini asked why banks did not pay taxes.

Mr Oriani-Ambrosini asked how he could acquire the research on which the “luxury tax” on certain motor vehicles was justified. He asked if, from the viewpoint of taxpayers, a connection could be proved between climate change and putting more carbon dioxide into the atmosphere.

Mr Momoniat said that with regard to the environment, he would differ with Mr Oriani-Ambrosini. The scientific evidence for climate change was very strong. National Treasury and SARS’ position was driven by the position that Government had taken, and must adjust tax accordingly. It was not getting colder overall.  National Treasury and SARS would be happy to assist in making their research available.

Mr Morden added that National Treasury and SARS were not experts on climate. That expertise lied elsewhere. A conference on climate change would be held in South Africa in 2011.

The Chairperson agreed with Members about the royalties on minerals. Not everything had been covered. It was important for strategic minerals, for example, platinum, to be reviewed under the Mineral Resources Act.

The Chairperson referred to page 19, slide [38], and said that this proposal reminded him of the attitude of the police before the new dispensation. He asked about tax practitioners, and who would bear the responsibility for under or over taxation of an individual. He noted a narrowing of the proposal to cater for circumstances outside the tax payer’s control. He asked what the bench marks of these clarifications by National Treasury were.

Mr Momoniat responded that the amount of revenue that a state raised was at the heart of an effective state. It had to be asked how competitive South Africa was as an economy. There was no point in having high taxes if investors were not attracted to South Africa. It was important to bear in mind that the higher the tax rates, the more people sought to avoid paying tax. With regard to the process, the public comments began arriving as soon as the draft Bill was published. Some had waited to the deadline, 11 June 200. Others had focused on the parliamentary hearings. Professor Engel had omitted the list of those who had given comments. What the Committee decided in the light of the day’s briefing would decide the eventual form of the Bill.

Mr Momoniat said that taxation was often used to discourage carbon emissions. However, the primary motive of tax was to raise revenue.

Mr Momoniat said that National Treasury and SARS could cost some deductions, but it was hard to get exact numbers. He said that next day National Treasury and SARS would be attending a hearing of the Committee on the tax statistics. He acknowledged that more should be published, but it was an incremental process of improvement. National Treasury and SARS did take into account the cost. 

Mr Momoniat said that National Treasury and SARS generally taxed profit. In the mining sector National Treasury and SARS had decided to tax royalties. Certainly National Treasury and SARS could make available how much National Treasury and SARS collected from different sectors. National Treasury and SARS did have the mechanisms to do so.

With regard to prospects of success in beneficiation, Mr Momoniat said that the case of each metal had to be reviewed. As to the broader issues the help of the Department of Mineral Resources was needed

Professor Engel explained that National Treasury and SARS were worried about key person insurance. There had to be a matching principle. The insurance that the employer took out was to cover the employer for lost clients – it was to protect the company. However, some people had tried to conceal a personal plan as a key plan. “They want to play a little game.” So they pretended that the plan was to benefit the employer, while their intention was that the ultimate beneficiary would be the employee.

Professor Engel explained that National Treasury and SARS were trying to help the tax payers in the area of retirement. Many people wasted their lump sum on retirement, rather than using their lump sum of cash to pay off debts or invest. Sometimes an annuity could be converted into a lump sum. At this point National Treasury and SARS allowed conversion. 

Professor Engel said that it was easy pursue tax avoidance, but there might be unintended consequences. Dividends should be taxed only once, even if went go through the system many times. There were reasons for this rule. Professor Engels referred to the issues of parity. One can obtain an interest deduction whoever one was if one paid out for appropriate reasons. He denied that he said that banks were not paying the appropriate rates. It was the public which had said that. It was hard, worldwide, to tax banks, since taxing banks raised the cost of funding.

Mr Morden said that National Treasury and SARS would return to the Committee early next year. National Treasury and SARS had achieved an important step on the issue of royalties. It was not a fixed royalty. South Africa had a royalty regime that was very flexible. It was still possible to adjust the rates. It would be possible to monitor the rates revenue only over a period of 18 months. National Treasury and SARS would not enter the debate of nationalization.

The Chairperson asked Mr Morden about his allusion to debt working in the interests of shareholders. One might find equity always less than debt.

Mr Morden replied that account had been taken of that.

Professor Engel replied that with royalties one did not measuring the overall wealth of the company. The other issue was real beneficiation. One did not want to add a charge for adding value, otherwise one discouraged adding value. One wanted to tax only the mineral.

The Chairperson asked about Australia and the link between super profits and the actual performance of the company in the mining sector.

Mr Morden replied that many countries had lost out on specific royalties and derived no benefits from the super profits.

Ms Dlamini-Dubazana asked how.

Mr Morden elucidated the subject of the profitability of the mines, and referred to a short presentation on the royalty structure.  The Australian super tax applied only in cases of very high profitability.

Mr Momoniat said that there had been a proposal to consider a windfall tax.

Mr Tomasek said that the tax system was neutral as to citizenship. There was taxation based on the number of days, or ordinarily resident tax on world wide income. The United States based taxation on citizenship, rather than on residence. South Africa worked on the basis of residence as the source for taxation. South Africa did not distinguish married or unmarried persons or consider whether tax payers had children or not.
However there was a donations tax on transfers to the spouse. There was a broader definition of spouse. The tax system tried to be neutral in this regard.

Mr Tomasek said that, with regard to  the 80% withholding, there was a small subset of employees who spent most of their lives on the road, for example, sales representatives, in whose case the percentage of private travel was much lower. A 20% cut was reasonable. If on audit SARS discovered that someone had assessed it wrongly, there was the potential for a penalty.

Mr Tomasek responded to a question about renegotiating treaties and referred to the history of domestic law.

Mr Momoniat said that it was a real sweat to renegotiate. Many of the countries concerned were tax havens.

Mr Tomasek said that National Treasury and SARS tried not to have treaties with tropical islands. National Treasury and SARS were broadening these treaties somewhat, and they were working better. From experience of discussions in the OECD, this could be a painstaking process. October was reasonably challenging. South Africa was closer to the international model now. National Treasury and SARS would publish a draft, and expected a busy year for transfers.

Mr Tomasek said that circumstances outside a tax payer’s control were defined as something outside the taxpayer’s own daily control, not outside his or her accountant’s control, for example, being knocked over by a car.

The Chairperson said that Members appeared to have exhausted the discussion. In terms of process, he highlighted the issues. Members had indicated that it would be important to have briefings on the structure of royalties, and on the windfall tax. Members needed to apply their minds to the treaties. There was also a cross-cutting issue in relation to the mining sector. At some point Members would need to debate and do an assessment on the mismatch of skills with the economy and the labour force. It had to be asked how much progress had been made on skills. A database was needed; wherever it was, Members needed to know the limitations. It was necessary to be mindful of what could be done and what could not. It had to be asked how long it would take. It was a whole range and package. He asked National Treasury and SARS what they thought, in terms of process, was to be done next. It was necessary to finalise the Bill for formal tabling. He noted that this had been a short year, and that Members did not want to find themselves running short of time or undermining public participation.

Mr Momoniat said that National Treasury and SARS would finalise this response document, talk to the State Law Advisor, and table it before the end of August 2010. National Treasury and SARS had taken account of the comments of members of the public, but it had to be asked if members of the public wanted a second opportunity to comment. There were other issues. When tabled, the matter would be in the hands of the Committee.

The Chairperson thanked National Treasury and SARS. He deferred the second item on the agenda, the Committee’s inputs and comments on Mr P Pretorius (DA)’s Private Member's legislative proposal, 12 October 2009, to amend the Land and Agricultural Development Bank Act 2002 (Act No. 15 of 2002), on which the National Treasury had made a submission dated 07 May 2010. He did not think that it was a big issue.

The meeting was adjourned.

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