South African Revenue Services (SARS) on Double Taxation Agreements and Protocol; National Treasury and SARS on the 2009 Tax Statistics Report

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Finance Standing Committee

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

National Treasury briefed the Committee on the tax treaty protocols with Ireland and Sweden, and reminded Members that the Constitution required Parliament to ratify treaties before they could come into effect. The renegotiation aspects had been completed. The protocol between South Africa and Ireland had been signed on 17 March 2010. The protocol between South Africa and Sweden had been signed on 07 July 2010. Details were given of investment by South Africa into Ireland from 2005 to 2008. Details were also given of investment flows from South Africa to Ireland and to Sweden from 2007 to 2009. Figures were given for exports and imports between South Africa and Ireland between 2005 and 2009. Examples were also given of exports and imports. Similarly, figures were given of imports and exports between South Africa and Sweden for the same period, together with examples. The South African Revenue Service gave further explanation, from its perspective, on the protocols, and concurred that amendments to the Convention had become necessary because of the proposed phasing out of the secondary tax on companies, and its replacement with a dividend tax to be levied on shareholders. The Service had firstly amended the definition of “resident” (Article 4) to follow the more modern approach of the Organisation of Economic Cooperation and Development (OECD) and United Nations (UN) models. In addition, the Irish wanted to make it clear that their Common Contractual Fund was excluded from this definition, since the Fund was fiscally transparent and thereby not an entity for tax purposes. In other words, the Fund itself was not to be taxed, either by Ireland or by South Africa, but the individual investors in that Fund would be taxed. The Service commented on dividends (Article 10). Article 26 was replaced by a new article in line with the model of the Organisation of Economic Cooperation and Development. The new article ensured that bank secrecy or the absence of a domestic interest could no longer be used to deny a request for exchange of information.  National Treasury was moving from a zero rate of tax on interest to a withholding tax on interest. This would be implemented gradually, the same as with the dividend withholding tax. One of National Treasury’s concerns had been that some of the treaties had a zero withholding tax on the interest. The Ireland treaty did not have a limitation of benefit article. This kind of article protected South Africa against the erosion of its tax base by third parties who were not resident of either country party to the treaty. National Treasury had taken the position that it would, following the review of the taxation on interest, be reviewing some of South Africa’s treaties, and would, in some of these treaties, include “a limitation of benefit article”.  With regard to the South Africa – Sweden Protocol amending the Double Taxation Agreement, as with the protocol amending the agreement with Ireland, amendments to the Convention had become necessary in view of the proposed phasing out of the secondary tax on companies and its replacement with a dividend tax. The South African Revenue Service noted that there was also a most favoured nation clause.

Members noted that the figures for Ireland’s and South Africa’s exports and imports were massively out of proportion, and that there had been international debate on how Ireland had been attracting so much investment, for example, by the lower corporate tax in Ireland. South African companies would ensure that their taxable earnings were lower in South Africa and higher in Ireland, and therefore derive a tax benefit. Members asked if National Treasury had taken into consideration that Ireland was aggressively attracting business by a more favourable rate of tax for corporates. Members also asked about ownership and beneficiation, if there practical measures to ensure that there was involvement of the local people, and if there were any South African companies present in Ireland or Sweden which had bought land there.
Members also asked if National Treasury considered that certain imports must be limited in order to create jobs in South Africa. Members were worried that Ireland had attracted so many South African companies to invest in Ireland, thereby creating more jobs for the Irish, while South Africans were left unemployed.
A Member observed that the amount of money invested by South African companies in Ireland was clearly an issue of tax arbitrage, and that South Africa’s tax base was seriously eroded already.

The tax treaty protocols with Ireland and Sweden were adopted.

The South African Revenue Service gave a preliminary briefing on the South Africa – Botswana Protocol amending the Double Taxation Convention. Article 25 of the Convention was deleted and replaced by a new Article ensuring that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for exchange of information. This was in line with the protocol with Ireland, and with the Organisation of Economic Cooperation and Development’s model Tax Information Exchange Agreement.

The South African Revenue Service gave a preliminary briefing, using the example of Guernsey, on the Tax Information Exchange Agreements. The purpose of the agreements was to allow for the effective exchange of information between the tax authorities. The agreement with Guernsey closely followed the Organisation of Economic Cooperation and Development’s model Tax Information Exchange Agreement which formed the foundation for the vast majority of tax information exchange agreements worldwide. The model Tax Information Exchange Agreement ensured that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for exchange of information. The Service indicated the articles of particular interest in the agreement. He noted that it had become undiplomatic to call offshore financial centres, such as Guernsey, “tax havens”.

Members commented on the possibility of a competent authority’s declining a request for information (Article 6).

The South African Revenue Service and the National Treasury reported that the 2009 Tax Statistics had been released in March 2010. Changes from the previous edition had taken account of the considerable feedback that had been received. Improvements included a new table on capital gains tax, and a glossary. All the tables were included at the back of the publication. The publication was conceived to make available comprehensive tax revenue data, to provide statistical tables of benefit to economists, and to provide the private sector with information that could be used in marketing and commercial planning. A technological innovation would be updates on the websites, but these would not replace the printed publication. The 2010 Tax Statistics would be released in October 2010. An overview of revenue collections was given in Chapter 1 which also included the number of registered tax payers, and a view of the tax revenue based on main sources and main categories. The consolidated South African tax revenue for all three spheres of Government (national, provincial and local government) was an estimated 28.4% of gross domestic product or R657.7 billion in 2008/09. The largest portion of this revenue was collected at the national level by the South African Revenue Service. Even though the provinces and local government collected some tax revenue from gambling taxes, motor vehicle licences and property rates, the bulk of tax revenue was collected nationally. A difference was noted between the total tax revenue and the budget. For the first time capital gains tax declarations were published. There was an exponential growth in these declarations, because of the growth in assets: a slow-down was not expected. During the 2007 tax year, the 69.7% of taxpayers who were in the taxable income group up to R150 000, earned 32.9% of taxable income and contributed 17.4% of total tax assessed; it was important to note that there were 5.5 million registered individual tax payers. This number was expected to double once the requirement for employers to register all their employees took effect (Chapter 2). The Service noted that tax relief had assisted tax payers, and affirmed its belief that in an inflationary environment people should not loose out. There was a decline in the headline company income tax (Chapter 3). South African companies also paid secondary tax on companies - a tax based on declared dividends. This tax rate was 12.5% for most of the period under review and was reduced to 10% in October 2007. The South African tax system was residence based, meaning that South African residents were taxed on their worldwide income. A company that was incorporated in or effectively managed from South Africa was a South African resident for income tax purposes. Capital gains tax was not recorded as a separate revenue item but included corporate income tax. Different sectors of the economy had different effective tax rates due to specific tax dispensations and deductions. Value-added tax (Chapter 4) was levied at a standard rate of 14% by registered vendors on most goods and services, and also on the importation of goods and services into South Africa. Customs or import duties (Chapter 5) were imposed on certain goods imported into South Africa. Import duties were imposed to protect local producers. In addition, excise duties were also imposed on selected imported goods, as well as on similar goods produced in South Africa. Machinery, mechanical appliances and electrical equipment was the category that accounted for the largest value of goods imported (21.2% of total customs value in 2008/09).

Members asked if they
could participate in workshops organised by SARS, about public awareness campaigns, how much had actually been collected from the levy on plastic bags  and if that tax had been successful in changing behaviour, asked about the number of individual tax payers,  about the number of companies assessed, about apparent reductions in personal income tax collected, why women appeared to contribute less in tax than their male counterparts, and why more analysis was not included in the publication.


 

 

Meeting report

National Treasury. Ratification: Tax treaty protocols with Ireland and Sweden.
Mr Lutando Mvovo, Deputy Director, National Treasury, said that National Treasury was today returning to the Committee to give a presentation on ratification on these taxation protocols.  He reminded the Committee that it was required by the Constitution that treaties must be ratified by Parliament before they could come into effect.

The implementation of the proposed switch from secondary company tax to withholding tax on dividends could only come into effect if some of the treaties on withholding tax on dividends had been ratified. Some of the treaties on withholding tax on dividends included those with Australia, Cypress, Ireland, Malta, the Netherlands, the Seychelles, Oman, Sweden and the United Kingdom.

The renegotiation aspects had been completed. The protocol between South Africa and Ireland had been signed on 17 March 2010. The protocol between South Africa and Sweden had been signed on 07 July 2010. National Treasury had also included the investment flows between the two countries, which were presented before the Committee in March, but that did not include the 2008 investment flows. The investment flows from Ireland into South Africa were R1.5 billion in 2005; R1.9 billion in 2006; R2.4 billion in 2007; R1.9 billion in 2008. Some of the Irish companies that were in South Africa included Independent News, Howard Holdings, and ESP International.

Investment by South Africa into Ireland in 2005 was R33.4 billion; R45.4 billion in 2006; R51.4. billion in 2007; and R44.6 billion in 2008. South African companies in Ireland included the Alexcor Group, SASOL, and Old Mutual.

National Treasury had also examined the flow of dividends from South Africa to Ireland. In 2007 the dividend flows were R3.3 billion. National Treasury had examined the thresholds for withholding tax on dividends. At 5% South Africa would have a revenue of R266 million; at 10% it would be R133 million. In 2008 the dividend flows to Ireland were R462 million; at 5% the revenue from provisional tax would be R23 million; and at 10% it would be R43 million. In 2009 the total dividend flows were R171 million; provisional tax at 5% would be R8.5 million; at 10% it would be R17 million. The total flows for 2007 to December 2009 were R585 million; and provisional tax at 5% would be R29.2 million; and at 10% it would be R58.5 million.

The dividend flows from South Africa to Sweden in 2007 were R371 million; the provisional tax at 5% would be R18.5 million; and at 15% it would be R55.7 million. Figures were also given for 2008. In 2009 dividends paid from South Africa to Sweden were R571 million; provisional tax at 5% would be R28.5 million; and at R15% would be R85.7 million.

National Treasury had also examined the trade flows. These showed the economic activity between the two countries.

Figures for the exports from South Africa to Ireland between 2005 and 2009 were given. The main exports were base metals, machinery, mechanical and electrical appliances, and mineral products. Figures for the exports from Ireland to South Africa between 2005 and 2009 were given. South Africa’s main imports from Ireland were collectors’ items, antiques, live animals, plastics, animal products, wood, and charcoal.

Details of Investment by South Africa into Sweden between 2005 and 2009 were given. South African companies in Sweden included Dimension Data, Tiger Wheels and Sappi. Figures of exports from South Africa to Sweden between 2005 and 2009 were given. Main exports included wine and fresh grapes, citrus fruits, dried fruits, and aluminium. Figures for the exports from Sweden to South Africa between 2005 and 2009 were given. Swedish companies in South Africa included Atlas Copco, Electrolux, Ericsson, Volvo, and Skania. Imports included paper, wood, motor cars, trucks, dishwashers, and generators.

SARS. Double taxation conventions /agreements / protocols formal ratification. Presentation
Mr Ron van der Merwe, Senior Manager: International Treaties, Legal and Policy Division, South African Revenue Service (SARS), gave further explanation, from the perspective of SARS, of the articles of the protocols with Ireland and Sweden. SARS’ presentation was on the actual article of those two protocols.

South AfricaIreland Protocol amending the Double Taxation Agreement
Mr Van der Merwe concurred with his colleague from the National Treasury that, with regard to the protocol with Ireland, amendments to the convention had become necessary in view of the proposed phasing out of the secondary tax on companies, and its replacement with a dividend tax to be levied on shareholders. With regard to the articles in that particular protocol, SARS had firstly amended the definition of “resident” (Article 4) to follow the more modern approach under the Organisation of Economic Cooperation and Development (OECD) and United Nations (UN) models. The reason was that SARS had moved to a residence-based criterion in the year 2000. That change was subsequent to the original treaty with Ireland. In addition, the Irish wanted to make it clear that a particular entity in Ireland, the Common Contractual Fund, was excluded from this definition, since the Fund was fiscally transparent not an entity for tax purposes. In other words, the Fund itself was not to be taxed, either by Ireland or by South Africa, but the individual investors in that Fund. South Africa agreed with Ireland on this it was made clear in that particular Article.

With regard to the article on dividends (Article 10), in practice, of course, these withholding taxes rates varied very widely internationally.  In the protocol between South Africa and Ireland, the rate was 5% for a shareholding of at least 10%, and 10% on all others.

Article 26, on the exchange of information, was deleted and replaced by the new article on the exchange of information. This new Article was in line with the OECD model. The new article ensured that bank secrecy or the absence of a domestic interest could no longer be used to deny a request for exchange of information.  Mr Van der Merwe considered this a step in the right direction to a full exchange of information.  

Mr Charles Makola, Director: Legal Tax Design Unit, National Treasury, said that National Treasury was also reviewing its position on the taxation of interest. National Treasury was moving from a zero rate of interest to a withholding tax on interest. That would similarly be implemented gradually, the same as with the dividend withholding tax. One of National Treasury’s concerns had been that some of the treaties, including those that National Treasury had presented to the Committee, had a zero withholding tax on the interest. The Ireland treaty did not have a limitation on benefit article. This kind of article protected South Africa against the erosion of its tax base by third parties who were not resident of either country party to the treaty. National Treasury had taken the position that it would, following the review of the taxation on interest, be reviewing some of South Africa’s treaties, and would in some of these treaties be including “a limitation of article benefit”.  National Treasury should at some point brief the Committee on National Treasury’s policy on double taxation, and would welcome the opportunity to do so.  

South AfricaSweden Protocol amending the Double Taxation Agreement
As with the protocol on Ireland, amendments to the Convention had become necessary in view of the proposed phasing out of the secondary tax on companies and its replacement with a dividend tax.

With regard to Article 10, in practice, withholding taxes varied widely internationally. The dividend rate in the South AfricaSweden protocol was 5% for a shareholding of at least 10% and 15% on others.

Mr Van der Merwe said that there was also a most favoured nation clause, according to which, if South Africa did a better deal, then it would also become valid in relation to that particular agreement.

Discussion
Dr D George (DA) said that the figures for Ireland and South Africa exports and imports were in the small billions; as compared with the investments by South Africa into Ireland, these figures were massively out of proportion. There was obviously something in Ireland that attracted South Africa’s business. There had been international debate on how Ireland had been attracting so much investment, for example, the lower corporate tax in Ireland. There was thus a key attraction for South African companies to set up shop in Ireland and then possibly through transfer pricing make sure that their taxable earnings were lower in South Africa and higher in Ireland, and therefore derive a tax benefit. He asked if National Treasury, when it had examined these protocols, if had taken into consideration that Ireland was aggressively attracting business by having a more attractive rate of tax for its corporates.  

Dr Z Luyenge (ANC) asked about ownership and beneficiation, especially by the local people. In terms of the public-private partnership in relation to companies that were coming to South Africa, were there practical measures to ensure that there was involvement of the locals? He asked also about immoveable properties that were perhaps used by these countries when they were in South Africa. He asked about land and buildings. Was there any arrangement that if those buildings were bought, there would be benefit to South Africans? Also regarding the South African companies which were present in those countries, were there any companies which owned or which had bought land in those countries?

Mr E Mthethwa (ANC) asked if, when signing these treaties, National Treasury also took into account the products which were in surplus in South Africa. For example, when National Treasury considered imports, it had to be noted that these did not balance South Africa’s exports. Wood and paper, for example, were imported, while South Africa had job losses in those sectors. He asked if National Treasury took such imbalances into account. Did National Treasury consider that certain products must be limited in order to create jobs in South Africa?  One could not miss that “they import more than we export to them”.

Ms Z Dlamini-Dubazana (ANC) said that she was covered by Dr George, but not completely. It was worrying that Ireland had designed a particular strategy towards its corporates which attracted so many South African companies to go and invest in Ireland. In so doing they then created more jobs for the people of Ireland. At the same time, South Africans were left without jobs, while the Government was emphasising the need to create jobs. She asked if the experts in the various governmental departments could not produce something to correct this anomaly. She referred to mineral products. South Africa was far better than Ireland and Sweden as far as mineral products were concerned.

The Chairperson asked if there were any other questions of clarity. There being none, he asked National Treasury and SARS to respond, but to indicate clearly to which particular country, Ireland or Sweden, their responses pertained.    

Mr Van der Merwe replied to Dr George and to Ms Dlamini-Dubazana. Ireland had historically a lower rate of tax than most other countries. For a number of years, Ireland had done very well out of it. However, it was also true that one of the countries that had taken the biggest knock from the recent financial crisis over the past two years was Ireland, and there had been massive job losses there. There had also been “a pull-back” on the revenue that Ireland had been able to collect. So things were not looking that good in Ireland at the moment. The more specific issue was that companies might set up in Ireland and move profits from South Africa to Ireland. In that regard, although SARS had not addressed that issue in the protocol, it was addressed in the main double taxation agreement with Ireland, in that Article 9 of that particular agreement dealt with the abuse of transfer pricing.

Mr Van der Merwe said that SARS took transfer pricing very seriously; its large business centres had transfer pricing teams, which were continually investigating and examining these issues to ensure that the relationship between companies concerned should be at arms length. This, of course, was an extension of Section 21 of the Income Tax Act which dealt with the relationship between connected persons, as it was called in domestic law although in treaties it was called associated enterprises. It was, in fact, the same thing. SARS insisted that the relationship and transactions between those associated enterprises should be at arms length as if they were independent and separate. SARS was spending much time and effort in building good teams to combat that form of abuse. Mr Van der Merwe acknowledged that it was an abuse.

Mr Van der Merwe replied to Dr Luyenge who had asked the second question on beneficial ownership in relation to local involvement when there was investment into South Africa. This was not something that SARS could include in a double taxation agreement. These double taxation agreements dealt with taxing rights and not ownership of particular companies investing into South Africa. This was not something that SARS as such, or a tax treaty could seek to legislate on. With regard to immoveable property, inevitably there would be use of immoveable property into South Africa, and in that regard, in both the main treaties – not the protocols, the article dealing with immovable property gave unlimited rights of taxation to the state of source. The state of source was where the immoveable property was situated. So if any of those companies were, in fact, using in any form letting out or selling such property at a capital gain, there was an unlimited right of taxation given to South Africa when the immoveable property was situated in South Africa. So this was fairly well covered. With regard to South African companies owning property in Ireland, Mr Van der Merwe did not have any details. However, this agreement worked on the basis of reciprocity. So the Irish alternatively would have equal taxing rights on their side in respect of immoveable property situated in Ireland, Ireland being the source state.

Mr Van der Merwe addressed the question of imports and exports. Once again this agreement was about who got to tax what income, and how it was shared between the countries party to the agreement. It did not consider limiting either exports or imports into South Africa, since this subject was clearly the domain of the Department of Trade and Industry. Those were things which would be addressed in trade agreements between South Africa and Ireland or Sweden in this particular case. So once again SARS could not comment. A tax treaty could never deal with that issue. It was something within the ambit of the Department of Trade and Industry. He suggested that his colleagues from the National Treasury might wish to add additional comments.  

Mr Makola said that Mr Van der Merwe had given a substantial response. However, Mr Makola wanted to highlight two particular issues. On the transfer pricing issue, National Treasury had, in the current bill, aligned its transfer pricing in the Act with those in the double taxation agreement, so as to give SARS more teeth with regard to moving profit offshore. So to a certain extent National Treasury had ensured that South Africa had protection in the case of moving profits to Ireland or other countries. However, as he had indicated earlier, the National Treasury was considering the issue of limiting benefit in these treaties, but in that regard, National Treasury was looking towards excluding third parties from exploiting these double taxation agreements at the expense of South Africa’s own tax base.    

Mr Makola highlighted secondly the particular issue of the trade deficit.  As Mr Van der Merwe had correctly indicted, when South Africa negotiated treaties, the various factors that came into play were often political, and the economic issues mostly related to passive income flows. So trade inbound and outbound were related to the level of economic activity between the two countries between which there was a treaty. That also informed National Treasury on whether to go ahead with a treaty at all. Sometimes, however, it was political issues or political relationships which called for a treaty. Also the movement of people between the two countries also informed National Treasury on its decision whether to proceed with a treaty or not. The trade deficit issues would not, therefore, necessarily be dealt with in the trade treaties, as Mr Van der Merwe had correctly indicated.

Mr Makola highlighted also the rate of corporate income tax. It was understood that this was 12.5% in Ireland, where there was zero withholding. This might have encouraged the outflows. National Treasury had renegotiated on dividends, for example. Thus South Africa would have the right to withhold a portion of what went outside the country. National Treasury would also be reviewing interest.

The Chairperson asked Members if there were any follow-up questions.


Dr George thanked Mr Van der Merwe for his response on the Ireland issue. It was obviously very clear. If one examined the amount of money invested by South African companies in Ireland it was clearly an issue of tax arbitrage. Mr Van der Merwe noted that SARS was trying, however he wanted to know what was being done to ensure that the holes were plugged sufficiently. South Africa’s tax base was seriously eroded already. It was necessary to protect South Africa against what was almost an attack of aggressive pricing from the government of Ireland on South Africa’s own tax base.

Mr Van der Merwe said as a follow up to the question of imports and exports that as an example of what SARS was doing in treaties was that SARS had an article that decided the taxation of business profits. This article did not specify what kind of business profits.  

Mr Makola said that the arbitrage mentioned by Dr George was quite a difficult issue. For as long as there were differences in legal systems in various countries, arbitrage would never go away. However, the current bill had quite a few provisions on arbitrage in order to protect South Africa’s tax base. To mention but a few these included a definition of a partnership in the bill that ensured that people did not erode South Africa’s tax base by means of hybrid entities people. There was also a definition of foreign dividends to ensure that South Africa did not have hybrid instruments where interest outflows somehow found their way back as dividends thereby eroding South Africa’s tax base. So there were quite a few measures that South Africa was putting in place. In future, National Treasury would examine other income streams to strengthen the Act. However, arbitrage was a topical issue internationally. Because of the differences in legal systems of various countries, it was indeed difficult to deal with it, since one needed cooperation between various parts of the world.  For as long as there were tax havens it would be extremely difficult to deal with tax arbitrage.

Mr Van der Merwe added that these issues were normally combated under domestic law, which should have provisions against abuse in the main.  Treaties would deal would anti abuse on certain things like transfer pricing and beneficial ownership. However, the main anti abuse provisions should always be in domestic law. This was why some changes had been proposed in the bill.

The Chairperson said that Members had exhausted the deliberations with regard to the agreements between South Africa and Ireland and between South Africa and Sweden. He proposed, however, that before adopting a formal recommendation on the two agreements, that the Committee would hear the preliminaries to the agreements with the remaining countries, on which National Treasury and SARS would return to the Committee at a later stage.

SARS. Double Taxation Conventions / Agreements: preliminary hearing
South AfricaBotswana Protocol amending the Double Taxation Convention
Mr Van der Merwe said that the amendments to the Convention became necessary in view of the global initiative to incorporate a comprehensive exchange of information article in existing double taxation agreements. In the agreement with Botswana, Article 25 of the Convention was deleted and replaced by the new Article on the Exchange of Information. This new Article was in line with the Organisation for Economic Co-operation and Development (OECD) model and extended to taxes of every kind and description. The new Article ensured that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for exchange of information. This was in line with the protocol with Ireland. Botswana had approached South Africa to say it was ready to exchange information in accordance with the latest international model.

SARS. Tax Information Exchange Agreements: preliminary hearing
Mr Van der Merwe said that the purpose of the agreements was to allow for the effective exchange of information between the tax authorities.

South Africa / Guernsey Tax Information Exchange Agreement
Mr Van der Merwe said that the agreement with Guernsey closely followed the OECD Model Tax Information Exchange Agreement (TIEA) which formed the foundation for the vast majority of tax information exchange agreements worldwide. The TIEA ensured that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for exchange of information. Mr Van der Merwe indicated the articles of particular interest in the agreement. He noted that it had become undiplomatic to call offshore financial centres, such as Guernsey, “tax havens”. He noted SARS had achieved progress to the extent of achieving six agreements with such countries. He noted that any request for information was subject to approval from the party from which information was requested (Article 6). Costs were to be carried by the party that made the request (Article 8). He noted that Guernsey was interested in studying South Africa’s experience, since South Africa’s compliance techniques were more advanced.

Discussion
The Chairperson observed that these agreements were a great step forward. Such agreements encouraged the wealthy to invest their assets where they lived; however, it made much work for tax practitioners.

Dr George asked how far the agreements went, and if there was some kind of congruence.

Dr Luyenge commented that information sharing could not be forced, since there was the possibility of declining a request (Article 6).    

Mr Van der Merwe responded that prior to these agreements there was no cooperation. This was a first step; however, he acknowledged the need to move further. It was encouraging that all had been willing to enter into these TIEAs.

Adoption of the tax treaty protocols with Ireland and Sweden
The Chairperson moved that the tax treaty protocols with Ireland and Sweden be adopted.
 
National Treasury and SARS. 2009 Tax Statistics. Presentation
Dr Randall Carolissen, Group Executive: Revenue Analysis and Reporting, SARS, used graphs and other statistical tools to illustrate the vast amount of data that was presented in the 2009 Tax Statistics. Comments and feedback that had been received were reviewed. Some of the 2009 statistics were reviewed. Some of the proposed changes from the 2008 statistics were noted, followed by an overview of the different chapters.  It was intended in future to attach summary notes to these statistics. SARS indicated its thoughts on future improvements and enhancements in the presentation of the information. The 2009 Tax Statistics were available on the SARS website.

The publication was conceived to make available comprehensive tax revenue data in accordance with the Promotion of Access to Information Act, for general information to concerned parties, to provide statistical tables of benefit to economists, and to provide the private sector with information that could be used in marketing and commercial planning.

The current publication had been released in March 2010. The changes from previous publication took into account the many comments and much feedback that had been received after the publication of the 2008 Tax Statistics. Improvements included a new table on capital gains tax (CGT) showing the capital gains tax raised from individuals and companies separately. The taxable income groupings in the tables on corporate income tax had been regrouped to provide a more representative spread of taxable income across the income groups. The five taxable income groups of R1 to R100 000 had now been consolidated into one taxable income group and the taxable income group of R10 million and over had been expanded into six taxable income groups. Also a glossary of terminology had been included. For ease of reference, all tables had now been included in Annexure A at the back of the publication. The tax register tables for both individuals and companies now excluded the coded cases where the status was in suspense, estate or address unknown; and the percentage assessed had been removed from Chapter 2 on personal income tax and Chapter 3 on corporate income tax.

Mr Raymond Sithole, Senior Economist: Tax Policy Unit, National Treasury, indicated the contents of Chapter 1, which gave an overview of revenue collections. This chapter provided a summary of aggregate tax revenue collection trends in South Africa. The emphasis was on budget revenue. It also included information on tax relief, and changes in rates of personal income tax (PIT) and value added tax (VAT). It also included the number of registered tax payers, and a view of the tax revenue based on main sources and main categories.

The consolidated South African tax revenue for all three spheres of Government (national, provincial and local government) was an estimated 28.4% of gross domestic product (GDP) or R657.7 billion in 2008/09. The largest portion of this revenue was collected at the national level by SARS. This revenue was estimated to be around 95% of total revenue or 27% of GDP. The provinces and local government accounted for less than 1% and 4.1% of the total tax revenue respectively or 0.2% and 1.2% of GDP respectively. Even though the provinces and local government collected some tax revenue from gambling (casino) taxes, motor vehicle licences and property rates, the bulk of tax revenue was collected nationally.

Table 1.1 showed total South African tax revenue from the three spheres of Government - national, provincial and local - with the corresponding percentages of GDP.

Mr Sithole noted a difference between the total tax revenue and the budget.

Mr Sithole noted some peaks in monthly revenue collections in the last months of each quarter. This was most likely explained by the fact that most companies paid at the end of the quarter. He noted that the fourth quarter in several fiscal years had shown the highest collections. The pattern of collections over the past three years had changed marginally. However, the first quarter in 2008 had been the largest, while the fourth quarter had shown a decline. This was obviously because of the recession.

Members would be aware that for the first time capital gains tax declarations were being published. There was an exponential growth in these declarations, obviously because of the growth in assets: a slow-down was not expected.

Dr Carolissen gave details about personal income tax statistics (Chapter 2). Personal income tax (PIT) was Government's largest source of revenue. Income tax was levied on residents' worldwide income, with appropriate relief to avoid double taxation. Non-residents were taxed on their income from a South African source. Tax was levied on taxable income that, in essence, consisted of gross income less exemptions and allowable deductions. Taxable capital gains also formed part of taxable income.

It was important to note that there were 5.5 million registered individual tax payers. This number was expected to double once the requirement for employers to register all their employees took effect, if the labour force survey was to be taken as a guide.  

Individuals generally received most of their income as salary or wages, pension or retirement payments and investment income (interest and dividends). Some individuals might also have business income which was taxable as personal income, for example, sole proprietors and partners.

During the 2007 tax year, the 69.7% of taxpayers that were in the taxable income group up to R150 000, earned 32.9% of taxable income and contributed 17.4% of total tax assessed. The remaining 30.3% were in the taxable income group of R150 000 and above, earned 67.1% of taxable income and contributed 82.6% of total tax assessed.

Dr Carolissen noted that, even in 2009, when times were hard, tax relief had assisted tax payers, and affirmed SARS’ belief that in an inflationary environment people should not loose out.

Mr Deon Breytonbach, Executive: Revenue Analysis and Planning, South African Revenue Service, reviewed company income tax (CIT) (Chapter 3). For the period under review, there was a decline in the headline CIT rate. South African companies also paid secondary tax on companies (STC), a tax based on declared dividends. This tax rate was 12.5% for most of the period under review and was reduced to
10% in October 2007.

Not all taxes paid in a tax year were attributable to income earned in the same year, due to the system of provisional tax payments and tax returns being submitted and assessed long after the end of the tax year. Also, companies had financial years that might differ from the fiscal or calendar year, as companies were free to choose the period for their financial year (which was normally their tax year).

The South African tax system was residence based, meaning that South African residents were taxed on their worldwide income. A company that was incorporated in or effectively managed from South
Africa
was a South African resident for income tax purposes.

Tax on capital gains was included in company tax revenue, which meant that capital gains tax was not recorded as a separate revenue item but included in corporate income tax.

Different sectors of the economy had different effective tax rates due to specific tax dispensations and deductions. Examples were the gold mining formula, farming deductions and valuation, insurance allowances and valuation. Small business corporations with a turnover of not more than R14 million could apply for a special tax dispensation in the form of a graduated income tax rate table.

This chapter gave an overview of the number of companies, provisional tax payments by tax year, taxable income and tax assessed by taxable income group, taxable income and tax assessed by sector (industry), companies with assessed losses or profits, and tax assessed by main sector.

Value-added tax (VAT) (Chapter 4) was levied at a standard rate of 14% by registered vendors on most goods and services subject to certain exemptions, exceptions and zero-ratings provided for in the
Value-Added Tax Act 1991. VAT was also levied on the importation of goods and services into South Africa.
This chapter gave an overview of the number of registered VAT vendors, domestic VAT - payments and refunds, and turnover.

Dr Carolissen gave an overview of customs or import duties (Chapter 5). Customs or import duties were imposed on certain goods imported into South Africa. Import duties were imposed to protect local producers. In addition, excise duties were also imposed on selected imported goods. Excise duties were also imposed on similar goods that are produced in South Africa.

This chapter gave an overview of customs VAT, customs duty, and Duty 1-2B (Ad valorem excise duties on imports).

Machinery and mechanical appliances, electrical equipment was the category that accounted for the largest value of goods imported (21.2% of total customs value in 2008/09), followed by mineral products (18.9%) and then vehicles, aircraft, vessels and associated transport equipment (9.3%).

Discussion
The Chairperson thanked SARS for the presentation, but said that it had been given too quickly, and raw data had been given without sufficient information.  

Mr D van Rooyen (ANC) asked if Members could participate in workshops organised by SARS. How did the content of the workshops compare with what had been presented to Members. Had SARS presented Members with sufficient information to ensure that they were empowered for their oversight responsibility?

Dr Carolissen said that invitations were fairly open, though he needed to check his principals. However, he could not see anything to prevent the Committee from making inputs. The workshops were more detailed than the presentation given to Members, in which much of the richness of the data had been lost through shortening. The dates of the workshops would be made available to Members, and he would discuss with the Commissioner the forms that the invitations to Members would take.

Dr Luyenge asked about the role of the citizens in participating in these matters, especially in registration. There was a great deal of money which could be collected if ordinary people were aware that to pay tax was not a penalty. He asked if there was any mechanism that could be employed to ensure that members of the public were educated on tax paying concerns so that they were fully aware of the importance of their making their contributions to the fiscus.      

Dr Carolissen said that SARS had a comprehensive outreach programme. There was a comprehensive education strategy, especially with regard to e-filing. SARS needed more consultation. There was literature available for schools.

Dr George asked how much had actually been collected from the levy on plastic bags (Tax Statistics 2009, page 11) and if that tax had been successful.

Mr Breytonbach replied that information on the plastic bags levy appeared in Tax Statistics 2009, table A1.7.1, on page 40. It had been incorporated in “other” because it was a very small amount. Only R79 million constituted the plastic bag levy. The details were published in the budget review. The question of the effective utilisation of the levy did not fall within the domain of SARS, but rather with the National Treasury.    
Mr Breytonbach said that he would send a formal report to the Committee on the plastic bags levy.

Dr George said that it was a tax to change behaviour.  Did it change behaviour?

Mr Breytonbach replied that, from a slight decrease in levies collected, he inferred that the levy had influenced behaviour.

Dr George asked about the number of individual tax payers (Tax Statistics 2009, table 2.2, page 14). On the next page the number of taxpayers assessed fell between 2007 and 2008 by 968 950 (Tax Statistics 2009, table 2.3, page 15). He knew that there was a partial explanation in that certain people did not get assessed because there were certain limits, but somehow that number did not make sense.

Mr Breytonbach replied that this data was extracted on 31 March 2009. Normally an extension was granted for the submission of tax returns until the end of February. SARS had not managed to process all the returns received between 01 and 31 March, when the data was extracted. The number of assessments had in reality increased quite drastically.

Dr George asked about the number of companies (Tax Statistics 2009, table 3.2, page 20). In 2007/08 the number increased, but the number assessed fell quite substantially. Did this indicate that the process of assessment was falling behind?

Mr Breytonbach replied that SARS normally granted an extension for the submission of a tax return up to 12 months after the end of a financial year. However, the majority of taxes were collected by the provisional tax system. He noted that SARS did collect most of the taxes when they were due.

Mr Braytonbach added that a very few companies ended up paying the greater part of the tax. The really big companies did pay. There was a huge increase in collections from the mining sector.

Ms N Sibhidla (ANC) asked about the reductions in personal income tax collected. What were the contributing factors besides the tax relief granted?

Mr Breytonbach replied that personal income tax collected had still shown a significant increase, although as a proportion of the total tax collected, personal income tax had shown a slight decline. Also, in times of economic difficulty, corporate tax decreased to a greater extent than personal tax. He explained the effects of fiscal drag relief. He referred to table 2.3, on page 15.

Dr Carolissen said that most of the job losses had occurred in the lower income brackets. However, that was substantially offset by the settlements that people received. However, while regrettable, the job losses were not seen as threatening the personal income tax base. Also one now saw an uptake of jobs in the automotive industry. This was an encouraging trend.

Ms Sibhidla asked about slide 6 which indicated that women contributed less in tax than their male counterparts. Did SARS know the causes of this situation? Was it because of historical issues? Was it because there were fewer women who were participating in the economy? Or were those who were participating at the very lowest level?

Dr Carolissen said that there was a substantial proportion of women in the economy – 45%; but the gap between incomes remained. Most tax was paid by those at the top level.

Dr Carolissen remarked that the amount of development aid was miniscule in comparison with the capital outflow from Africa. South Africa was also affected by this.  He said that it would be counterproductive to include information about compliance indicators in publications such as Tax Statistics 2009. It was an ongoing debate, and SARS sought guidance from Members.

The Chairperson asked that in future SARS should “please tell us a story about the figures”.

Dr Carolissen said that SARS, in its analysis, was responsible for advising the Minister. Its own analysis was much deeper and SARS had its own view. “It’s not just us generating numbers.” However, it was a deliberate approach in the publication not to include analysis.

Mr Breytonbach added that overseas texts had even less analysis than South Africa’s.  

The Chairperson said that the Committee and SARS were in agreement on the amount of analysis to be included in the publication; however, he felt that a presentation needed to go deeper. He thanked SARS and the National Treasury.

The meeting was adjourned.

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