The National Treasury explained the Taxation Laws Amendment Bills process, which had begun with the release of the bills on 10 May 2010. After preliminary briefings, the receipt of written comments, hearings, National Treasury and SARS workshops, the responses of National Treasury and SARS to public comment, it had culminated in the tabling of the Bills in the National Assembly on 24 August 2010.
The National Treasury summarised the key issues: tax rates and thresholds for individuals, interest exemption on savings; employer-provided motor vehicles; employer-provided severance benefits; executive share schemes; employer-provided long-term insurance policies; Islamic finance; terminating residential property entities; international cross-border interest exemption; regional headquarter companies; royalties; permissible rollovers; specified condition rules for minerals; the Voluntary Disclosure Programme and interest on unpaid provisional tax.
Personal income tax relief amounted to R6.5 billion, nearly covering all inflation. Deductible contributions to a registered medical aid scheme increased from R625 to R670 for each of the first two beneficiaries, and from R380 to R410 for each additional beneficiary. There was a R750 exemption for employer-provided benefits. In respect of employer-provided vehicles there was a basic inclusion rate and a new fringe benefit inclusion rate of 3.5% per month and a rate of 3.25% for motor vehicles purchased with a full maintenance plan. National Treasury gave details were given of implications for executive share schemes, and explained implications for employer-provided long-term insurance group plans.
National Treasury gave details of proposed relief in respect of Islamic finance, which involved transactions and instruments in conformity with the Shari'ah (Islamic law), in which riba (interest) was prohibited. Islamic law also stipulated risk-sharing (sharing profit or losses); and materiality (financial transactions must be linked to a real economic transaction).
National Treasury gave details of proposals in the event of liquidating residential property entities. Greater flexibility was proposed.
National Treasury explained that cross-border interest exemption was consistent with international tax norms. The cross-border interest exemption was mainly limited to portfolio debt capital or trade finance. National Treasury noted that all tax treaty exemptions remained but some would be re-negotiated to a higher rate. The proposal would be implemented on 01 January 2013 to allow for treaty renegotiations.
National Treasury described the proposed relief for a regional headquarter company and explained qualifying criteria.
National Treasury explained the background to the mineral resources royalty and rollover relief. It was proposed that elective roll-over relief be granted. The background was that the Royalty Act sought to ensure a minimum level of beneficiation for refined and unrefined mineral resources by specifying the condition at which mineral resources should be transferred. It was noted that National Treasury was obtaining substantial revenues from these industries, and that it was not being lenient, just reasonable.
The South African Revenue Service explained the Voluntary Disclosure Programme. In response to representations from tax advisors that a significant number of their clients wished to come forward to disclose defaults, SARS had proposed a substantive enough provision to lead to a change in the name of the bill, from the Taxation Laws Second Amendment Bill to the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill [B29-2010]. This change was on the advice of the State Law Advisor. The programme would run from 01 November 2010 to 31 October 2011. SARS offered a no name opinion option. Depending on how the disclosures were made, some or all of the interest would be waived, and SARS would not pursue criminal prosecution for the contravention of the Act.
SARS proposed that its discretion on interest on underpaid provisional tax was to be narrowed to cater for circumstances outside a taxpayer’s control, as was the case in the Value Added Tax (VAT) Act.
The Chairperson noted that some Members had asked him before the meeting if the subject matter could be simplified so that ordinary Members of Parliament could better engage in discussion. Members suggested that the briefing should have been presented in a more narrative form so that Members could follow easily, and noted that while National Treasury and SARS were trying to simplify the tax system, it was on the other hand becoming more complex. This was unfortunate when more people from the disadvantaged groups were entering the mainstream of the economy. Members asked about employer-provided vehicles, including ministers' vehicles, and the inclusion rate, were the tax proposals going to affect the fiscal framework, noted that "Our tax laws are getting more and more complex" and suggested the time had come for consolidation of some kind. Members also asked how the amendments on royalties were meant to benefit smaller contractors, clarity on the term "beneficiary", and about Islamic finance: was it interest-free on savings, on investments, or on hire purchase, or on all three, and were the proposals in line with international trends? Members asked about motorcar log books, which were felt to be a burden to maintain, and whether the R750 exemption for employer-provided benefits would apply to senior Government officials who received benefits associated with the World Cup. Other questions included whether the 20% rule on fringe benefits applied to Members of Parliament, cross-border interest exemption, how roll over relief would impact on the collection of revenue as a whole, why there was an no exemption for fund managers, as in more progressive regimes around the world. Was the Southern African Customs Union treaty going to be renegotiated at a higher rate as some others were? If not, was South Africa going to do something about it in the near future?
Both the Taxation Laws Amendment Bill [B28-2010] and the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill [B29-2010] was adopted by the Standing Committee on Finance.
The Chairperson proposed that the Democratic Alliance's concern about value added tax on books, especially on schoolbooks, should be the subject of deliberations by the Committee, so that the Committee could process the matter officially to the National Treasury.
The Standing Committee on Finance met jointly with the Select Committee on Finance to hear a final briefing from the National Treasury and SARS. The Chairperson said that the Taxation Laws Amendment Bill [B28-2010] and the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill [B29-2010] had been tabled officially in the National Assembly the previous week. The Committees would receive a final presentation from the National Treasury and SARS. The Standing Committee on Finance would then consider and vote on the Bills.
National Treasury and South African Revenue Services (SARS) presentation
Prof Keith Engel, Chief Director, Legislative Tax Design, National Treasury, explained the Taxation Laws Amendment Bills (TLAB) process.
The initial (informal) phase was the release of the Bills on 10 May 2010, followed by initial briefings on 18 May 2010. The informal response phase comprised the taxpayer hearings held by the Standing Committee on Finance on 01 June 2010, the receipt of written comments by 11 June 2010, and four National Treasury and SARS workshops between late June and early July 2010 on international and business (income tax), individuals, savings and administration (income tax), mineral and petroleum royalty, and Islamic finance (income tax and indirect tax). The responses of National Treasury and SARS to public comment were heard on 03 August 2010.
Prof Engel outlined the formal phase: introduction of the Bills occurred on 24 August 2010. The formal deliberations were now being held on 31 August 2010 by the two Finance Committees.
Prof Engel summarised key issues: tax rates and thresholds for individuals, interest exemption on savings; employer-provided motor vehicles; employer-provided severance benefits; executive share schemes; employer-provided long-term insurance policies; Islamic finance; terminating residential entities; international cross-border interest exemption; regional headquarter companies; royalties; permissible rollovers; specified condition rules for minerals; the Voluntary Disclosure Programme and interest on unpaid provisional tax.
Prof Engel gave details of individuals, employment and savings; and rates and thresholds.
Personal income tax relief (PIT relief) amounted to R6.5 billion, nearly covering all inflation.
Medical relief: deductible contributions to a registered medical aid scheme increased from R625 to R670 for each of the first two beneficiaries, and from R380 to R410 for each additional beneficiary.
There was a de minimis interest exemption: Individuals < 65 years = R22 300 (previously R21 000); and individuals of 65 years+ = R32 000 (previously R30 000).
There was a R750 exemption for employer-provided benefits.
For employer-provided vehicles there was a basic inclusion rate and a new fringe benefit inclusion rate of 3.5% per month and a rate of 3.25% for motor vehicles purchased with a full maintenance plan. There was a monthly withholding of 80% included per month in respect of (PAYE) Pay-As-You-Earn withholding. This could be reduced to 20% for vehicles used 80% for business. There were deductions at year-end for employer-provided vehicles. There were offsets available at year-end against the total inclusion (i.e., 3.5%/3.25% x determined value of vehicle x 12) for: across-the-broad percentage deduction for business use.
Prof Engel gave details of executive share schemes.
Proposal No. 1 for company distributions was that ordinary treatment for distributions would apply only in respect of restricted equity instruments that were not ordinary shares (e.g., restricted preference shares). The rule of no deduction for employer and STC still applied.
Proposal No. 2 for employee purchases was that employee acquisitions of shares were still tainted without regard to purpose, but this rule applied only to acquisitions of restricted shares.
Prof Engel explained implications for employer-provided long-term insurance group plans. Deductible premiums for employer and includible for employee; OR no deduction/no inclusion. For key person plans deductible premiums for employer was a pure risk plan with no cash value
payout includible. Anti-avoidance rules existed to prevent proceeds from being paid over to employees.
Prof Engel gave a background to Islamic Financing. Islamic finance involved financial transactions and instruments that complied with Shari’a law. This law was based on the following principles, including: prohibition of riba (interest); prohibition of gharar (removal of asymmetrical information from contracts and the encouragement of full disclosure); risk-sharing (sharing profit or losses); and materiality (financial transactions must be linked to a real economic transaction).
Prof Engel gave details of proposed relief for Islamic finance.
Mudarabah: there would be relief available for individual savings; and individual clients would be eligible for the threshold interest exemption.
Murabahah: there would be borrowed funds equivalence. The client would be treated as having acquired asset from seller at cost incurred by Bank on purchase of asset from seller. The mark-up would be treated as interest for Income Tax purposes.
Diminishing Musharaka: the client would be treated as having acquired bank’s proportional interest in the property. The client would be treated as paying part capital/part non-capital when paying installments (i.e., generally partially deductible if the property was acquired for business)
Prof Engel gave details of proposals in the event of liquidating residential property entities. Greater flexibility was proposed. The residence could be transferred to any owner or beneficiary. Transfers to entities would be permitted. The 90% residence value requirement would largely be removed. Timing requirements would be more flexible (e.g. closing date based on agreement date, not property registration date). Termination would still be required. The distributing entity must terminate. If several entities were involved, they all must terminate.
Prof Engel gave details of proposals with international effect. Cross-border interest exemption was consistent with international tax norms; the cross-border interest exemption was mainly limited to portfolio debt capital or trade finance. The basic rules were that an 10% withholding tax would be applied in respect of interest received by foreigners except bonds issued by any sphere of Government, listed bonds on the Johannesburg Stock Exchange (JSE) and foreign exchanges, and bank deposits, excluding back to back loan agreements.
Under the heading of international trade finance, Prof Engel outlined the implications for dealer and brokerage accounts, and interest from a non-resident to another non-resident.
Prof Engel noted that all tax treaty exemptions remained but some would be renegotiated to a higher rate (10%?). The proposal would be implemented on 01 January 2013 to allow for treaty renegotiations.
Prof Engel described the proposed relief for a regional headquarter company. The proposed relief was to treat a regional holding company as flow through by relaxing the following tax rules: the CFC rules - the tax charge on outgoing dividends (STC and New Dividends Tax); and
thin capitalisation rules (in terms of back-to-back loans).
Prof Engel explained qualifying criteria: minimum share participation of 20% in holding company; 80–20 tax asset value test (in terms of 20% foreign subsidiaries); 80–20 receipts and accruals (in terms of 20% foreign subsidiaries);compliance from inception in respect of: the share and tax value asset tests, but not the receipts and accruals test.
Prof Engel explained the background to the mineral resources royalty and rollover relief. The Royalty Act specified the minimum condition at which mineral resources must be transferred. Many smaller and medium sized extractors did not have sufficient size to engage in the full gamut of refining activities – these extractors sold to other extractors who refined the mineral resources to a higher level. This failure to refine by the smaller and medium sized extractors triggered a notional upliftment of the royalty – negatively impacting small extractors.
Prof Engel explained the proposal: it was proposed that elective roll-over relief be granted. This relief applied upon mutual agreement between extractors. Transferees (e.g. manufacturers) could elect to become extractors so as to allow for rollover relief (but these electing parties could not rollover the royalty again.
Prof Engel explained the rules for specified conditions. The background was that the Royalty Act sought to ensure a minimum level of beneficiation for refined and unrefined mineral resources by specifying the condition at which mineral resources should be transferred
Prof Engel explained the proposals. It was proposed that mineral resources with minimum levels be treated as follows: if transferred at a level above the minimum – there should be a downward adjustment only to exclude beneficiation; if falling to a level below the range there should be an adjustment upwards to the minimum. If a mineral was sold with by-products, the by-products need not satisfy any of the otherwise existing specified conditions.
Specific minerals comprised: iron ore - 61.5% minimum; coal - 19.0 MJ/kg minimum; vanadium - 10% V2O2 minimum. The percentages for aggregates were: ilmenite - 80% FeTiO3 minimum; rutile - 70% TiO2 minimum; and Zircon 90% ZrO2 + SiO2 + HfO2
Prof Engel asked Members to note that National Treasury was obtaining substantial revenues from these industries. National Treasury was not being lenient, just reasonable.
Mr Franz Tomasek, SARS Group Executive, said that he would focus on the biggest item on the administrative side - the Voluntary Disclosure Programme (VDP). SARS understood from taxpayer representatives that a significant number of their clients wished to come forward to disclose defaults. SARS proposed a substantive enough provision significant enough to lead to a change in the name of the bill. When Members had first seen it in draft form, it was the Taxation Laws Second Amendment Bill. Now it was the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill [B29-2010]. This change was on the advice of the State Law Advisor because it the Voluntary Disclosure Programme was such a significant aspect of the Bill. The programme would run from 01 November 2010 to 31 October 2011. It was aimed at voluntary disclosures of matters that would be subject to additional tax or penalties if discovered by SARS. What was new for SARS, although SARS partners in the Reserve Bank had done this for some time, was a no name opinion option. If anybody wanted some comfort as to whether he was in or out, he or she could get his or her representative to approach SARS on a no name basis and SARS would give that person an indication or whether he or she qualified to be in the programme or not. The benefit of being included was a waiver of the additional tax or penalties. Depending on how the disclosures were made, some or all of the interest would be waived, and SARS would not pursue criminal prosecution for the contravention of the Act.
Mr Tomasek added that if SARS had an audit in place, and a person came forward and told SARS of something that SARS would not have discovered under the audit, SARS could let that person into the programme on that basis; again this was a deviation from prior dispensations. However, part of the cost of entering the programme at that late stage was that only half the interest would be waived. If a person approached SARS before an audit had commenced, or if a person was aware of an audit, then potentially a person could have all the interest waived.
Mr Tomasek explained the background to the proposal on interest on underpaid provisional tax. Currently SARS had discretion to waive interest on underpaid provisional tax, if a person had a reasonable belief or grounds for taking the position that he or she had taken. However, in the final analysis, interest related to use of money and the question of whether reasonable grounds existed for a position taken was properly taken into account when setting any penalties due. So the initial draft of the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill [B29-2010] had done away with the discretion altogether, but after receiving comments the proposal was now to narrow that discretion.
Thus the proposal now was that the discretion was to be narrowed to cater for circumstances outside a taxpayer’s control, as was the case in the Value Added Tax (VAT) Act.
Mr Tomasek said that there were several other issues that he and Prof Engel could talk about, but the above were the highlights.
The Chairperson thanked Prof Engel and Mr Tomasek, and observed that on his way to the meeting he had met one or two Members who had one common comment about the business of the day: they wanted to know if this subject matter could be simplified so that ordinary Members of Parliament could really be in a better position to engage in discussion. Obviously, not much could be done about it now, but looking to the future, it was a general question that was asked from time to time. As parliamentarians, Members were expected to exercise their minds in the interests of the public. "If we ourselves get lost, the public's in trouble." The onus was on Members to grapple with these issues in order to act in the best interests of the public. It was "a very heavy subject, not an easy subject".
The Chairperson invited Members' questions.
Mr N Koornhof (COPE) asked about the employer-provided vehicles and the inclusion rate. He asked if there was a difference between a top executive's rate and that of a Minister of Government. He understood that ministers were entitled to two motorcars -one in Pretoria and one in Cape Town. He asked if ministers were taxed on both or on only one motorcar, and at what rate. Was there a difference?
Dr D George (DA) said the Standing Committee on Finance had approved the fiscal framework in March 2010. These tax laws would now give effect to the revenue proposals. Then the tax laws were drafted to give effect to the money that needed to be collected. However, there had been consultation and there had been changes during the consultation process. Would there be an impact on the fiscal framework, and, if so, what was it, and how did National Treasury and SARS determine that?
Secondly, Dr George agreed with the Chairperson about the complexity of the tax laws. "Our tax laws are getting more and more complex." The Bill referred to all sorts of laws and amendments to laws. Possibly the time had come for consolidation of some kind. He asked National Treasury and SARS if they were considering something like that.
Mr D van Rooyen (ANC) asked how the amendments on royalties were meant to benefit the smaller contractors. He wanted details on how this elective role would assist in realising the basic objective.
Dr Z Luyenge (ANC) asked for an explanation of terms in the sixth slide. A reference had been made to the first two beneficiaries. His own understanding of the insurance language was that dependents and beneficiaries were two different types of people. Dependents meant those people directly dependent on the payer of the premium, or the principal party insured. The beneficiary was the person or persons, who in the absence of the payer of the premium or the principal party, to whom the benefits were due.
Dr Luyenge asked secondly about the ninth slide, on the tax free lump sum withdrawals. He asked if there was any mechanism to be employed to avoid people instead of withdrawing a lump sum, deciding to do that partially, so as to remain partially within the threshold where it was non-taxable.
Dr Luyenge asked thirdly about Islamic finance. Was it interest-free on savings? Or was it interest-free on investments? Or was it interest-free on hire purchase?
Mr T Harris (DA, Western Cape) said that according to Section 89 there was still a suspension of the waiving of interest by SARS for provisional tax. He understood that it had been softened for those cases where a taxpayer was physically unable to pay tax. However, if a tax payer obtained verifiable advice that the provisional tax was not due, but the tax payer was not physically unable to pay the tax, but it was proved that there was solid advice that the tax was not due, surely taking out the potential to waive that tax was simply unnecessary. One may as well retain that, because there could be a case where the person reasonably believed that the tax was not due and should be allowed not to pay the interest.
Mr Harris asked about motorcar log books. This was a version of the question which he had asked the previous time. He asked if SARS had any international precedent for requiring log books. From his conversations with those concerned, he believed that it was far too onerous to keep a log book.
Mr Harris asked about the R750 exemption for employer-provided benefits, especially with regard to the World Cup. Would that exemption apply to senior Government officials who received benefits associated with the World Cup?
Mr B Mashile (ANC, Mpumalanga) echoed earlier observations and said that the presentation should have been much more of a narrative so that Members could follow more easily, rather than having to crunch numbers. Also one thought that National Treasury and SARS were trying to simplify South Africa's tax system, especially when more people from the disadvantaged groups were entering the mainstream of the economy. However, as Members had mentioned, South Africa's tax system was becoming more complex, to the effect that an individual, without the help of a consultant, could not handle his or her tax returns and related matters. He understood that it might be a difficult thing for Treasury actually to deal with that, but it surely could not be impossible to make these matters simpler. He supported the proposal that there might be a need to integrate this system to help people understand it.
Mr Mashile asked, in terms of the taxation proposals, what the percentage increase to the 2009/10 taxation laws in terms of these proposals would be - the percentage increase in the total revenue.
Mr Mashile asked how much these proposals would affect the total disposable income in the next financial year.
Ms Z Dlamini-Dubazana (ANC) agreed that the tax system was becoming very complicated. However, she understood that it was a science. She asked about individual rates and thresholds - with particular reference to Members of Parliament, of whom the majority had a pension fund with Momentum. She said that many Members who did not sit on the Finance Committee, had asked her about the meaning of the de minimis exemption. She asked National Treasury and SARS to explain the monitoring process to ensure that what was proposed would happen effectively. Secondly, was the 20% rule on fringe benefits applicable to Members of Parliament? If so, how? If not, why?
Ms Dlamini-Dubazana appreciated the inclusion of the severance package in the lump sum. However, Members of Parliament were dependent on being re-elected.
Ms Dlamini-Dubazana asked about cross-border interest exemption. Some treaties would be renegotiated at a higher rate. Did this include the Southern African Customs Union (SACU)? If not, was South Africa going to do something about it in the near future?
Ms Dlamini-Dubazana asked what was the meaning of the LOBs, with regard to which the United Kingdom and the United States of America were zero-rated.
Ms Dlamini-Dubazana asked how Prof Engel's statement about roll over relief impacted on the collection of revenue as a whole. She noted that most of the refining did not happen in South Africa. Where did it leave us?
A Member asked for clarity on the fifth slide. He wanted an explanation of the no name non-binding option. He noted that some taxpayers defaulted through ignorance, and others defaulted through non-disclosure of information. Also there were those who were advised by tax representatives not to disclose, in order to avoid paying certain taxes. Of those three categories, there were those that SARS was aware of and still pursuing now, but there were those of whom SARS was not aware. Tax representatives were now advising clients that SARS would track them down. But having in the first instance been advised by their tax representatives not to disclose, under what conditions would a person coming forward, not qualify for a waiver of penalties on interest on whatever tax was owed. He noted that those who used representatives were normally monied people, and would always be able to evade certain provisions of the law. This might lead SARS to be soft on them. What was SARS doing with to make sure that these people knew the particular purpose of this amendment. He observed that it was tax representatives who were among those who suggested this amendment.
Ms P Adams (ANC) asked if National Treasury and SARS had received any more written responses.
Ms Adams asked also about Islamic finance. Were the proposals in line with international trends?
Mr J Gunda (ID, Northern Cape) asked for clarity on the seventh slide. He gave the example of a Member of Parliament who used his car for constituency work.
Mr Harris understood that there was a difference between international practices and what SARS was doing, if a foreign investor was going to invest in a local fund. The local fund manager would not be subject to that tax. He understood that in more progressive regimes around the world, there was an exemption for fund managers. Why do we not have such an exemption in these proposals?
The Chairperson invited responses.
Prof Engel replied that two themes came through very quickly here. One was the issue of the complexity of the tax laws. South Africa was not unique; tax law was inherently complicated, and what made the situation more complex in South Africa was the country's one size fits all legislation. There were different groups of people with very different needs. Much of the technical wording was designed to make sure that the laws accommodated the more complicated transactions of taxpayers at the top end, in order to prevent tax evasion and tax avoidance. However, because South Africa had "a one size fits all" regime, one found that the tax regime became very inaccessible. In all fairness one was not supposed to be a tax lawyer to know how to comply with the tax laws; one wanted guides to assist one.
Prof Engel said that the National Treasury and SARS wanted to simplify many of the issues of everyday life, with particular reference to employment. One of the discussions in the budget review was on a simpler method of taxing employees. Prof Engel thought that SARS had made much progress in this regard. For a great many people, it was much easier to file on line, as one could now with SARS. However, when one tried to simplify, sometimes the rules were not quite fair to particular individuals, who then started to complain. Thence there might be changes in an attempt to be fair, but this made the rules more complicated. On the other side was avoidance.
Prof Engel said that the National Treasury and SARS were trying to focus on small revisions which could be effected progressively and without causing major disruptions. Fundamental changes could remove many established practices before one could be aware of the consequences. There was some discussion there.
However, the greater discussion, Prof Engel said, was around employment. National Treasury and SARS were trying to simplify the employment area. It would always be somewhat complicated.
Prof Engel said that it was always difficult in these engagements to give Members what they really needed. On the one hand, everyone was pressed for time. On the other hand, Members wanted to be given a full briefing. Prof Engel suggested that Members might need another form of engagement to give a better form of access. Many at the National Treasury had been sympathetic to the idea of that for some times.
Prof Engel said that there were a number of issues concerning Members themselves - the Momentum plan, and the cars that Members drove in their constituencies. He could not answer in detail, as his field was legislation, not interpretation. An "off-line" discussion might be needed here in order to give Members facts relevant to their particular situation. Prof Engel said that it was important not to have a Parliament which did not trust the system. However, many of these issues lay outside this Bill.
Prof Engel said that the bigger matters were easier to model, such as the PIT relief. He himself was not an economist. Many amendments here were much smaller. There were areas that were hard to model, such as the anti-avoidance, because as much as one was not raising revenue, one was preventing the loss of revenue. It was much harder to quantify and would not have an effect until later on. Many things were on a cash accounting basis. The changes would not have an immediate effect. In future years it would be possible to make clearer adjustments, because there the impact would be apparent already. Prof Engel said that this was a non-technical answer from one who was not an economist.
Mr Tomasek said that a typical example of rough justice from a "one size fits all" system was the tax that had been introduced on turnover. This tax was imposed on gross receipts. That was relatively simple. No lengthy legislation was needed. But taxpayers who were operating at a loss could not claim for expenses.
Mr Tomasek said that, in effect, people were asking for a simple system that gave them all the benefits of a complicated one. However, even with the best will in the world, that was really very difficult. In some cases, it was impossible.
Mr Tomasek recalled that a professor of law had made a submission in a previous year concerning boundary issues in turnover tax.
Mr Tomasek said that Members would no doubt be aware that SARS had been working hard to simplify its returns. For people who did not have access to electronic filing (e-filing) SARS had facilities for over-the-counter filing, which SARS considered as e-filing, to make life simpler. However, some of that came at a cost to someone else. For example, SARS had endeavoured to pre-populate tax returns with information that SARS already had in its system in order to save the tax payer from having to fill it in by him- or herself. However, this meant that SARS had had to get tougher with employers to make sure that they gave SARS accurate information on time. However, SARS would definitely continue to try to simplify the system. SARS would try to further pre-populate forms, but before doing so would have to satisfy itself that the information was reliable. So this was being done on a phased basis.
Mr Tomasek seconded Prof Engel's suggestion to hold a workshop with the Committee. This should take two days and would feature a run-through of the tax laws as they stood to give Members a foundational knowledge, since every time National Treasury and SARS appeared before the Committee they came to tell the Committee the changes that they were making to that base.
Mr Tomasek said that SARS had held some workshops on Members' own tax issues. It was maybe time to hold another one, in which Members could bring specific issues to the table. It could be misleading, and dangerous, to answer specific questions on Members' issues across the floor.
Mr Tomasek responded to a question on the drivers of the amendments. Some of these drivers would be found in the budget review, with reasons as to why changes were being made.
Macro-economic issues were major drivers - how much money was needed to be raised. Such drivers would impact on how much PIT relief could be granted.
For some of the smaller amendments the drivers were things like tax avoidance. SARS would pick up when people were slipping through the net. But sometimes the law would be catching legitimate transactions. Things like changing the share option schemes were driven by tax avoidance concerns. Tax lawyers would take note of these amendments and try to find other ways whereby their clients might avoid tax.
Mr Tomasek responded to a question on the roll-over. A small business, because it was small, did not have the plant and equipment to refine the mineral to a higher state. Because it was in that situation, it would trigger higher royalties. However, if it could team up with a bigger player and allow the bigger player to assist it to bring the mineral to a better state, then it could get a lower rate of royalty. SARS was thus allowing that kind of partnership. This was the reason for the roll over. This was driven by a concern that maybe the law was somewhat too tight.
Mr Tomasek responded to a question on the employer provided vehicles. There was no specific provision for ministers in the law. However, ministers might be able to access the provision for vehicles that were provided for official purposes and were not permitted to be used for private purposes. This would be a question of fact.
Prof Engel said that if there was one rule for Ministers and another for ordinary people, that would undermine democracy. However, might be unique circumstances, similar to those of Members of Parliament. With business cars, there were two circumstances. One was where the employer bought the car for him or herself, but then used it for business purposes. For this there was the car allowance - and hence the discussion on log books. The rules had been simplified. It was no longer to keep receipts. It was tedious, but it was international practice. However, it was necessary to have some proof that the car was being used for business. The car allowance, however, was not being changed in the law today. There were offsets for business use. If a user could show, through a log book, that the level of use was at least 80% for business, the level of withholding would drop substantially.
Prof Engel said that savings was a complex issue, because rich people saved more, yet at the same time, one wanted to encourage middle income people to save. He noted the nature of the Momentum scheme.
Prof Engel said that the industry was mostly interested in Islamic lending, since the banks made money by lending, not by saving. The first proposal was that if one invested in an Islamic bank there would be an interest exemption just as in Western finance. There was however no exemption if one was borrowing to buy a house. One could obtain a deduction only if one was borrowing money for a business purpose. Regarding trends, there were a number of countries which gave exemptions in respect of Islamic finance. South Africa was a little behind other countries and it was not enough to change the tax law and expect money to grow. In working with the community the importance of marketing these schemes had been observed. It was important to note that giving exemptions in respect of Islamic finance was part of the trend, especially since Western finance had dried up: people were now looking to the East.
Mr Tomasek spoke about consolidation of the tax laws. SARS would try to achieve consolidation in its Tax Administration Bill, which had been released in draft form in 2009.
Mr Tomasek said that the R750 fringe benefit exemption applied only in respect of benefits given by an employer. Gifts given by another party did not qualify for the exemption. However, the provision was available to all employees.
Ms Dlamini-Dubazana asked Mr Tomasek to be more clear with regard to the situation of Members of Parliament.
Mr Tomasek explained further. He emphasised that the R750 fringe benefit exemption applied in respect of benefits given by an employer in cash or in kind, and stressed that SARS had not given staff members any tickets for the World Cup.
Mr Tomasek said that there was a table in the budget review which indicated the impacts of the proposals. Because of the economic situation, there was expected this year to be a balance.
Mr Tomasek said the Voluntary Disclosure Programme was emphatically voluntary. Moreover, clients could approach SARS and enquire as to their eligibility for the programme "but leave out that little bit of information that said name of tax payer". it was a mechanism for helping people to make that decision to come forward, as they might feel a little bit uncomfortable otherwise. As previously stated, the criteria were relatively straightforward. Those people would just be able to go down the checklist. If they could check "yes", all would be well, and they could send in their application, knowing that they were covered.
Mr Tomasek said there was a question about those with sophisticated advisers who might argue that they should not be charged interest anyway; that was very true, and that was precisely why SARS was doing away with the discretion on the interest, because that was the problem. "Let's turn the question around and assume that you have overpaid your provisional tax. I don't think many people would be too impress if SARS could turn around and say 'Well SARS has got a pretty arguable case and we're not going to pay you any interest on the overpayment. We think that we’ve got a good case, and therefore no interest.'" If one stopped and thought about it, it was the case that interest was about who had the money. Now whether an individual had a good case or the bad case, that individual had the money. If an individual had a bad case, then maybe that individual should be subject to some additional tax, and penalties too. If an individual had a good case, that might be acceptable, and SARS would compensate for who had the money.
In the voluntary disclosure programme, it had to be asked how the programme would be extended downwards to the smaller taxpayers. This was a very important question. SARS had faced a similar question in the days of the small business amnesty. SARS had put a great deal of effort in extending it down to the smaller taxpayers. SARS had visited people on the street, and visited shops, and Mr Tomasek was worried that SARS would have to do the same again. The question was, what those people, whom SARS had visited, had been doing since then. He sincerely hoped that no one who had taken advantage of that amnesty would start knocking on SARS door to ask for a voluntary disclosure relief. SARS was going to do a couple of things as far as this was concerned. At the upper end, SARS would be talking to some of those advisers, which, as the Member had pointed out, were probably some of the advisers who had told the people to become involved in these structures in the first place. Now that SARS was pursuing them, they wanted to unwind. That was unfortunate, but SARS would like those people in the system, and would like them to pay tax. So SARS would give them this opportunity to come clean. With regard to the smaller people, who lacked high powered advisers, SARS would have to do rather more direct marketing. However, the voluntary disclosure programme was completely open to the smaller people as well as to the bigger, and SARS would do its best to get them into the system. It should be borne in mind that it was not the kind of amnesty that had existed before, because SARS was not walking away from the tax in the case of the voluntary disclosure programme. Taxes would have to be paid. What SARS was doing was walking away from the additional tax, the interest, and the possibility of a criminal charge in the more serious cases.
Prof Engel said that in the voluntary disclosure programme, SARS was not quite giving the same free amounts as before (in the business amnesty). He said that with regard to interest that it might appear to be the small people who had caused problems, but in fact it was the big people.
Prof Engel replied to a question on the Royalty Bill. A difficulty here was that National Treasury and SARS were covering not just one tax and the complexity of the legislation was formidable - hence the explanatory memorandum. However, one still had to have a deep knowledge and great experience to deal with it; moreover, one was not dealing just with income tax, but also with value added tax, the royalties and all these other taxes. There were many different taxes, and every country had them. Prof Engel said that the Royalty Bill was not a tax but a payment because the country had lost a non-renewable resource. SARS was effectively asking for people to pay for the loss of a permanent feature that the country had. Once the gold was gone, it was gone. The royalty was charged whenever anyone extracted and transferred. When one dug it out of the ground and sold it, the royalty applied. On the roll over relief and Mr Tomasek explained it very well, here you are a smaller player, you don't have the machinery, you pull it out of the ground and you sell it, the moment you do that you are subject to a royalty. But what we have acquired in the royalty is a minimum level of beneficiation. If one did not have a minimum level of extraction, or refinement, one found that people could undermine the royalty. One way to undermine the royalty was to extract the mineral from the ground and make sure that it had as little value as possible, and that way there was no royalty on it. By doing as little as possible to the extracted mineral, one undermined the royalty. What the royalty set out to achieve was to say that there was a transfer, but one had to do a minimum level of refining that one would do commercially.
SARS was trying to ensure that people did not manipulate their operational systems so as to undermine the royalty. The problem was that undermined many of the smaller players, especially in the area of platinum. Some of these smaller players could dig the platinum out of the ground, but the way that they had restructured, especially in the black economic empowerment (BEE) deals, was that the BEE deals did not have access to manufacturing. The BEE deals had access only to the extraction of the raw minerals. As the BEE deals extracted the minerals and sold them, the BEE deals would be liable for notional royalties, since the BEE deals had not reached the minimum level. The BEE deals' royalties would be effectively higher, the higher the value of the mineral transferred. As long as there was beneficiation in South Africa, why not charge a higher royalty, one wanted to know that beneficiation was in progress. In transferring a mineral, if both parties made an election, the bigger company's royalty would be lower, because it had done the right things to the mineral, and the bigger company would take on the royalty of the smaller company. Therefore it provided relief to those BEE players. It was a fairly simple procedure. It was that simple: the first party would not be charged a royalty, the second would be charged. National Treasury and SARS had tried to keep it as simple as possible. A formal election was not required.
Prof Engel replied to a question on cross-border interest. As a general matter, when National Treasury and SARS spoke about the interest exemption, the rules domestically had been changed to apply to everybody. Therefore there would be some treaties that would have to be renegotiated. Most of the South African Customs Union (SACU) countries were fine. There was no need to renegotiate any of those treaties.
Even with many of South Africa's Southern African Development Community (SADC) neighbours, the fact that they might have a zero rate interest, like Zimbabwe, for example - National Treasury and SARS would not ask for a renegotiation of that treaty either on that rate, because National Treasury and SARS did not feel that there was any avoidance on that rate. If one were not being taxed in South Africa, the interest would be taxed, at a reasonable rate, at home. Therefore there was no potential for tax avoidance. However, there were one or two, within that group, which were jurisdictions with low taxes. These low tax jurisdictions created a problem. This was a problem that went around the world. One might have SADC countries and politically one wanted to treat them well, but one did not want them to use that political leverage to undermine South Africa's tax base. Unfortunately there were a number of islands around the world and city states which were so small that what they basically were doing was to assist the big multi nationals and the big tax law accounting firms as part of financial transactions to lower tax rates. Effectively these countries were almost partners in business, and they would not receive any tax revenue, but they would receive fees. and they were basically giving away South Africa's money to promote their own economies. Those were the treaties that would have to be renegotiated.
Prof Engel replied to a question on the local managers. He was sure that Members had been lobbied on a number of things. There were too kinds of headquarter companies. The first was a traditional headquarter company. This was illustrated on the slide. The other one was a regional investment fund. A regional investment fund was one where foreign investors would take a pool of funds and use a South African manager, but most of the investing was into Africa. With regard to this proposal, National Treasury and SARS were lobbied by some people at the beginning, and SARS and National Treasury had realised that these people were the rule and not the exception, and they were requesting relief for a domestic partnership. National Treasury and SARS had created rules around that to give relief. Then there were further rules around LOC and limitiation of benefits (LOBs). Further relief was granted. More proposals came, and they wanted more and more. If anyone had a company, and all the management was in South Africa, that person wanted to get relief for that too. This was a trickier question for National Treasury and SARS. If such companies were allowed relief when all the effective management was present in South Africa, one started undermining core tax principles, which people could then use outside that context. National Treasury and SARS were aware of the problem and would examine it, but when the issue had arisen it was simply too late to make the amendment that had been suggested. Those who supported it had not come forward with enough facts. It was too late to make the change without opening up an avenue for avoidance. Prof Engel had much trouble with people who lobbied. National Treasury and SARS received tax proposals from many places. National Treasury received them from SARS which was worried about tax avoidance, and from individuals who had commercial interests. Too often the advisers came and they talked about law but did not give National Treasury enough facts. Because they did not give enough facts, the amendment got skewed to their problem and their problem alone. National Treasury' response was to demand the facts so as to be fully acquainted with the industry. In that way National Treasury could hope to solve the problem fully.
Prof Engel said that there had been some confusion on insurance. Employers provided insurance for employees. Under current law, that was generally a fringe benefit. So if an employer provided an employee with a group plan and paid every month R500 on the employee's behalf as a premium, and if the employee was taxed on that premium, the company received a tax deduction. Such a premium covered not only the employee but also the employee's family and any other people who were part of the beneficiaries. All National Treasury was asking for was a matching principle. If the employer received a deduction, the employee should receive income just like his or her salary. Prof Engel noted that group plans were cheaper than individual plans, and tax players were therefore well advised to continue to use group plans. Taxpayers would be taxed only on the cash value of their plans. Prof Engel said that the approach was now broader. When an employee died, the money that was paid out was exempt from tax. So even when the employee was getting some income from those premiums, when death came, the cash paid out was tax free, in order to help the dependents that the employee had wanted to help.
The Chairperson asked if there were any more responses.
Prof Engel said that he could continue.
The Chairperson observed that he could allow Prof Engel to continue indefinitely. However, Members' attention span on these highly technical matters was limited.
Mr Harris asked Prof Engel to unpack the idea that if National Treasury gave an exemption to a foreign fund manager, that fund manager would move its management team to South Africa, and this would therefore create a tax problem. Surely this was the kind of tax investment that South Africa was trying to facilitate? Movement of managers to South Africa would surely be good for South Africa on many different levels? What kind of tax problems would it create? He asked if in a cost benefit analysis it would not be worth South Africa's while to encourage that kind of investment and accept the tax issues.
Mr B Mashile (ANC, Mpumalanga) asked about the extent of amendments made to the Companies Act, it was impossible to make further amendments overall. Transfer duties, which were based on very old laws from before democracy, he was worried that the amendments would become even more complicated. He thought that the proposed workshop on the principal Act would assist the Committee, since we were in a democratic system. That Act had been enacted in the apartheid era. He said that it was painful to some of the Members. He did not think that many people would turn around and say to themselves that SARS had a well argued case
Professor Engel replied that the fund manager issue was that one had to be very careful in designing a tax incentive in order that one obtained the desired result. Typically all tax incentives had a wonderful label, and were thought to bring about increased employment. What one hoped to attract was the funds with fund managers located elsewhere such as in the Netherlands and Luxembourg, and it was believed that if one fixed the tax, theoretically those funds would return to South Africa. The key was to fix their problem without opening up another problem. The original proposals that we had were fairly innocuous, and would not open the door to tax avoidance. What one was really asking for was a change in the effective management test. The effective management test was used to determine if a company was foreign or domestic. If it was foreign, South Africa could tax it only in a limited way. If it was a domestic company, there was worldwide taxation. There was a lot of change at the edge of the border, since the company might be incorporated abroad but the effective management was entirely in South Africa. At that point, if it was a South African company, it should be fully taxed.” What they are asking for is a deviation on that principle." There might be good grounds for that deviation, but it would have to be very narrowly crafted to make sure that all the other scams that were going on would not leave South Africa in a worse shape. Those things were fairly prevalent, so one had to balance the potential revenue loss against the gain. If this change was effected, one might find 200 fund managers; it would be find if one could change the tax without opening it up, but one could guarantee, if one was not careful, that if one could get those 200 managers to come home, but if one opened oneself up to major revenue losses under core principles, it might not be worthwhile. The point here was that the real issue had been identified too late. National Treasury was now going to review that issue, and had to be sure that it could effect the change. It was not a foregone conclusion at the present time. At this stage, that portion of the Amendment (to what Act), which was not in the original proposal, could not go forward. It was too late in the process when it was identified.
The Chairperson observed that Members were becoming restless. He proposed a break of 10 minutes, before reconvening to complete the day's business.
Taxation Laws Amendment Bills: deliberations and adoption by Standing Committee on Finance
The Chairperson said, with reference to Members' questions, that there was never enough time. He agreed with Members that an interaction in the form of a workshop would be important. It was important to talk upfront about the drivers of the amendments. Obviously in the main it would be the ability of the state to meet its priorities and therefore the budget deficit. How did one actually minimize the impact on ordinary people; in terms of service delivery and in terms of the tax burden. The other point was that taxation was rough justice - "one size fits all." In the previous interaction he could see that sometimes he could sympathize with National Treasury and SARS. The more that National Treasury and SARS tried to close the loopholes, the more some members of the public tried to find alternatives. On the question posed by Mr Van Rooyen on the subject of tax avoidance or ignorance of tax laws, there were people who defaulted, not because they intentionally wanted to avoid paying tax, or to evade their obligations, but out of ignorance. This was more around the subject of education.
He said that the last point before he made a proposal of how he thought that the Committees should proceed was to remind Members of the processes that had been followed up to the present time. These processes began with the fiscal framework. These sorts of amendments were indicated in the speech at the time. In the budget speech itself, the proposals were quite clear. Out of that a draft bill was then presented to the Committee on 18 May 2010. National Treasury and SARS had briefed the Committee on that day about the draft taxation bill. The Committee had held public hearings on 01 June 2010. What was important was what transpired after the public hearings between National Treasury, SARS and the stakeholders. Some of the issues that could not be resolved in the meetings were to be the subject of further consideration and deliberation, as was the normal practice, and it was agreed that National Treasury should return with a comprehensive and composite report as to how it intended to address such concerns. Such a report - Taxation Laws Amendments Bills, 2010: Draft Response Document from National Treasury and SARS [Final version of this document published by date of introduction of the Bills] was presented to the Committee on 03 August 2010 and it was important to return to that report, since it dealt with a number of sections in the Bill itself, and what was acceptable and half acceptable. On 24 August 2010 the Bills were introduced into the National Assembly. Today the Committee was considering the two pieces of legislation before it. The National Assembly debate on the Bills was scheduled for 09 September 2010. The Chairperson noted that there was only a short time available this year.
The Chairperson said that he had circulated an item of correspondence from Mr Oriani-Ambrosini (IFP), who, more often than not, did miss meetings of the Standing Committee on Finance. The letter stated that the Committee should give itself more time to deal with the proposed amendments or to deal with the Bill as it stood. As much as Members might prefer more time, the matter was nothing new, given the stages that these bills had gone through. He asked that the Committee formally consider the two bills and adopt the Committee's report.
Dr George agreed that the subject was not new: the Committee had been working on it for a very long time. This time had been sufficient to consider the contents of the bills. There was, however, one point in Mr Oriani-Ambrosini's letter, that the Committee's power to amend the money bills; the Parliamentary Budget Office had not yet been established. The Committee had discussed that matter. Dr George did not think that had impacted on Members' ability to understand whatever was going on. However, Dr George had made a proposal that books should be zero rated for the purposes of value added tax (VAT), and it was agreed that at some point the Parliamentary Budget Office would be examining that proposal. Dr George was waiting with great anticipation for that to happen. Members did not have the benefit of that office, and the one thing that they should be doing was to press that issue, because the Parliamentary Budget Office was expected to be established in the next year, and the issues were complex, and Members needed it to do certain things. That was Dr George's view. However, on the letter that had been circulated, from Mr Oriani-Ambrosini, Dr George did not think that it was factually correct. The Committee had indeed worked for very long on the bills, and certain statements made about Members of the Committee having or potentially having a certain image of being rubber stampers and being clueless about what they did, was frankly an insult to this Committee, and was totally untrue.
Dr Luyenge concurred fully with Dr George, and said that Members needed to consider the attitude that Mr Oriani-Ambrosini had adopted. If one of the Members of this Committee could actually write a statement that Members of the Committee were clueless and did not know what they were doing, it was something that Members could not let go unchallenged; therefore Mr Oriani-Ambrosini must come and explain himself in front of the Committee.
Mr Koornhof said that, for the record, he and his colleague in COPE supported Dr George and Dr Luyenge.
Mr Mashile referred to the paragraph in Mr Oriani-Ambrosini's letter in which he referred to the practice of the old Standing Committee on Finance, of passing bills in record time. He questioned this statement on the basis that Mr Oriani-Ambrosini had joined the National Assembly only on 09 May 2009. Which old practices? Clarity was needed.
Co-Chairperson De Beer said that the rejoinder to Mr Oriani-Ambrosini was on the screen (slide on TLAB); it described the process up to today. Co-Chairperson De Beer said that Mr Oriani-Ambrosini would have to prioritise his Committees.
The Chairperson inferred that he should reply in writing to Mr Oriani-Ambrosini, expressing the views of these Members, but inviting him to come and explain further what his problems were and to express his views. The Chairperson did not want to spend to long on Mr Oriani-Ambrosini's issues. A copy of the Chairperson's response would be circulated to Members.
The Chairperson said that although the two Committees were meeting jointly, for the purpose of practicalities, and the processes of the National Assembly, the next step would involve only the Members from the National Assembly in terms of processing these two pieces of legislation. Therefore he wanted to read and see if Members of the Standing Committee would concur with and adopt the report on the position of the Committee so that one could proceed to the next stage in the National Assembly.
Voting on the Bills
The Chairperson read the motion of desirability that the Standing Committee on Finance, having considered and examined the Taxation Laws Amendment Bill B28-2010 (National Assembly, Section 77) referred to it and classified as a Money Bill, reported that it had agreed to the Bill. He asked if Members agreed.
Members indicated their agreement.
The Chairperson signed the report in front of Members. The Committee's report that it agreed to the Bill was thus adopted.
Dr George said that the same issue as before applied. As discussed amongst the Members of the DA, the wording needed to be "Members of the Committee". He said that the DA's caucus would be looking at it, but he, Dr George, would recommend it.
The Chairperson read the motion of desirability that the Standing Committee on Finance, having considered and examined the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill [B29-2010] (National Assembly, Section 75) referred to it and classified as a Section 75 Bill, reported that it had agreed to the Bill without amendments, taking into consideration the position of the DA Member in this Committee. He asked if Members agreed.
Members indicated their agreement.
The Chairperson signed the report in front of Members. The Committee's report that it agreed to the Bill without amendments was thus adopted.
The Chairperson said that there was one last matter that he did not want to get lost - the issue that Dr George had raised and continued to raise about schoolbooks in particular; he asked for attention to it as soon as possible; it could not wait until the Budget Office. While acknowledging that the Budget Office would be important to help Committees do their work, it was not possible to wait for the Budget Office to be established. Despite the challenges, the Committee was doing its level best to do its work and would continue to do so.
Prof Engel said that the National Treasury was well aware of the issue. He asked if the Committee wanted the National Treasury to return to it on this issue. This was the first time this kind of request had come through. He wanted to know what the process that the Committee expected was. He really was not sure what the Committee wanted National Treasury to do. Did the Committee want National Treasury to consult the Minister?
The Chairperson said that this was a fair question. He proposed that Dr George's matter should be the subject of deliberations by the Committee, so that the Committee could take a view on this matter and process it officially to the National Treasury.
The meeting was adjourned.
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