Taxation Laws Amendment Bills [B-2011]: briefing by National Treasury & South African Revenue Service

Meeting report

National Treasury & South African Revenue Service (SARS). 2011 Draft Taxation Laws Amendment Bills. Presentation.
The presentation was led by Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, supported by Prof Keith Engel, Chief Director: Legal Tax Design, National Treasury, Ms Sharlin Hemraj, Director: Environmental and Fuel Taxes, National Treasury, Mr Franz Tomasek, Group Executive: Legislative Policy, South African Revenue Service (SARS), and Mr Johan Lamprecht, Director: Personal Income Tax (PIT), Savings, National Treasury.

Consultation process [Mr Momoniat]
Details were given firstly of the Consultation process for the Taxation Laws Amendment Bills (TLAB ) which gave effect to the tax proposals announced in 2011 February (as contained in Chapter 5 and Annexure C of the Budget Review) . These Bills were “money” bills. The Bills were published for public comment on 3 June 2011. The briefing before the Standing Committee on Finance (SCOF) was 15 June 2011. There would be hearings before SCOF on 21 and 22 June 2011. The Treasury deadline for public comments was 05 July 2011. Treasury workshops with the public were to be held in mid-July 2011. The response document was to be presented before SCOF in August 2011. The formal introduction of the Bill was to be in late August/September 2011. The Treasury and SARS were open to be persuaded by public comments and public consultations ; however, it was to be emphasised that there was need to be vigilant about lobbying and special interest groups, and fact that individual interests were often not represented . (Slide 2)

Pending or new issues
Pending or new Issues from the Budget would be dealt with in separate and later Bills. Pending issues (work in progress) included medical credit (partial), the retirement base (discussion document pending), provident fund (discussion document pending), gambling tax (pending), and the carbon tax discussion paper. New Issues (focus anti-avoidance, eliminating anomalies)  included Section 45 suspension , dividends from share-based employee schemes , Unemployment Insurance Fund (UIF) exemption for office holders , timing of foreign tax credits , and Value-added Tax (VAT) relief for temporary rentals by developers. (Slide 3)

Key policy objectives for 2011/12
An overview of key policy objectives for 2011/12 was given:  broadening the tax base in support of inclusive growth , raising sufficient revenue to finance Government , tax relief for individuals, tax breaks to support job
creation and skills development, including fiscal drag relief (changes in Personal Income Tax (PIT) brackets & rebates) and changes in some monetary thresholds, closure of tax loopholes to sustain a broad tax base , and adjustments in specific excise taxes to address environmental and health concerns . (Slide 4)

Tax proposal highlights for individuals:
Personal income tax relief of R8.1 billion (fiscal drag)
Introduction of a third rebate of R2000 for individuals 75 years and older
Adjustments to medical scheme and tax free interest monetary thresholds
Conversion of living annuities into draw-down accounts
Uniform taxation of life insurance products

Tax proposal highlights for business :
Dividends tax would take effect on 1 April 2012, replacing the secondary tax on companies
Foreign dividends to be taxed at an effective rate of 10%
Suspension of section 45 roll-overs
Ordinary treatment for third-party backed shares and closure of various dividend schemes
Introduction of a Government Sukuk (Islamic finance)
Modification of incentives, including industrial policy projects, research and development, venture capital companies and film production plus extension of the learnership incentive
Adjustments to the micro business turnover tax rates and exemption thresholds from R100 000 to R150 000 plus segregation from VAT


International
International tax proposal highlights included Gateway into Africa initiatives - controlled foreign company reforms and special taxation of offshore cell companies.

Indirect taxes highlights:
VAT: Notional inputs for developers purchasing property
VAT: Relief for developers temporarily engaged in rentals
Transfer duty relief: Increase in thresholds and equal exemptions for entities
Securities Transfer Tax: Temporary expansion of relief for brokers acting as principals
Gambling tax: Pending

Administration highlights:
Voluntary disclosure programme remains open until 31 October 2011
Tax administration bill (formal introduction pending)
Customs modernisation programme

Major tax proposal highlights:
Increase in the general fuel levy (10 c/l) and the Road Accident Fund (RAF) levy (8 c/l) effective as from 06 April 2011
Increases in the excise duties on tobacco products and alcoholic beverages effective as from February 2011
Electricity levy increase to 2.5c/kWh from 1 April 2011. Revenues to be used to finance rehabilitation of roads resulting from coal haulage
Increase in the international air passenger departure tax effective from 1 October 2011
Gambling tax legislation pending for later in the year

(Slides 5-8)

The impact of tax proposals on 2011/12 revenue was summarised (table, slide 9). Tax revenue trends 2006/07-2010/11 were shown (table, slide 10) and described (slide 11). Revenue 2010/11: estimates versus actual were shown (table, slide 12). Income tax rates and thresholds, with comparisons between 2010 rates and 2011 proposals were shown (tables, slides 14-15).

Individuals
Current and proposed rebates for individuals were shown (table, slide 16). A table of current and proposed retirement lump sum and severance benefit taxes was provided (table,slide 17). Interest exemptions and capital gain exclusions were described (slides 18- 19).

Information on individuals, employment & savings with regard to income tax 
medical credits (Sections 6A & 18(2)(c); Clauses 10 & 47) [Mr Lamprecht]
retirement reform: living annuity background (Section 1 definition; Clause 7(1)(zP)) [Ms Hemraj]
long-term insurance: employer contributions as a taxable fringe benefit (Paragraph 12C of the 7th Schedule; Clause 113)
long-term insurance: taxation of proceeds (Section 1 - paragraph (m) of the definition of “gross income”, sections 10(1)(gG) & 10(1)(gH); Clauses 7, 30 and 122)
long-term insurance: employer key person plans (Section 11(w)(ii); Clause 33)
share incentive schemes (Section 10(1)(k)(i)(dd); Clause 30) [Prof Engel]
Road Accident Fund payouts (Section 10(1)(gB); Clause 30) [Ms Hemraj]
employee compensation fund entities (Section 10(1)(t)(xvi) of the Income Tax Act and Section 1 of the VAT Act - proviso (xi) to the definition of “enterprise”; Clauses 30(1)(r) & 137)
judicial long-distance commuting (Paragraph 7(8) of the Seventh Schedule; Clause 111)
parliamentarian contributions to UIF (Section 4 of the UIF Act; Clause 150).

Ms Hemraj commented that current arrangements were very expensive for people, and it was hoped to bring additional providers into the market. The aim was to drive down the price for pensioners. The basic principle was that the proceeds that paid out should not be taxable.

(For full information, please refer to the presentation document, slides 20-34.)

Business: [Prof Engel]
• The Secondary Tax on Companies (STC) imposed tax at 10% on dividend declared by domestic companies (at company level)
• STC was to be replaced with the Dividends Tax system as of 1 April 2012 . STC credits  would continue for a transitional period
• Dividends Tax (“DT”) imposed tax at 10% on dividends paid by domestic companies (at shareholder level)
• DT used a withholding system in terms of which the company paying the dividend must withhold
the tax on behalf of the shareholders (slide 36)
Technical refinements and notable issues of the Dividends Tax, with comparisons to the current STC and reference to the removal of the Value Extraction Tax (VET), foreign dividends, and capital distribution revenues, were given.
(Slides 35-40).

Contributed Tax Capital (CTC) refinements (Section 1 and paragraph 19 of the ninth schedule; clauses 7(11) (c) and (d); 116) ; debt cancellation; taxable business sales; and contingent liabilities: business
assumption proposal (Sections 115 and 24(A); clauses 36 and 53) were described (Slides 41-45).

Urgent Change: Section 45 Suspension (Section 45; Clause 75)
• The Bill suspended section 45 roll-overs from 3 June 2011 until close of 2012
– 03 June 2011 was the date of publication of the draft TLAB
– This date of suspension was also subject to clause 75(1)(1)(b) in the TLAB being enacted.
• Timing:
– Not announced in February 2011
– Urgent action due to rising tide of avoidance (reports coming through after February)
– Each tax avoidance deal could wipe out a company's income for many years to come
• Related action: Preference share schemes (announced in February)
(Slide 46)

Section 45: Weighing Impact
• Suspension decision not taken lightly
– Treasury rarely took action of this kind (last time was several years ago in relation to treaty avoidance)
– While Treasury understood the needs of commerce, the fiscus must be protected against unintended outflows
• Beware of labels
– Some expensive avoidance deals were cloaked in Black Economic Empowerment (BEE)
– LBOs could often be driven by financial engineering (including tax manipulation) as opposed to value addition
– Many of those hardest hit were the dealers making the greatest revenues from the most aggressive deals
(Slide 46)

The need for facts was noted. National Treasury had been concerned about the misuse of section
45 since 2006/7. The avoidance game was often one of “hide and seek” with taxpayers quick to complain about anti-avoidance efforts but slow to provide meaningful assistance (slide 48). For details please see the presentation document slides 49-58 ).

Other business topics:
Debt without maturity dates: proposal (slide 59)
Islamic Finance: Government sukuk (Section 24JR; clause 58 (I)(e)) (Slides 60- 62)
Incentive: Industrial Policy Project Revisions (Section 12I(2); Clause 41) (Slide 63) [Mr Tomasek]
Incentive: Venture Capital Company Revisions (Section 12J; Clause 42) (Slides 64 -65)
Incentive: Research and Development Revisions (Section 11D; Clause 35) (Slides 66-67)
Incentive: Film Production Revisions (Section 12O; Clause 43) (Slides 68-69) [Prof Engel]
Small business: Micro-business turnover tax relief – current & proposed rates (Paragraph 7 of Appendix 1) (table,slide 70) [Mr Tomasek]
Small business: Micro-business turnover tax relief (Sixth Schedule; Clauses 106, 108 & 109; VAT Clause 139, 141 & 148) (slide 71)

International [Prof Engel]
African Gateway: Unification of Source Rules (Section 9; clause 24) (Slides 73-74 )
African gateway: Foreign rebates for management fees (Section 6quin; Clause 12) (Slide 75)
African gateway: Timing of foreign rebates (Section 6quat; Clause 11) (Slide 76)
African gateway: Headquarter company adjustments (section 9I; clause 29) (Slide 77)
controlled foreign companies (CFCs): Closure of de facto control schemes (Section 9D(1)(cfc definition); Clause 27(1)(b)) (Diagram, slide 78)
CFCs: Tainted Income (business versus non-business) (Section 9D(9A)(a); clause 27(1)(o)) (slide 79)
CFCs: New paradigm for passive income (Section 9D(9A)(a); clause 27(1)(o)) (slide 80)
CFCs: Offshore cell companies (Section 9D(1)(“offshore cell company” definition); Clause 27(c) & (e)) (Slide 81)
CFCs: Offshore restructuring (Section 41-47, paragraph 64B of the 8th Schedule; Clauses 73,74, 76, 77 & 124) (Slide 82)
Foreign currency issues (Section 24I and repeal of Part XIII of the 8th Schedule: Clauses 56 & 132) (Slide 83)
Transfer Pricing Adjustments (Section 31; Clause 62) (Slide 84)
Taxpayer migration (Section 9H; Clause 28) (slide 85)
Cross-Border Interest Withholding Adjustments (Sections 37JA – 37N; Clauses 67 – 71) (Slide 86)

Value-added Tax
Delinking VAT from Transfer Duty (Section 16(3) of VAT; Clause 145(1)(b)) (Slides 88-89)
Relief for temporary rentals by developers of residential fixed property (Section 18B of VAT; Clause 146) (Slide 90)

Miscellaneous (Section 11(n)(i), 16(3)(i) and 22; Clause 142, 145(1)(c), 147) (Slide 92)

Other indirect taxes
Transfer Duty Relief (Sections 2(1) and 9(1)(l); clauses 2(1)(b) and5(1)(a)) (Slide 94)
Securities Transfer Tax: Expanded Broker Relief (Temporary)(Section 8(1)(q) of the STT; Clause 154(1)(b))
(Slide 95)

Coming Attractions : Issues not covered in the TLAB but coming in next tranche of bills later this year or next year
Retirement reform: uniform retirement contribution base options
• It was proposed that the current retirement savings tax incentive be amended within the broader retirement reform framework in regards to the following:
 - The tax treatment of an employer's contribution on behalf of
  an employee (i.e. inclusion as a fringe benefit)
 - Uniform deduction limits for retirement savings (for employees and small business owners)
- Limited deductions in respect of high income earners
• Different options (including the Budget Review option of 22.5%/R200 000) would be presented for public discussion pending July 2011).

Retirement reform: Uniform retirement withdrawals (i.e. provident funds)
• Currently, pension and retirement annuity funds allowed the retiring member to take 1/3rd as a lump sum and purchase an annuity with the rest.
• Provident funds however, allowed the member to take the full amount as a lump sum upon withdrawal.
• Pending discussion document (July 2011) as required more consultations:
- To create uniformity and to ensure that retired individuals had sustained sources of income during their retirement years, it was being considered that provident funds be subject to the same withdrawal rules as pension and retirement annuity funds.
- Transitional measures would be provided to protect existing members.


Gambling Tax (not covered in TLAB) [Mr Momoniat]
Announcement in Budget 2010 that taxation of gambling would be reviewed to ensure efficient tax collection
National Treasury work in progress, particular emphasis on the role of taxation to address gambling externalities.
Department of Trade and Industry (dti) paper on gambling to be made available
Two-fold tax policy objective – To tax gambling winnings as compared to other forms of windfall income, plus internalisation of some of the social costs associated with problem gambling.
Initial proposal: all gambling winnings above R25 000, including from the National Lottery, would be subject to a final 15% withholding tax with effect from 1 April 2012
Details on the design and implementation of the gambling tax were being finalised through consultations with both Government and gambling industry stakeholders to ensure the most administratively viable mechanism .
(Slides 97 -99 )

Administration
The Tax Administration Bill to be introduced later this month dealt with the bulk of the administration related changes announced in this year's Budget
Two issues relating to Customs were dealt with in the draft TL2AB:
            – Adjustments to the secrecy provisions relating to the enforcement of anti-money laundering          legislation and of legislation regulating the movement of goods        or persons into or out of South    Africa
            - The continuation of rules made to underpin the SARS Customs modernisation process during the              period 1 June 2010 to 31 July 2011. The only rule made in the period to date related to the   production to SARS of an exporter's clearing instructions to his/her customs broker    
An additional matter that had been the subject of industry consultation and might be included later, depending on procurement proceedings, related to the replacement of the “diamond mark” on cigarette packages with a counterfeit-resistant digital system.
(Slide 100)

Conclusion [Mr Momoniat]
It should be remembered that these Bills were part of a larger package
– Alleviating the burden for the middle class (PIT relief)
– Incentivising savings (monetary thresholds retirement draw-down accounts, long-term insurance, etc.)
– Promoting growth and jobs (industrial project, R&D, African Gateway, learnerships, etc..)
– Promoting equity and fairness, and protecting the tax base (Section 45, third party preference shares)
It should also noted that this briefing (and publishing of draft TLAB) was only the start of the consultative process
– Public comments, hearings, workshop and (where necessary) individual consultations lay ahead
– Followed by adjustments based on public comment to be reported in the response document in late July/August
(Slide 101)

Discussion
The Chairperson pointed out the need for presentations to be submitted in advance.

Mr D van Rooyen (ANC) agreed with the Chairperson that it was a very detailed presentation and that Members needed more time to dissect it, especially the details of some of the tax changes.

Mr Momoniat apologised for the late submission of the presentation, which had been finalised only that
morning. In future, presentations would be submitted in advance, even if only in draft form. He said that it was sometimes difficult to encourage concerned parties to engage in consultations, even if they would be obviously affected by proposed changes. More thought had to be given to the matter.

Dr George asked about Section 45, which had been discussed before by the Standing Committee. BEE deals had been abused, and Prof Engel had mentioned that tax payers and the fiscus needed protection. There was no doubt about that. However, the key point was certainty in South Africa's economy. Section 45 suspension had come as a big shock at a time when much corporate activity was going on. He was a rather big fan of the National Treasury which did good work. However, perhaps National Treasury could not fix this problem, so decided just to shut it down. Perhaps that was an over-reaction? National Treasury had observed an emotional response from the business community, which was understandable, since lots of money was at stake. However, one detected an emotional response from the National  Treasury. Had National Treasury not gone too far, to the extent of straining the social contract?

Dr George asked if there were not other measures that could have been taken on Section 45 abuse.  What had been done before this radical intervention?

Mr Van Rooyen said that there was need to promote empowerment deals. He asked National Treasury to explain how true the serious allegations from the public domain were.

Mr Van Rooyen asked how we married the principle of a participatory democracy to suspending Section 45 but engaging afterwards. What precipitated this suspension before thorough engagement?

Mr Momoniat agreed that the suspension of Section 45 was a strong measure.  Prof Engel had outlined that National Treasury wanted to obtain the facts. There was some element of abuse. 'Have we gone too far?  How long is a piece of string?' There needed to be equity. National Treasury wanted corporates to pay their fair share. There would be much shouting from those who stood to loose. It was very hard to figure out what the truth was. However, National Treasury was certainly open on those issues. There was a period for public comment. National Treasury certainly did not want to stop company lease structuring within a corporate group, but people had artificially structured these devices  to avoid tax and often in doing so, as Prof Engel had pointed out, they called them something else. In the legal sense these structures had one definition; but in an accounting sense they were something else. These were really artificial structures. Therefore to claim that the suspension would stop BEE was spurious. 'Let's look at the facts.' The previous Standing Committee had a workshop on BEE deals which many banks attended. There were unrealistic assumptions about how fast dividend growth needed to be to cover for the BEE deals. Those were the issues and the challenges that one needed to examine. Certainly there were many tax measures to promote BEE. He acknowledged that those concerned might have reservations about engaging with SARS, since SARS had to enforce the rues, whereas National Treasury drew up policy, but National Treasury was ready to engage and welcomed feedback.

Prof Engel said that some emotion was evident because big money was involved. If National Treasury could produce a more nuanced solution, it would. If one gathered all the facts, there were probably about 25 paradigms from which to work. Thence one could, hopefully, produce a more nuanced solution. There were many good tax payers, and National Treasury sought to be fair, and, while containing the problem, keep the economy moving. The goal here was not to have 'an emotional accusation session'; however, it did help also 'to see some of the bad'.  In this people who were good corporate citizens could assist greatly. National Treasury would take note of responses, but not back off lightly. He emphasised a 'nuanced solution'.  

Prof Engel said that there were good BEE deals. However, if they were 'closed circuit', one could see a risk to the fiscus.

Prof Engel said that National Treasury had tried various measures before; he explained them in detail, including interest deductibility. However, it found the treaties an obstacle. It had considered transfer pricing, and other nuanced solutions, but found in the end that it was business as usual. However, he hoped to report in future to the Standing Committee on a nuanced solution.

Dr George asked again about Section 45. The industry was aware that there was abuse, but was not perhaps robust enough to flush it out.  Maybe a little whistle-blowing would be useful. However, he asked if the door was now completely shut on any transaction now in progress even if it was not an abusive one.

Mr Momoniat replied that in terms of the law nothing was completely shut. So people could continue, though they would take the risk that they would have potential liabilities. National Treasury and SARS might move quite hard if they felt that there was abuse. The only certainty was once National Treasury and SARS dealt with the law in the response document and decided which way to go.  National Treasury and SARS did not  want to create total uncertainty and hoped to meet some of the players over the next days or weeks. 

Prof Engel said that National Treasury and SARS needed to be convinced of the justification for  exceptions. He could not give the details yet since the facts were still coming in. As the facts came in, National Treasury and SARS would have a clearer picture and might be able to offer a more nuanced solution. However, the nightmare for National Treasury and SARS was what they had done before, namely to act then retreat.  When National Treasury and SARS returned with the response document, they would try to offer as much flexibility as possible. 'We will try our utmost to get there.'

Mr Momoniat added that tax policy was sometimes like a game of chess.  One did not know what people were thinking when they made their move; and they would not reveal their thoughts. 

Dr George was confused about the gambling tax. Was it to influence behaviour or collect revenue or both?

Mr Momoniat replied that the gambling tax was like the taxes on alcoholic drinks and tobacco. By themselves, such taxes did not reduce consumption. But the complementary measures that the first Minister of Health fortunately had put in place all helped – such as banning smoking in public buildings, together with the taxes, to reduce consumption. However, there was no doubt that the high level of the alcohol and tobacco taxes contributed. However, one had to be aware of other factors such as the possibility of counterfeit products coming onto the market and enforcement capacity at the borders. With gambling one would find the same thing.  The need for a tax was felt to reduce gambling behaviour on the margins. The tax, however, would not succeed by itself. At the same time, one did not want to shift behaviour to illegal forms of gambling: today one could do that on line. There were hard issues – hence the reason for the separate bill.  It was a marginal issue; it was unlike that gambling would be reduced altogether. There was need for complementary measures to make it harder to gamble.

Dr George asked the same about the carbon taxes. How did one measure the impact?

Mr Momoniat replied that such taxes as the carbon tax revenue generation was not a big factor. In so far as the taxes might succeed in influencing behaviour, National Treasury hoped to raise  as little money as possible. As to the carbon tax one was looking at a different quantum of funding. Climate change was the biggest challenge that the world faced. As with smoking one needed complementary measures. Like the financial crisis one needed globally coordinated action. The Conference of the Parties 17 (COP 17) conference would take place in Durban at the end of the year. It was hoped that such conferences would facilitate global agreement. To the extent that there was massive revenue from any source, it did produce an argument for lowering other taxes, whether it was Personal Income Tax (PIT) or other taxes, and one needed to look at this as a whole. The issue was not just to raise more revenue from one source but to  influence behaviour.  National Treasury would hopefully table a discussion paper on the carbon tax sometime in the following year. However, this did not mean that there could not be prior discussion.

Ms Hemraj said that National Treasury had published a policy paper in which it recognised that the market basically failed in respect to pricing environmental resources and pollution. The costs of these could be internalised basically by the pricing of goods and services. That concept of internalising those costs was broadly in line with the carbon tax. South Africa in 2009 announced that  it would be taking action to reducing emissions, and announced a target. It had taken cognisance of work done by the Department of Environmental Affairs on the long term mitigation scenario, which recognised explicitly the role of a carbon tax on reducing emissions. The paper was released in December 2010 and comments had been received from a range of stakeholders.  National Treasury had also held a workshop on 16 March 2011 at which it had received additional comments.  National Treasury was considering revising that discussion paper into a policy document to address various aspects of the tax – such as the tax rate and the tax base, and how to mitigate impacts on the poor and phase in the tax to avoid reducing the competitiveness of key sectors. These would require additional consultations.  

Dr George agreed that the fees on annuities were horrendous and greater competition would perhaps assist in that regard. How would National Treasury mitigate the risk of having more providers?  Would the Financial Services Board (FSB) make sure that people did not run out of money?

Mr Momoniat said that the measure on the costs of annuities was just a small measure. The idea was not that people should run out of money. So National Treasury was not increasing the withdrawal limits.

Mr Momoniat said that lowering of costs in the financial sector was a big issue. However, there were trade-offs. The extent to which financial companies were able to rely on such fees for revenue had made them safer.  In the United States of America (USA) clients paid very little in the way in bank charges and this had been a problem because the banks had had to seek revenue elsewhere. There were hard trade-offs to be made.

Mr Momoniat said that one of the key reforms which National Treasury considering was to put consumer market conduct and consumer protection measures in place. South Africans were not noticeably militant as customers. Even as the FSB took on the market conduct role, National Treasury wanted to put in place measures that enforced greater transparency. The cost issue aside, the bigger issue was that there was very little transparency in the financial industry as to costs. This was deliberate practice. There were layered costs. Unless you spent a great deal of time, it was hard to determine what the cost really was.

Dr George asked about assumed contingent liabilities. Was there a balancing mechanism if the assumption proved wrong or was changed?

Prof Engel replied that it was a quid pro quo. What should happen was that if someone had a business with warranty claims, and a purchaser sued for those claims, there would be one deduction per purchase for the seller because the seller had lost his purchase price. The purchaser would not be able to deduct it.  However, Dr George was asking if National Treasury would allow a deduction in the case that the warranty was worth more than that. In that case, the extra that the purchaser never expected to pay would be a tax deduction. Again, National Treasury's aim was to make sure that there was a fair and neutral system.

Dr George asked about debt cancellation where there was a significant change in the value of the debt. Was not National Treasury and SARS doing a disservice here?

Prof Engel replied that this was a simple issue. If a debtor owned a company which went bankrupt it was worthless. In that instance the one who cancelled the debt  was not giving a donation. The creditor was cancelling the debt because of the debtor's inability to pay. That should fall under Section 12(5). So all that National Treasury was saying was that one must look to the circumstances.  National Treasury wanted to prevent the situation in which someone made a loan which he could pay off, but, for the purposes of planning his estate, he started playing games with the value. However, if it was not clear in the law, National Treasury might have to make an adjustment.

Mr Van Rooyen asked to what extent the changes in the provisions for foreign dividends would impact on the national revenue base and what National Treasury hoped to achieve.

Mr Momoniat responded that South Africa was obviously an open economy. South African companies operated in other countries and one must be careful not to see all outflows as a problem, since South Africa also received inflows. Obviously many of these remittances had to do with shares or dividends. To the extent that National Treasury felt that any measure affected South Africa's tax base, it would try to take measures on anti-avoidance.

Mr Tomasek said that one aspect was the flow of dividends from Africa offshore. However, the question was more about the taxation of dividends flowing onshore, in other words, the foreign dividends that a South African was receiving.  At present there was a participation exemption, which meant that if one already had a very substantial exemption, it was already tax exempt. So this dealt with the smaller dividends that were flowing onshore. National Treasury wanted to treat these as neutrally as possible with domestic dividends.  So if one received a dividend from a South African company one was charged 10% tax, and if one received one's dividend from a foreign company it was also taxed at 10%.

Mr Van Rooyen asked if the changes to medical credits in Category C were a benefit or a loss.

Mr Van Rooyen asked if the review of the provident fund would accommodate aspects around the withdrawals that were made by contributors.  There had been an outcry from stakeholders.  In the current economic situation it was hitting hard on those who were withdrawing. Much of what one withdrew went to SARS. However, the intention to discourage people from dipping into these savings was good, but on the other hand, in the present tough economic situation, people were finding it hard to move forward. Would the review of this particular approach accommodate some of these factors?

Dr Z Luyenge (ANC) asked if the anti-avoidance clauses addressed the situation whereby a beneficiary would want to withdraw any amount that was beneath the taxable amount in order to avoid tax. He asked about life policies of which the maturity value was more than R300 000 and the situation where the beneficiary chose to reinvest for the next five or 10 years and instead withdraw the interest.

Mr Momoniat replied that there was a big debate as to whether National Treasury should allow this R300 000 let alone increase it. It certainly was a tough question, since South Africans were quite notorious for not saving. There were indeed hardship issues but on many occasions people just took their money for other reasons.  Also one did not want employers to walk away from workers' pension funds. There were softer and broader issues that had to be dealt with. National Treasury did not have all the answers, and would like to hear from Members.

Mr E Mthethwa (ANC) asked about pensions and retirement.  In terms of uniformity of retirement, he asked if SARS and National Treasury would consider also those who were on provident funds whose non-taxable [amount] began at R300 000, as had been discussed previously: how far would that work?

Mr Momoniat replied that, to the extent that National Treasury was going to make amendments on provident funds, it was not going to take away people's vested rights. National Treasury recognised that these questions were complex and would return to the Standing Committee on these issues, including the maturity value of life policies. These were areas in which National Treasury was working actively.

Mr Mthethwa asked about the difference between the slide on the UIF and the one on the work of judges.   What was the difference between the work of judges and the work of parliamentarians in this regard?

Mr Momoniat replied that judges had a particular dispensation. There were indeed issues with elected representatives, but he did not know who was actually involved in the process.  However, perhaps it should be put on the table.

The Chairperson said that tax proposals were factored into revenue projections. It was a very complex and technical piece of legislation before the Standing Committee which must first look at the consultative process   and then the conclusions. He cautioned that National Treasury should not feel somehow that it was almost in the wrong just by putting proposals before the public as well as before Parliament; these were proposals that had to be engaged with. As Parliament, the Standing Committee should try robustly to make it possible for the broader public to be engaged with these proposals within the envisaged and stipulated time frame, because if the Standing Committee started to relax its way of doing things, it might end up with unintended consequences for South Africa. All parties should be given chance to engage and Members of Parliament must facilitate the engagement. The Standing Committee must then produce a composite report on the basis of which Parliament could proceed. Tax proposals from time to time generated heated discussions; however, the interests of the country would have to come first, not at the expense of individuals or companies, but through striking a balance and ensuring fair treatment. The Standing Committee would do its level best to make sure that the process was as transparent and inclusive as possible to enable informed decisions to be made.

The meeting was adjourned.